This year’s Economist Intelligence Unit (EIU)’s report “Forging new frontiers: advanced technologies will revolutionize banking” based on a global survey of over 300 senior banking executives, highlights the role of new technologies in driving the digital transformation of banks in the coming years to help them gain competitive advantage, as they face slowing profit growth coupled with intense competition from technology and e-commerce disruptors and payment providers -  pressures that have intensified as a result of the ongoing COVID-19 pandemic.

The impact of new technologies

Two-thirds (66%) of banking executives say new technologies will continue to drive global banking for the next 5 years compared to 42% of retail bankers in 2019. 84% of respondents agree that DevOps will drive transformation in core banking, while 81% of banking executives believe a multi-cloud strategy will become a regulatory pre-requisite. Banks see advanced technologies as the drivers of digital and open banking. Cloud, microservices, DevOps and, APIs are all about allowing agility and flexibility in driving new business models quickly and cost-effectively, while ensuring resilience and security, the cornerstone of a regulated industry like banking.

Regulation fell to second place as a top strategic driver this year. The challenge for regulators today is not just effective risk and compliance but governing the adoption of these new technologies and ensuring both, that the consumer’s rights are protected, and that the industry as a whole remains resilient as it faces innovation and new competition.

Artificial intelligence a game changer

The judicious use of artificial intelligence is seen as a key differentiator between winners and losers in the future. Building AI platforms is already the top technology investment area for banks, immediately after cybersecurity.

AI and machine learning are all about leveraging the transactional and behavioural data banks possess towards improving digital customer engagement.  Banks believe that the most valuable use of AI is in improving the user experience i.e. digital assistants and voice-assisted channels, personalization of the customer journey and digital marketing. Another area to deploy AI is customer fraud which is in fact closely tied to experience. For examples, banks that send an alert notification in real time to check with the user when a transaction looks suspicious, are creating a very different customer experience to those that block the transaction upfront and thereby create a lot of hassle and inconvenience for their customers.

Digital transformation accelerated

The EIU report reveals that digitization was already well underway even before COVID-19 had fully entered into the respondents’ consciousness. Improving customer experience and engagement including intimacy and personalization, migrating to digital channels and digital marketing all feature at the top of banks’ list of strategic priorities. Even more dramatic is the finding that nearly 60% believe that the traditional branch-based banking model will be dead by 2025, compared to 44% last year and 75% believe cash will represent less than 5% of all transactions globally compared to 48% last year.

Digital customer engagement will only increase in importance with the COVID-19 crisis. Already, immediate changes have been observed in consumer behaviour for obvious reasons like inability to visit branches in lockdown conditions and the bulk of shopping moving online. In parallel, with small businesses closing and economic activity plummeting, there has been a spike in unemployment and financial distress and consequently more consumers and SMEs are calling their banks for help So across all countries, customer traffic in branches is spilling over to call centres and ultimately to digital channels.  In addition, there has been a spike in contactless payments in many countries due to perceived safety.

COVID-19 has woken up banks to the realization that they have no option but to beef up their digital capabilities. They now need to handle many more interactions and transactions in terms of scalability,  extend omni-channel capability to enable relationship managers and call centres to seamlessly engage, ensure even complex customer journeys can be handled completely digitally across all product lines and services, even those that currently may be offered only in the branches. Banks need to help non-digital customers, say the elderly, to rapidly adopt digital banking. One Chinese bank set up a COVID specific online portal to inform customers about their products and services with video servicing capabilities and tutorials. 

Open banking and the rise of platforms 

With COVID-19 accelerating the digitization of banking, 45% of banking respondents say their strategic response is to build a ‘true digital ecosystem’ and integrate their self-built digital services and third-party offerings, in order to enhance customer experience and create new revenue streams. An overwhelming 83% of survey respondents believe that the platformisation of banking will steer the industry, an increase of 30% over last year. Different forms of collaboration with multiple players in a wider banking eco-system are emerging.  Larger banks are following multiple strategies such as partnering with the platform giants in some countries, launching green-field banks in partnership with local telecom or travel companies in yet another country or distributing third-party, including non-banking products on their own portal in others. All banks are seeking innovative use cases that provide real value-add to their end-customers. Examples from Temenos clients include launching an aggregator multi-bank app and exploiting open APIs to provide non-banking services like managing passwords or offering a charity marketplace on the bank’s own portal.