Emerging Financial Services Trends and The Future of Banking

Digital strategist mapping future ideas for banking platform
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Having spent the past 20 years working across the UK, Europe and APAC in various senior strategic and consultancy roles working with financial services providers, I strongly believe the banking industry has never been so complex and competitive; with over 350 lenders now operating in the UK.

Trends that were seen as somewhat far-fetched a decade or so ago (e.g. hyper-personalisation of service; digital as the primary engagement channel) are very much here to stay and becoming table stakes to survive and grow.

In this article I’ll explore trends as we witness them and share our implications for the remainder of 2024 and beyond.

The future of banking: Regulatory environment

Financial markets in the UK are facing a much more assertive approach from regulators towards the focus on consumer protection, data privacy and the advances in AI (that are finding reasonable use cases for adoption into banking processes). In addition, banks are putting significant focus on the Basel standards implementation. The compliance period for this update starts in 2025, and much of 2024 will be allocated towards implementation and preparation programs.

The culmination of this effort is expected to see some level of risk aversion from financial market players in a period where growth in customer bases and profitability is unlikely to be as easy to achieve compared to recent times. With this prudence in place, it is imperative for banks to gain a granular understanding around their customer’s circumstances and to treat each customer according to their situation and in line with the regulatory requirements they are facing.

The balancing act faced by financial markets in finding niche pockets of growth whilst ensuring excellence in their prudential responsibilities to their customers is expected to see significant demand in customer level data gathering and improvements to customer engagement processes.

Additionally, FCA updates (as recent as February 2024) to the Consumer Duty Act provide insight into best practice examples of work being carried out by providers, whilst highlighting areas of concern and required improvements, as businesses look to meet the new legislation and improve customer outcomes and higher standards of customer care.

The future of banking: Meeting consumer expectations

Under current market conditions the UK economy has witnessed a period of higher than usual interest rates led by inflation control strategies adopted by the Bank of England.

The challenge for banks within this process has been the increased cost of servicing and attracting deposits within a high interest rate market. The upside of this high interest market has come through the ability to offer attractive deposit rates for customers who are seeking greater returns for their savings and transactional accounts. The challenge for banks has been the ability to find similar increases in profitability in a highly competitive lending market where pricing remains a major differentiator amongst consumer choice. This reduction in spread has created pricing challenges - consumer choice and expectation have driven increased deposit rates yet we have seen a lower rate in the increase of lending rates.

Should rates remain high for a prolonged period we'd expect banks to overcome this challenge by overlaying products, services and processes which appease a consumer’s individual circumstances and not just rely on the pricing lever available to attract deposits and increase lending demand.

The future of banking: The influence of FinTechs

Financial services will remain the main battleground for technological disruption, with younger consumers increasingly showing preferences to experiences over legacy brand loyalty. The evolution of the FinTech market saw this become a major threat to incumbent banks in market. This threat has evolved into an adoption and collaboration approach as generational preferences migrate in how consumers want to be served.

Incumbent banks are witnessing the benefit of multi-channel approaches to customer engagement and advances in the way consumers want to interact and consume financial products. While many incumbents have travelled down the build and adopt route, a fair amount of financial market institutions have recognised the benefits of collaboration with businesses previously considered threats to financial services. The adoption of microservices within customer journeys and product fulfilment has created an environment of reduced competitive threat from FinTech but rather an avenue for disruptive collaboration.

At the heart of this evolution lies the demand for customer level data and insights to cater for the personalisation requirements of younger generations. It has also aided in improving customer handling and removing friction from experiences of face-to-face interactions still demanded by 60% of the population.

The future of banking: Customer hyper-personalisation, technology and innovation

User experiences in other sectors (e.g. retail through the likes of Amazon and Apple) as well as with Neobanks have completely changed what customers expect from financial service providers. They now demand their banks not only know who they are (through a safe, smooth, seamless journey) but also tailor specific products and services to their personal situations (saving for their first home, requiring a credit card for a big holiday etc.). As an aside, the trade-off between friction in a customer journey versus ensuring the right levels of fraud controls are in place is always a healthy topic of debate — having a “friction-right” journey is key.

Pre-eligibility and robust affordability checks are becoming more critical to effectively tailoring solutions to keep customers taking new products from that lender. Open Banking adoption has gained strong momentum, which will further enable a more granular view of the customer. Trust and loyalty also remain key issues across financial services, so any lender not delivering a hyper-personalised service will likely see their customers go elsewhere. We're likely to see continued investment and development of apps and platforms with new innovations and potentially folding-in of different services that empower consumers and offer convenience.

For decades, major lenders have faced the challenge of trying to rationalise their core banking platforms borne from years of acquisitions. With greater focus on digitalisation and hyper-personalisation of customer service, as well as competition from Neobanks (that don’t have the same complexity of operating systems), high street banks are further prioritising material investment in future-proofing their technology estates.

The aspiration for lenders is to be able to ingest new forms of data and services to ensure they have the most robust, actionable and current view of their customers which enables more personalised services to be offered. We’ll see innovation in customer-facing ways such as products and payments, powered in the backend by richer data insights stemming from trended data, Open Banking and alternative data sources.

Composition of consumers

Banking beyond 2024

Within traditional financial products, banking markets have seen a reduction in profitability over the years. Historically low interest rates and increased consumer choice have been the major contributors to reductions in lending margins. Adjacent services (considered as distribution against financial service products and attracting fee-based revenue) have seen strong double digit returns for banks who have entered the domain of the expanding customer ecosystem and the adoption of embedded finance products.

With the increasing influence of younger generations – the future target market for financial services – demand is for greater experiences, and there can be an expectation that banks move towards creating and adopting non-traditional financial service products as part of the move to capture more ground in customer ecosystems. This, of course, will require greater flexibility in adopting current and future available technology as well as consuming non-traditional alternative data assets used for many years outside of financial markets.

The traditional focus of serving a customer's demand for financial products will require a change in approach and a move towards banking a customer’s lifestyle and creating capacity for customers to consume products when they arise and attuned to their real-time circumstances. Banks will have to evolve a more intimate relationship with their customers as they embed themselves further into their lives.

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