Emerging Financial Services Trends and The Future of Banking

Digital strategist mapping future ideas for banking platform
Sam Welch discusses the future of banking and the trends he seeing in the market

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 I am seeing them and share my predictions for the remainder of 2023 and beyond.

The future of banking: Macroeconomic headwinds

The financial markets have experienced many unpredictable and sizeable shocks since the turn of the century. The Global Financial Crisis in 2007 shone a light on some weak foundations underpinning the industry at that time. This resulted in the implementation of a more stringent regulatory capital regime. More recently external factors including Brexit, the COVID-19 pandemic, the cost of living crisis and a mini-budget that spooked the market have each caused material problems for the economy and importantly the financial ecosystem.

While consumers are feeling the pinch, many are able to withstand these impacts by cutting back on non-discretionary spending or eating into their savings, or they have enough headroom to not really be affected. However, there’s clearly a segment of the population struggling to make ends meet. In these tough times a major focus for lenders should be supporting these vulnerable customers with the right products, support and education to help them navigate these hurdles as best as possible.

Whilst recent interest rate rises have increased margins and profitability of lenders, continued market volatility is putting pressure on the housing market (a key segment and pulse of the broader economy) as well as the cost of funding for a number of Fintechs. Add to that the turmoil surrounding the collapse of US bank SVB (Silicon Valley Bank) and, in Europe, the forced takeover of Credit Suisse by UBS. Whilst guardrails are in place, such as guaranteeing deposits and the UK’s ring-fencing rules which should prevent a material issue for retail operations of large financial institutions, continuing uncertainty of this kind has the potential to destabilise confidence in the financial services industry.

The future of banking: Competitive environment

Traditional lenders are under constant threat from Neobanks as they try to acquire large customer bases through either competitive offerings or a slicker user experience — leaving no part of the traditional banking value chain safe from being challenged. The likes of Monzo and Starling (with significant customer bases of 5 million and 2.7 million respectively) are inevitably going to continue to thrive.

Product and technology innovation are constantly pushing the boundaries of what we would consider traditional banking. Recent examples include the maturity of digitalisation of instalment payment providers (buy now pay later) and banking as a digital experience that seeks to create stronger relationships between bank and customer. ‘Banking as a Service’ (in which licensed banks integrate their digital banking services directly into the products of other non-bank businesses) has broadened the competitive landscape. This allows non-bank business to offer its customers digital banking services, without needing to acquire a banking licence of their own.

The future of banking: The evolution of banking regulations

Financial Services continues to be a heavily regulated industry. The upcoming Consumer Duty regulation is consuming considerable lender resources to implement, to ensure they have appropriate processes and controls in place to demonstrate they are putting customers at the heart of everything they do and therefore achieve good customer outcomes. This poses its own challenges for traditional lenders and Neobanks; with the former having to unpick a myriad of legacy systems and processes and the latter having to introduce workflows potentially not already in place — or bring them to the level of robustness now required.

Illustration of a consumer using their laptop for online banking

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 given 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.

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), banks are further prioritising material investment in future-proofing their technology estates.

The aspiration for all 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.

Banking beyond 2023

Technology and data will continue to play critical roles across the banking industry. Artificial intelligence and robotic automation will likely become table stakes, with blockchain and crypto moving along the maturity curve and potentially coming to the fore. As banks morph away from the traditional branch network, and barriers to entry continue to be lowered, it remains to be seen whether Big Tech companies will be enticed to move into the banking industry and leverage their strengths (strong UX, hyper-personalised service and significant customer base) or whether they want to avoid regulatory scrutiny. The challenge will be for regulators to keep pace with technology advancements to ensure minimum standards are met (from Tier 1 banks to Fintechs), and the end customer is the beneficiary of these developments.

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