For the past three months, bank leaders have focused their attention almost exclusively on the COVID-19 pandemic. This is understandable, but with everyone focused on the short term, there has been little discussion about what will happen in 2021 or beyond. Especially now, leaders must not lose sight of what they want to achieve long term. For this reason, it is important to consider what banking will look like in 2030. When looking so far ahead, it is helpful first to look back and see if what we have learned over the past 10 years could help us predict the next 10 years.
Banks are resilient
The COVID-19 pandemic is the latest in a long procession of events that have seemingly threatened the traditional banking model. Today, as in the past, the banking model is proving remarkably resilient. Expectations for the second quarter of 2020 are already better than some had recently feared. Likewise, a decade ago many predicted the imminent demise of large traditional banks. Instead, they rebounded thanks to a combination of factors including regulatory defenses, government support, deep customer relationships, and strong ties to the broader economy. For all the talk of how the new generation of financial technology (FinTech) firms will disrupt banks and make them redundant, history suggests that most of these FinTechs will disappear by 2030 and many traditional banks will survive.
Most “disruptive” business models do not deliver
Despite the perpetual search for new business models, the demise of the traditional banking model is not imminent. These new models often do not deliver on their promise. Many fail outright. For example, a decade ago bank/retail partnerships were all the rage. They seemed like the way banks could expand their reach into the daily shopping habits of consumers. Instead, these partnerships mostly failed because banking is highly regulated, complicated, and difficult to operate alongside a retail business. A few of the recent bank/telecom and bank/FinTech partnerships may succeed. However, many telecom operators and technology companies will struggle in banking over the next decade for the same reasons that retailers did over the past 10 years. By 2030, we believe that most banking activities will remain in the hands of banks.
Customer data and AI are important, but they are not a panacea
A decade ago, many banks were focused on exploiting their large store of customer data to improve customer relationships and obtain a greater “share of wallet.” After 10 years, banks are still struggling to access their data and render it actionable. More recently, there has been much talk about artificial intelligence (AI) as the key to unlocking more value from customer data. In reality, banks already use simple AI applications such as fraud detection. The problem is that the emotional component of money, which means a wide range of outcomes when making decisions, makes the use of predictive analytics very difficult for banks. Indeed, it is completely different to how such companies as Amazon or Google deploy predictive analytics. Some banks will improve how they use customer data, but by 2030 banks will both use AI more and be more realistic about what AI can achieve for them.
This time, the change will be real
A decade ago people predicted severe technological disruption in areas such as payments, cards, and wealth—most of which did not come to pass. One reason is that some consumer habits and preferences are deeply ingrained. They change slowly. Some other habits, however, change rapidly and dramatically. A decade ago online shopping was just one established channel, but by the end of the decade it had become the fastest growing channel. More than 9,300 stores closed in the U.S. in 2019, felling many large retailers. The surge in online shopping has simply set the seal on this change. It is millennial consumers who drove digital adoption. Their successors, Generation Z, the first demographic of digital natives, will adopt new technologies even faster. By 2030 the majority of customers will engage with banks in a very different way—and those banks that struggle to adapt will face the same bleak future as many of today’s retailers.
To be ready for these changes, banks should consider their long history and have a clear strategy on how to develop necessary innovation capabilities. Most large banks today are the product of a long line of M&A—and M&A will continue to be a preferred route for banks to address the strategic challenges ahead. Over the next decade, banks with strong innovation capabilities will have opportunities to purchase banks which cannot innovate but which still possess value, in the form of customers, assets, and deposits. Banks without innovation capabilities can avoid becoming acquisition targets by purchasing these capabilities from FinTechs.
By remaining resilient, excelling at those activities which are core to banking, using customer data better, and being ready for rapid change, banks can again prove the prophets of doom wrong.
This article originally appeared in Gulf News, October 2020.