The global banking industry encountered many changes in 2017. As a result, it is proving prudent to analyze the core factors that will drive the dynamics of impending industry changes, as well as the challenges banks will face throughout this year.
Driving factors to watch
• Artificial Intelligence: Banks and other financial services firms will focus on collecting and analyzing data across different sources to understand customer behavior patterns. Machine learning will assist banks in analyzing huge piles of data from different sources to deliver meaningful insights about customers so banks can target different customer segments appropriately. Having been segmented by behavior, these customer segments differ from the traditional product-based customer segmentation.
Visualization of patterns of data will be fundamental and will be heavily influenced by AI techniques. The areas of banking that will get the most traction in this space will include customer acquisition, product offerings, risk management, credit decision-making, investment advisory services, and the handling of customer queries and complaints.
• Processes Automation: Automation’s collective impact on jobs is already being debated in banks. In 2018 we will experience a huge leap in the Robotic Process Automation (RPA) space. Jobs that are repetitive and prone to human error will be automated. Application processing, reconciliations, issuing periodic letters, offers, notices to customers and generic query handling will be the areas that will see improved, error-free automation.
• Fintech Capabilities: The word “disruption” will continue to gradually disassociate itself from the fintechs. Banks have learned that fintech competencies are a must-have in regard to their overall service offerings. Fintech features have to merge into the blend of offerings, through partnership, acquisition, or in-house development. In 2018 we will see more collaborations and partnerships that will establish bank-fintech amalgamations. The outcome of this will be the addition of new customer segments to bank customer bases, ultimately, new revenue streams for banks.
• Open Banking (PSD2): With PSD2 regulations becoming national law in European Union member countries in the first part of 2018, many banks will have to focus on PSD2 compliance. Banks must put in place effective strategies to establish strong customer authentication, as per these guidelines, without impeding the customer experience in the PSD2 era. Initiating a two-factor authentication for every customer transaction may be detrimental to the rich customer experience a bank may be planning for. Therefore, banks will have to focus on exemptions to “strong customer authentication” (SCA, a term under PSD2) and judiciously build their services around them.
The PSD2 concept will not be limited to the European Union only. We will see the propagation of the concept in other parts of the world in 2018. Newer API (application programming interfaces) development and their monetization will drive the open banking success story.
Challenges to anticipate
While the above are the different directions the banking industry will progress towards, there are some great challenges that banks will encounter as they digitize. These include the following:
• Start-up Mindset: Artificial Intelligence and blockchain remain relatively new and are still in the nascent stage. Banks should take up such projects with a different approach than their traditional business models. Incubating and building such solutions and transforming them to platforms will require banks to think like start-up companies. Yet forming a dedicated team and trying to achieve rather uncertain objectives can challenge traditional bank culture.
• Regulatory Compliance: Even through some regulators have embraced open banking concepts, there are still challenges here for banks regarding regulatory compliance. Rules like SCA (Strong Customer Authentication) come at the cost of client experience and compliance will not be stress-free.
Solutions developed in new areas like AI will have to undergo regulatory scrutiny to ensure compliance. Exposing and consuming APIs with third-party service providers will have to fulfill compliance rules and regulatory risk management expectations as well.
• Integration of Emerging Technologies: Banks will make quantum jumps in different new areas, as discussed above. However, to integrate them into their existing platforms will be an uphill task.
For example, imagine a bank carrying out machine learning-based predictions to come up with recommended outcomes and automate their processes according to each outcome. This will involve AI algorithms running and feeding their output as input to RPA. Such cases will create complex scenarios to handle and integrate.
All the advancements discussed will be expected to prove their work. They will have to yield results in terms of better customer satisfaction and improved revenue streams for banks.
The key to making a success from these developments lies in having appropriate strategies in place to prioritize directions; pro-actively assessing of customer sentiments; and re-thinking business models to align with upcoming changes.
About the author
Satya Swarup Das is a Senior Solution Architect at Virtusa. He has worked in the banking domain for multiple clients across the world in the retail financial services transformation space. He can be reached via LinkedIn.