The last decade has seen the global banking industry wrestle with a lethargic economy, historically low interest rates, and a stiff regulatory environment. But the tide of forces squeezing margins could finally take a turn this year. With the impending fintech threat, rising interest rates and regulatory changes, banking institutions are in for a mixed future; one with both opportunity and challenges. With technology continuing to shape and influence customer engagement, banks will need to put the customer back at the centre of their strategy if they want to grow market share. Key to this will be leveraging their IT infrastructure to ensure that they can cope with new, instant needs and support a more seamless customer experience.

Making the digital shift: new generation consumers give rise to a new digital norm

The 2016 EY Financial Services Leadership Summit highlighted that financial institutions will need to adapt to a changing landscape in the year ahead. As digitalisation of the banking world becomes a reality, major banks will continue to focus on customer experience and how to address needs relating to instant and user-friendly services. For example, new generation customers expect to bank and pay easily at any time and on any device with the same frictionless experience. This means banks will continue to invest in this area as part of any key strategy.

This trend is further highlighted by consulting firm Deloitte in its Banking and Securities Outlook for 2017 report. It emphasises that refining the customer experience will be the main driver for technology that supports core transformation, digitisation, and automation. As technology upgrade cycles continue to shorten, banks may finally start to retire legacy systems for cloud-based platforms, many of which operate on subscription models.

New regulations, as well as increased eCommerce and identity fraud have put additional pressure on financial institutions to provide Know Your Customer, ID verification, and other authentication processes to minimise risk. Building and maintaining high levels of trust within new customer experiences needs to be easily achievable. Deloitte’s Outlook also points to the issue of automation within the industry which it highlights as the technology most likely to be used in the near term.

Improving the customer journey is at the heart of the industry’s transformation wave

Needless to say, 2016 was a great year for digital technology. Various industry players made significant investments to modernise their infrastructure, as well as focus on delivering services through digital channels.

New technologies including artificial intelligence, biometrics and blockchain ledgers were also integrated as part of new payment and financial services built by incumbents, fintechs and neo banks. This integration saw the benefits of these technologies (in terms of fast transactions and operations) integrated with tighter security to give the right balance of freedom expected by consumers. Given this, we can look forward to more banks exploring the benefits of IoT in helping to improve the customer journey.  This could take the form of initiatives such as self-service kiosks and automated services at re-vamped bank branches. Physical branches will also undoubtedly continue their digital transformation with augmented reality pilots taking place – materialising through new payment market segment opportunities such as in-car payment systems.

The threat of tech giants making inroads into payments

Unbanked communities around the world continue to challenge banks to develop new services, new payment means and ways in which to manage their money. The rise in mobility will go part of the way to reaching the unbanked population – 1.5 million people in the UK - and banks’ abilities to offer new services, which are seamless, customer-oriented and easy to access.

With tech giants such as Google, Amazon, Facebook and Apple, as well as some mobile network operators, putting banking and payment on their main agenda, the fight for this space promises to remain interesting throughout 2017. Because these platforms are customer-based and customers are already using them, players such as Google are managing to leverage their databases to not only deliver tailor-made services to consumers in the retail shopping area but also in the more traditional banking area. Their expertise in loyalty, rewards and customer experience is proving invaluable. If these players start pushing financial services to their own customer bases, these ecosystems can potentially take customers away from the banks. This is another challenge which banks need to be aware of – making payment as seamless as possible.

While banks understand that their world is becoming more digital, many of them are still reluctant to fully commit to embracing digital transformation. Banks often don’t have a clear view of the costs involved and don’t always understand the short-term implications of the investment against the long-term returns. Given that companies such as Google and Apple have deeper pockets and are taking full advantage of the gap, banks need to change their thinking – and fast. The compelling return on investment and other benefits including user-experience enhancements, especially in retail banking, need to be strategically considered.

The light at the end of the acquisition and loyalty tunnel

While many surveys prove that banks still have the full trust of end users, to remain partners of choice they will also need to implement new payment methods to better understand individual behaviour and expectations, analyse consumer needs and build personalised real-time advice, financial overview and reward offers. If banks are able to meet these demands, they will win a much larger customer share.

In conclusion

It is critical for banks to consider new digital channels as part of an integrated strategy and evolve from first to second generation digital banking: switching digital from a supporting role, to their primary sales and communication channel. While re-engineering processes around the customer is not easy, banks must embrace digital banking to remain competitive and relevant – investing to position themselves as preferred service providers. By fully embracing digital services and solutions, they will set the scene for next generation; encouraging millennial customers to switch and support their brands.