Introduction to Future of Banking

Customers and their expectations are changing with that one of the oldest services – ‘banking’ – is also undergoing a change. Let’s delve into how banks can continue to remain mainstream.

First of all, let’s define “what does banking mean to you??”

The answers can be varied, but chances are that they can be broadly classified among the following types:

  1. An institution for financial transactions and deposits
  2. Wealth management and financial planning
  3. Financial lifecycle management

Banking in its current form services the first two categories reasonably well. The institutional, industrial and technology maturity has helped banks and financial institutions develop and launch full-scale services that take care of the transactional aspects of banking. Banks come second only to Big Tech firms in terms of customer data and customer outreach. Yet, for all its full-scale services, one question continues to trouble financial institutions – how to build customer loyalty in the long term beyond the implications of long-term credit? Full-scale financial lifecycle management where banks are able to manage every aspect of a customer’s financial lifecycle is still not covered under the ambit of present data banking.

Ask yourself – are you loyal to any bank? Chances are the answer would mostly be a “no”. Customers are not loyal to their banks, they regard it as much a utilitarian service as other general services. In order to build loyalty, banks have been looking at diversification of services as well as means of outreach – going digital is just the first step of that journey.

The bank of the future will be a very different kind of institutions than its current avatar. It will be defined by its ability to be agile, dynamic and responsive to changing business scenarios and evolving customer habits. In order to do so, banks need to move from being traditional holders of transactional data and engage in relational data.

4 trends shaping the future of banking

  1. Banking APIs are enabling developers to build fintech products in collaboration with banks
  2. Partnership opportunities are allowing both banks and fintechs to leverage each other’s strengths
  3. Unbundling/bundling of financial services through diverse offerings
  4. Tech platforms are gravitating more and more towards financial offerings.

Banking APIs and the Open Banking revolution

APIs allow different systems to communicate and interact with each other. Using APIs, banks can expose their customer database and transaction repository to be leveraged by a fintech platform to offer differentiated services. Similarly, any partner/external agency can offer their services to bank’s customers. Using APIs, the user journey can be seamless and hassle-free.

So far, these interactions have been limited to partner fintechs/partner firms. However, under the open banking framework, banks can allow their customer data through open banking APIs that can be consumed by any third-party developers or institutions to build applications and services around the data from the financial institution.

Banking APIs are currently offered around 3 major segments:

  1. Data Aggregation – Data Aggregation APIs enable developers to access clean customer financial data
  2. Lending – Lending APIs enable the creation of better debt underwriting and debt servicing workflows and algorithms. Lending APIs can work on both data origination as well as credit scoring.
  3. Onboarding – Onboarding APIs help startups and fintech firms to onboard customers quickly and efficiently in line with compliance and regulatory framework. KYC APIs provide a readily available tech stack through which to verify and validate customer ID and data.

Bank-Fintech partnerships

Bank-fintech partnerships are enabling Banking-as-a-service. BaaS allows any organization to directly add banking products to their portfolio and offer the same to their customers. For eg., banks can offer developers access to a developer environment via a portal and deploy an API middleware that takes care of identity and access management as well as security of data. In the Indian context, RBL Bank and Federal Bank have taken the initiative to provide developers access to banking APIs via developer portals. However, there is a huge untapped opportunity here for banks to leverage.

Bundling/unbundling of financial services

With evolving customer behavior comes the need to evolve business offerings and this trend finds significant traction in the way various financial services are either bundled/unbundled across different products and services. For eg., in lending, there is a marked diversification of services in the form of either P2P lending, P2M lending, unsecured personal credit lines based on alternate sources of data. Fintech firms traditionally focused on specific niche services such as payment gateways, e-wallets, virtual debit cards are now moving towards bundling their existing offerings to offer more traditional services such as physical debit/credit cards or offering assets management services in partnership with legacy card merchants or banks. A recent example of this can be seen in the way Paytm has partnered with Citi Bank to offer Mastercard-branded credit card to merchants registered with Paytm.

Convergence of Tech Platforms and Financial Services

The biggest threat to legacy banks and FIs are not the fintechs and startups but the big tech platforms who already have achieved significant scale in customer outreach and customer data. The GAFA (Google, Amazon, Facebook, Alibaba) tech cartel has a far reaching impact on banking beyond niche financial offerings offered in partnership with banks. These platforms have the tech firepower necessary to process humongous datasets and have detailed insights into customer behavior and interests based on their digital footprint. Coupled with the latest AI and ML-enabled analytical tools, these firms can make timely interventions in a person’s lifecycle to pre-emptively pitch financial products at the right time when customer need is at it’s highest. This would help set it apart from legacy banking networks where the offering is based more on customers expressing interest, ie., a pull scenario vs a push scenario.

In the future, banks will have to evolve from its traditional roles of being providers of financial services to become a gateway for all kinds of engagement practices. Using a customer’s digital footprint as a building block, banks will have to look at more proactive and pre-emptive engagement that helps customers find more value in its relation with the bank.

Someone once said, “Banks are in the business of managing and maintaining trust.” The bank of the future will have to reinvent themselves to earn and keep that trust if they are to maintain their relevance and businesses. Banks will have to enter the life of its customers than remaining a mere financial transactions platform.

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