The commercial banking sector has witnessed unprecedented innovation in recent years – from new customer channels and propositions through to new back office technologies and automation - across functions from SME banking to trade transactions to retail payments.
The pace of technological change has only just begun to pick up true momentum. According to a recent KPMG study, almost half of bank CEOs said they expect major disruption to occur in the sector over the next three years as a result of technological innovation.
For traditional commercial banks, the pressure is on – they face competition from the burgeoning FinTech sector, as well as from new banking start-ups. Non-traditional players are getting in on the act too – in the US for example, Walmart has partnered with Green Dot Bank to offer checking accounts. This means keeping abreast of trends, competitors, new market entrants and customer needs, is ever more important for commercial banks today.
In a recent study for one of the largest banking and financial services organisations in the world, The Smart Cube analysed key innovation trends and drivers in the sector, and the activities of its key competitors. Below we summarise some of the major developments:
1. Migration to public cloud systems
Large banks such as Bank of America and Goldman Sachs are increasingly migrating their legacy systems to public cloud systems from providers including Amazon, Microsoft and Google. Flexibility offered by the public cloud will allow banks to digitise their mid- and back-office processes on an end-to-end basis, rather than just overhauling the front-end systems, and reduced IT infrastructure spending will reduce costs and improve banks’ operating margins.
The CIO of JP Morgan Chase cited access to innovation as a key driver for the bank’s move to the cloud in 2016: “One of the reasons we are focused on the public cloud is that we recognise that some of our strategic technology vendors are going to migrate their products and services over time to the cloud. We want to be ready to leverage their future capabilities."
2. Increasing uptake of AI
Leading banks are increasingly investing in Artificial Intelligence to improve productivity and enhance customer experience, as well as to compete with FinTech firms. AI solutions can improve banks’ competitive position (against FinTech firms) by automating data-intensive and repetitive tasks, and can also quickly identify anomalies, thereby reducing money laundering and fraud.
In 2017, large banks including JP Morgan Chase, Bank of America, Citibank and Wells Fargo implemented a wide variety of AI-enabled solutions. According to The Financial Brand’s 2018 DBR survey, most financial institutions have either deployed or are expected to implement AI in the next 18 months for fraud prevention, biometrics identification and chatbot/robo adviser solutions.
3. Rising adoption of blockchain
Blockchain technology helps banks increase automation, transparency and compliance, while reducing fraud, delays in communication, and transaction and operating costs. According to a 2017 survey by PwC, 55% of financial institutions plan to use blockchain in their processes by the end of 2018, and 77% by 2020.
Many leading banks have either adopted or started developing blockchain-enabled solutions (either through in-house labs, FinTech partnerships or consortiums) to improve their service offerings and enhance customer experience. In 2017, Commerzbank partnered with IBM, and Santander with Ripple, to develop blockchain-enabled trade finance and payments solutions.
Blockchain is expected to completely revamp core banking services such as payment transfers and trading, and is also poised to replace the centralised business model of financial institutions. Early adopters of the technology will have an edge over competitors.
Commercial banks are finding it difficult to compete with FinTech firms, which tend to be fast-moving disruptors focused on a particular technology. The sheer speed of technological change and rising customer expectations present additional pressures.
To remain relevant and profitable in an evolving landscape, banks are adopting a number of strategies, including:
- Collaboration: Banks are collaborating with FinTech and other non-bank payment service providers, and leveraging their strengths, to create a conducive environment for innovation and to better serve evolving customer requirements. For example, BNP Paribas has teamed up with numerous FinTech firms to accelerate the on-boarding process and develop consumer models using machine learning software.
- Open banking: Some leading banks have started to open up their APIs (partly due to a regulatory push), allowing third-party companies to develop innovative customer solutions. Banks are moving to operating as a platform, with service offerings being outsourced to FinTech firms.
- In-house innovation: In the past two to three years, many banks (including Lloyds, HSBC and BNP Paribas) have opened in-house innovation labs (emulating the FinTech start-up culture) to develop new financial solutions. HSBC now has in-house innovation teams, in addition to innovation laboratories in Hong Kong and Singapore focused on AI, biometrics, big data analytics, blockchain and internet finance solutions.
The Smart Cube’s competitor and market intelligence has identified a wide range of opportunities for our global commercial banking clients to leverage both FinTech partnerships and enhance in-house technology. Our financial specialists translate their research and analysis into tailored recommendations aligned to banks’ specific business challenges, enabling clients to develop innovation-based strategies to create new propositions, meet evolving customer needs and gain a competitive edge.
If you would like to know more about how financial market intelligence can help your organisation, please get in touch.