Banks can emerge in a ‘better place’ from today’s perfect storm

20 September 2022 7 min. read

Ever since the global financial crisis of 2008, the banking system has been facing mounting pressure to change. But amid today’s perfect storm, on the back on disruption and a fresh wave of economic uncertainty, the sector could emerge as a better, more purposeful global force, according to a new report.

For its analysis, financial services strategy consultancy Fincog spoke to executives and senior leaders from across the banking world in Europe and Asia. According to Jeroen de Bel – founder of Fincog and lead author of the study – the findings show that a mixture of macroeconomic and industry-specific developments is creating the perfect storm in the coming years for banks.

Far from being pessimistic about the situation, however, Fincog’s ‘Banking for Tomorrow’ report suggests that the coming crisis provides the banking sector with a “perfect opportunity” to reboot and revamp.

Banking in a perfect storm?

Banks that succeed in navigating through this period of transformation will emerge stronger, and in a much better position to serve their customer in a changing future. While some will fail to adapt, overall, the banking (and broader financial services) ecosystem will in Fincog’s forecast be better in the end.

“The idea banks might be about to feel the heat may still be hard to believe for some. Profitability has been improving over the last years and rising interest rates provide a positive stimulus,” says De Bel. However, a more long-term view on the sector reveals that profitability “has generally been lagging behind the cost of capital. And with a slowdown of the economy, returns will be under further pressure again.”

Additionally, impactful developments are unfolding at a time when several trends are coming together to create pressures from within the sector.

Perhaps the most obvious change on the horizon is customer experience. There is mounting demand for banks to provide experience 24/7, which people can use as and when they need them. Banks have struggled to meet these demands so far, meanwhile FinTechs are leveraging their agile and innovative models in order to effectively capitalise on the gap.

“FinTech start-ups typically focus on one specific niche, often one that is still underserved or overpriced,” De Bel explains. “They benefit from a greenfield approach combined with rigorous focus on one specific customer need, as opposed to banks that serve a wide variety of customers across large product portfolios. Thereby they are able to provide a better customer experience, with higher quality of service and lower cost.”

But it’s not only FinTechs which may eat into the customer base of traditional banks. New types of players, such as BigTechs and super-apps, are also entering the financial services sector, offering an integrated, seamless customer experience, in what De Bel calls “a clear blurring of lines between industries.”

Super-apps are apps that bring several aspects of life into one app, including e-commerce, social media, ride-hailing, food delivery, among many other use cases. Such platforms pose a threat to banks as they are experts at cultivating customer relationships – meaning they see an opportunity to expand into financial services, and “disintermediate the banks” which have lost touch with customer needs.

Further reading: Will financial services soon see the emergence of a local SuperApp?

Meanwhile, BigTechs also have an advantage on banks at present, due to their knowhow regarding the ‘new gold’: data. “The amount of data, quality, and capabilities to act upon insights – forms a key enabler to capitalise on customer relationships and deliver a tailored customer experience,” says De Bel.

Presentation - Banking for Tomorrow

A slow-moving target

As they look to develop responses to these threats, banks face a challenge. They are being held back by legacy organisations: including complex governance structures; traditional ways of working which involve slow decision-making and risk-aversion; and an outdated, siloed technology landscape.

This, De Bel says, means that banks “are rather slow to change, less efficient and less innovative” – potentially hamstringing any efforts to become future-proof.

However, even against this backdrop the banking sector is still evolving towards a new equilibrium. The dismantling of incumbents is driving the progression of the financial ecosystem forward, opening space for new types of banks to thrive with new technology, services and means of distribution. Weeding out weaker players will mean “stronger ones will emerge building upon fertile grounds”, De Bel contends.

“In the long term, consumers and society as a whole will be better off, benefitting from better customer experience and a more cost-efficient, resilient, inclusive and sustainable system,” he adds. “Thus, brighter times lie ahead on the horizon as the industry moves forward.”

During this process, however, politicians and regulators will need to be open for the transition. Redundancies will likely be a key part of the shift – but propping up banks to avoid that risks de-energising the transformation of financial services providers.

“Banks will need to downsize to be ready for their future function”, De Bel argues. “Key policy makers should accept the difficult reality of employment losses. Sticking to today’s paradigm will only hamper progress and uphold market inefficiencies.”

The future of banking

In the future banking sector, customer experience will be a focal point of differentiation. Services will be provided in ever more personalised ways, at the right place and in the right form for clients. This will be enabled by banks building upon customer data and advanced analytics, according to De Bel.

Beyond that, ESG is another area that will be at the forefront of future successful banks. This is arguably the most crucial progression of the financial services industry, which has not historically been seen as sustainable, socially responsible or inclusive. But banks are already “becoming more conscious of the role they have in making a positive change”, De Bel contends. And there is much more to come.

In their new state, banks will operate beyond today’s scope of environmental, social, and governance (ESG) practices, expanding from current areas such as investments to operating net-zero and playing a key role in helping others realise and finance their own net zero journeys – something which other reports have also suggested could help banks bolster earnings.

Similarly, banks of the future will also be more inclusive by reaching new customers around the world. Across the globe, bank account ownership surged from 51% to 76% between 2011 and 2021 according to the World Bank. With the help of technology and digital payments, banks can further improve financial inclusion.

Executing the strategy

In its report, Fincog provides a methodology for how banks can embark on this daunting transition. The approach advises banks to first define a future-proof strategy, and then build and transform the seven key capabilities that serve as pillars of the future bank.

Seven components for building the Bank of Tomorrow

“To succeed, one needs to both plan and execute with superior quality and the right focus, De Bel concludes. “In addition, banks are urged to act on immediate priorities while in parallel building new capabilities for the long term. And for those banks that are able to re-imagine their traditional banking models, the future will be bright.”