It’s been a tumultuous few years for financial service companies. Many of them have seen traditional models of working and business disrupted by the ongoing Covid-19 pandemic, the fast-changing technology landscape, and a new breed of agile, tech-driven startups.
If anything, the next few years will be even more critical, as we see which businesses are able to adapt to and thrive in this changing environment.
As well as the pandemic, strong drivers behind these trends include the ever-growing numbers of customers who expect to access services instantly, from anywhere via their smartphones. As well as the vast explosion in the amount of data we are generating thanks to our increasingly digital, always-online lifestyles.
So let’s take a look at some of the biggest trends that will be impacting the industry, from the incumbent giants to the smallest, most agile startups, over the next 12 months.
There are over six billion mobile phones in the world today, and of the world’s 1.7 billion unbanked citizens, 66% own mobile phones. This means that these devices are a key target for banks and other financial services looking to put their services into the hands (literally) of customers.
Increasingly, when we make purchases, it will be done through a phone – this is true both online and offline, as many of us are ditching the habit of carrying plastic in our wallets in favor of mobile payment services. This is just one other way in which society is becoming ever more digital and connected, and to most of us, our phones are the primary interface between the digital world and the real world. Nowhere is this more true than in financial services, with every bank and insurance company keen for us to download and install their apps.
There are many reasons for this – from customer experience (more on this below) to economic reasons – it’s often far cheaper for banks to provide service this way than by having us come into bricks ‘n’ mortar branches (which, by the way, are rapidly disappearing). And of course, having an always-on connection to us that we carry in our pockets everywhere we go gives them access to a wealth of data on our lifestyles and behavior that can be used for many other purposes, from offering us tailor-made products and services to reducing fraud through biometric security measures. Throughout 2022 we will see banks and insurers increasingly deploying chatbots, cardless banking (including ATM withdrawals), and personalized communications, and they will all come to us through our mobile phones.
Banking in the cloud
Banks and financial services businesses were already migrating to the cloud en masse when covid struck, but the pandemic was a huge accelerator of cloud uptake. This was due to the benefits it brings to scalability at a time when digital services were increasingly in demand by customers, as well as security and resilience. Cloud technology makes it simpler and cheaper to spin up projects based on other breakthrough technologies mentioned in this list, such as mobile, blockchain, and artificial intelligence (AI).
Multi-cloud infrastructure, where more than one cloud service provider is used, as well as hybrid cloud, where banks invest in a mix of public and private cloud services, are both well understood and user in the sector. According to Accenture, 60% of its banking clients use more than one cloud provider, and over half have adopted a multi-cloud strategy. Cloud services are also increasingly seen as a way for companies in the financial sector to meet their environmental, social, and governance (ESG) commitments, as many of the big providers have adopted robust policies on sustainability and decarbonization.
Artificial intelligence and machine learning
The financial services sector has also been one of the keenest early adopters of AI, where its role in the automation of repetitive processes, risk assessment, and fraud prevention is well established. During the pandemic, almost half of us made significant changes to the way we bank due to Covid-19. This means that as we go into 2022, we will see an increase in use cases around understanding and responding to changing customer behavior.
Established banks face competition from more directions than ever before – with fintech startups, big retailers, and tech giants like Google, Amazon and Apple all signing up customers to services that would traditionally have been their domain. AI and smart, data-driven technologies are a key tool for all of those competitors, meaning that traditional banks and insurance companies have no choice but to adopt them themselves if they hope to stay in the game. They have often shown themselves to be quite capable of building these technologies into backend operations to create robotic process automations (RPA) capable of streamlining repetitive tasks. Now the challenge is to do this with less predictable jobs such as selling to individual customers or creating bespoke packages of services.
Worldwide, IDC predicts that the financial services industry will be second only to retail when it comes to spending on AI between 2021 and 2025, accounting for nearly 14% of the $204 billion that will be spent annually by the end of that period. One further area where growth will be apparent is the use of AI to ensure fair and equitable treatment of credit applicants. Algorithms will become more efficient at determining where bias is being applied in these processes, with the aim of ensuring that all segments of the population have fair access to lending and business funding opportunities.
Blockchains are basically just databases that have a few special characteristics; firstly, they are distributed, meaning they are stored across many different computers with no one person having overall control. Secondly, they are encrypted, meaning they can only be altered or updated by people who have the cryptographic keys that let them do so. Thirdly, they are governed by consensus, meaning changes to the data can only be made if everyone with a say in the matter agrees that they should be made. These characteristics mean they are hugely disruptive to the financial services industry, which traditionally has been centralized and governed by the owners of the banks alongside regulators, such as governments and national banks. They are also potentially hugely beneficial, offering the chance to streamline infrastructure while cutting fraud, creating transparency, speeding up core processes such as settling and clearing transactions, and increasing security.
Banks and other financial services have been trialing and piloting blockchain projects for some time now, and many have been put into general use. HSBC and Wells Fargo use the technology to settle foreign exchange trades; Mastercard and Paypal allow payments on their networks to be made using blockchain currencies (cryptocurrencies), as does J P Morgan, which has created its own cryptocurrency. And insurance giant AXA has created its own blockchain platform to automate the process of paying out to customers whose flights are delayed.
In 2022 it's inevitable we will see more innovative use cases for this hugely transformational technology. While it was initially limited to cryptocurrencies and digital money, its potential in financial services now clearly reaches far beyond.
Improving customer experience with technology
We know that all of the trends mentioned above have been successfully used by financial services companies to automate and streamline back-office functions like transaction processing and fraud detection. Now companies are comfortable with these technologies; they will increasingly feel confident deploying them to solve problems relating to their most important asset – their customers.
This is where I expect to see real growth and innovation in 2022. AI, cloud services, blockchain, and mobile are at their most transformative when pulled together to create solutions that improve the lives of customers. Banking apps are commonplace and often aim to deliver a great experience simply by filling their primary function of giving customers access to banking services from anywhere. In fact, during the pandemic, they became the most popular channel for customers to engage with their banks. Now the race is on between service providers looking to differentiate themselves on how effectively they can leverage the hottest trends to further improve the experience for everyone. Many apps now come with built-in AI assistants that can carry out tasks like helping customers manage their money more effectively by classifying spending patterns and automatically suggesting where efficiencies could be made. Other strong sub-trends include personalization, where data is used to match customers precisely with products and services that they actually need, rather than just the ones a financial services company wants to sell them. An example of this is when a lender is able to pre-approve a customer for a loan without carrying out a search that impacts their credit record. This means they are able to go to that customer with an offer of a loan, rather than just an invitation to make an application. Also high on the list of must-haves is voice – as in voice interfaces and chatbots – which are reaching levels of sophistication where they become truly useful.