What did we see in 2019?
2019, in retrospective, was a game-changing year for the world of banking.
The prize for the most revolutionary changes will certainly go to those banks which took a leap of faith and partnered with fintechs and the bigtechs. Citi’s partnership with Google to offer checking accounts and Goldman Sachs’ alliance with Apple to launch the ground-breaking Apple Card will certainly be the highlights when we look back at 2019.
Meanwhile, the bigtechs themselves made rapid moves into the banking industry. Facebook has gone ahead with its controversial digital currency, Libra. Google, Amazon, Alibaba also made considerable progress in the world of finance by making huge investments in the digital payments space. Google Pay became one of the most used apps in India, Amazon launched a credit facility for SMEs, and Alipay launched its international e-wallet in the last year.
The growth of digital banks and digital banking was also a welcome change that energized the banking sector even as the gaps between the digital banking leaders and digital banking laggards widened in terms of performance and customer experience. The Chinese and UK based digital banks made heavy inroads into the global market in the last one year. Not to be outdone, the traditional banks also pitched in with their versions of the digital banks.
Banks also made the right noise in looking at the way they manage costs and improve their operational efficiency. Moving towards the cloud, decoupling their core from their back-end and front-end systems, increasing their focus towards reducing the non-performing assets – all were steps that the banks across the world took in the right direction in enhancing their operational efficiency.
What do the numbers say?
Well, the numbers may not have reached the highs of 2018, but they certainly did not disappoint. While 2018 was the first time since 2007 in which the year on year growth of market value, profits, revenue, and assets of the world’s largest banks as per the Forbes Global 2000 list reached double digits, 2019 was also not far behind. The rate of growth of profits and revenue, the two most important drivers of any business, was the 2nd best in the last five years, just behind 2018. In fact, the average revenue of the world’s top 300 odd banks in 2019 fiscal year crossed the highest ever average revenue of the top 300 banks which was previously achieved. Yes, because of global pressures, the market value and asset size did dip, but they are still the second-highest values in the last twenty years.
Just see the numbers below which tells a story by themselves (Note: All numbers are based on the last reported fiscal year and the years indicate the year)
For starters, the world will witness 80 million more people. That is a growth rate of more than 1%. But this population growth will be uneven. Many countries in Africa will witness a larger growth in its population whereas many countries in Europe and North America will witness a slower growth rate. People who were born in this millennium and were not witness to the 2000-01 dot com bust will start entering the workforce. While there will not be any mass production of flying cars or dresses that will help us become invisible, the growth in technology will be faster. Technologies like 5G, blockchain, quantum computing, etc. that were just buzz-words will become more common. The world will also witness some large political and regulatory disruptions. The race for the White House will heat up; Brexit will surely shape up; and Open Banking, GDPR, and California Consumer Privacy Act (CCPA) will become clearer and more organizations and countries will come under their purview. The taxation rules, already having undergone a transformation in many countries, will continue to evolve in several countries. And the world will witness many more changes – technological, political, social, cultural, and economic – that will impact the world of banking in one way or the other.
What will this mean for the world of banking in 2020?
The banking industry was reborn after the year 2008 when the financial crisis made a large set of people think that several of the large banking behemoths may die. But many of them survived, and a new phase of banking started. As we step into 2020, the banking industry will feel like a kid stepping into its teenage years.
An age where bodies and emotions change along with their perspective of the outside world. An age where kids start to grow out of the shadows of their parents. An age where they start to know about the world around them. I am sure the banking industry will also be having the same kind of feelings as they step into 2020.
Predictions are a tricky business. But I believe that predictions can be made more accurate if we rely on data and use the data to tell what the future holds. Hence, I have leveraged the data to outline some trends that I believe will define the world of banking in 2020.
Trend 1 – Non-traditional markets will drive the banking industry
An analysis of the world’s 300 largest banks in terms of market valuation reveals a strange thing. The top 5 countries which had the highest growth in market valuation all come from the middle east. India, Indonesia, Israel, Mexico, Colombia, etc. were also not far behind. It was even more surprising that banks in the world’s largest four economies – the US, China, Japan, and Germany, had a de-growth in their market capitalization.
I believe that this trend will further continue. The growth in the banking industry will not be shaped by the economic powerhouses, but by countries in Latin America, South East Asia, India, Indonesia, and the Middle East. While I do not expect the growth in these regions to be as high as what the world witnessed in 2019, I am sure the growth of the banks in these regions will far outweigh the growth of the banks from the economic powerhouses.
The reason for this, I believe, is the lead the banks in these regions have taken in their digital transformation journey as well as the significant banking reforms that the governments in these regions have done. It is also because of the significant investment by these countries in creating an ecosystem of digital banks and fintechs that will not only challenge the traditional banks but complement them.
Trend 2 – Digital Banks will grow, but will not replace the traditional banks in 2020
2019 saw significant progress being made in the world of digital banks. The existing digital banks across the world like Monzo and Paytm saw a significant upsurge in their customer bases (In fact, Monzo crossed 3 million customers and Paytm crossed 350 million users in 2019). Countries with a high level of internet banking penetration like Hong Kong and Singapore also started to open up to digital banks. If not for the Hong Kong protests, the digital banks of Hong Kong would already have made a mark.
But, the digital banks across the world are yet to have a viable business model that will make them successful in the long term. They are also offset by mounting losses as they push ahead to acquire more customers. In the meantime, the traditional banks have also launched their own digital banks.
With all this in mind, I strongly believe that while the digital banks will continue to grow in 2020, few of them will face further losses and none of them will be able to completely replace the reach of the traditional banks. While customers will further use the digital banks and mobile wallets from banks and technology companies, I do not expect the level of deposits in the bank, a key factor in driving the business of any bank forward, to come down. I am also sure that many more countries in South East Asia and Africa will open their doors to new digital banks, of which the traditional banks will show considerable interest.
Trend 3 – Hyper-Personalization will become more real
The world witnesses nearly 15 billion spam emails in a day and this constitutes nearly 50% of all the emails sent across the world. I still get emails asking me to sign up for a student loan. No wonder that people have gotten used to tuning out information they do not need. The world of marketing, and in particular, the world of banking are the ones who are worried.
In 2020, the banks will take a big leap to address this. With a focus on getting more value from every dollar they spent, banks will look at leveraging the power of machine learning and big data analysis to chalk out highly personalized offers and products that will be closer to the life of their customers. Context-based communications will start to become the norm along with an increased focus in considering each customer as a separate segment or the segment of one. Each engagement with the customers will move towards becoming more value-based which can be clearly validated thus bringing in the need to have an in-built “trust” mechanism. The execution context, in the coming years, will not just be based on the transactions but also depend on customer’s short and long term behavioural characteristics like average transaction value, and also other softer elements of the customers’ environment like the stage of life or the state of the economy, etc.
This, I believe, will put the banks, who leverage the data, in a more favourable position vis-à-vis their tech counterparts like Amazon and Google who will further leverage their power of customer understanding to make further inroads in becoming a greater part of their customers’ lives. The fight between the tech companies and the banks will get broader, but the banks, by 2020, with the power of hyper-personalization will have the power to hold their fort against the influx of the new competition.
Trend 4 – The concept of the digital core will rise further
The world of banking was changed in the late 80s and the early 90s when the concept of core-banking was introduced. The power of technology helped the banks to centralize their processes and made them more efficient, even if sometimes the effectiveness and practicality were thrown out of the window. And importantly, they were not built to cater to the real-time world of today as the world of the early 90s was driven by the concept of batch processing.
While core banking is not going to go away anytime soon, 2020 will see the transformation of a core that is more intelligent, modular, micro-services oriented, containerized, API driven, capable of big data analysis, and more importantly cloud-native and cloud-agnostic.
Yes, the banks spent the last few years enhancing their front-end capabilities, but the focus on 2020 and beyond will be to extend their core banking capabilities. With the knowledge that the next generation core banking systems will need to be more agile, banks will spend big money on completely transforming their core.
Trend 5 – SMEs, Gig economy, and Asset Sharing will be talking points for banks
2020, I believe, will be a year when the traditional pillars of the economy – large organizations, steady jobs, and a safe asset market will give further way to focused SMEs, the gig economy powered by freelancers, and lack of emphasis on ownership and increased focused towards subscribership.
This trend has been growing for some time. In the coming years, as per World Bank, SMEs are expected to contribute to 50% of the jobs across the world. Data also indicates that more than 40% of the US population will be part of the gig economy by 2020, which reflects a 25% growth over the last four years. And by 2020, more than eighty percent of the software licenses are expected to have a subscription-based software model.
Why do I think that this will impact the way banks work? Because the business model of banks is built around fees and the fees that banks can levy from this market will be limited. Imagine a situation in which people do not buy cars but opt for subscription-based car ownership. What will happen to the market of car-loans? What will happen to corporate accounts when a large percentage of people will be freelancers?
In 2020, banks will put their money on these segments and develop products that specifically cater to these segments. This will mean that the banks will lose some of their traditional models of business, but they will capture a new market which will give them a longer customer relationship.
Trend 6 – Technology will become more ubiquitous
Forbes, citing a study by UBS, mentions that the technology spend in 2018-19 of JPMorgan, Bank of America, Wells Fargo, and Citigroup will be $11.4 billion, $10 billion, $9 billion, and $8 billion respectively, which indicates a significant upswing in the money that the banks are spending on technology. This, in fact, forms nearly 0.5% of their asset size. Even though the smaller banks are not spending such big money on their technology, their technology spend is also nearly 0.5% of their overall asset size.
They are using this entire budget to upgrade their current technology and adopt technologies that were buzzwords untill now. In fact, in 2020, banks
will further adopt blockchain, machine learning, artificial intelligence in most of their systems and leverage 5G for its superior bandwidth which will enhance real-time capabilities of the bank. The adoption of cloud will also become more prevalent as many banks will move out of their current state and embrace this new technology-enabled by the regulators’ acceptance of the same.
Banking is a high-intensity transaction-oriented space and processing each transaction costs energy and money. With the world becoming increasingly connected, the volume of these transactions will certainly increase. Hence, the focus for banks in 2020 will also be to create an infrastructure that will help them process these transactions in a faster and more efficient way.
Banking will also move towards more real-time mode for its product and services including the risk assessment of these offerings. Hence, this will create a trend towards implementing infrastructures (both hardware and software) to enable the same.
Trend 7 – Regulatory changes will create a big ripple
Britain is expected to move out of the Eurozone in 2020. Presidential elections are going to happen in the US in 2020 where many politicians have argued for higher corporate tax rates. Over 100 countries are working on a model for a global model for corporate taxation, the first draft of which is expected to come in 2020. Debt to GDP ratios across the world will reach the highest point in the last 40 years. Furthermore, in 2020, a variation of PSD2 will be implemented in the US, Open banking and its variants will be further implemented across various countries, and several countries will rework their taxation policies.
With all these changes and an increasing atmosphere of trade protection, I believe that these will create a long-standing impact on the world of banking. Don’t be surprised if the global banks are forced to go further local, not just to cater to their customers, but also to cater to the laws of the region they operate in. Even while the regulators have helped the banks get a sense of safety and stability over the last decade, I am sure the strong control that the central banks and regulatory bodies will have over public and private banks will continue in the coming year also and will set a trend for the coming decade.
I believe that this will also be driven because many parts of the globe are yet to forget the impact that the global economic crisis of 2008 created. The governments and many regulatory bodies had to work day in and day out to ensure the impact created because of the misadventures of some financial institutions did not create a bigger economic depression ala the 1930s
Trend 8 – Branches and banks will further come down
37 banks that were present in the 1990s in the United States have merged (and merged again) to become just four by the end of 2010. Why? Not because it provided a strategic advantage to merge, but it was common sense to merge so that these banks could continue to provide the best services to their customers. Else, many of these banks would have died its natural death. In India also, the banking industry is undergoing a major consolidation as different public sector banks are being consolidated to form a larger entity.
How 37 Banks Consolidated to Become 4 Banks in the US; Source: Federal Reserve
This consolidation will go further in the coming years and 2020 will not be any different. Most of the banks that will be bought over will be community banks and mid-size banks. While the consolidation will help the banks gain new customers, this will also help the larger and smaller banks to focus on cost efficiency.
At the same time, I also foresee the number of bank branches to come down. While the bank branches are not going to go away anytime soon, the consolidation of banks and the evolution of digital banking will make many branches redundant. Some branches will evolve to become boutique branches that will focus on key market segments, but the number of branches will certainly come down in the year 2020. In 2020, I also see the foundations being laid for virtual branches that I feel will be commonplace during the coming decade.
Trend 9 – Profits will be tough to come by, and banks will have to dig deep
Nearly 60 percent of the world’s largest 300 banks had a reduction in their profits in the last reported fiscal year. And nearly 70% of the world’s largest 700 banks had a profit to assets ratio less than 1%, which meant that the banks were not even earning 1 cent on every $1 of the asset they have. It does not speak much of the banks or the banking industry.
2020 will witness further erosion in profits as banks will struggle to stay afloat due to new regulatory constraints, reduced central bank rates, reclassification of several old liabilities as bad, and increased costs due to upgrading their technology. The drive to accommodate more personalization and a shift to a subscription-based economy will also create a further dip in the profits. Do not be surprised if more banks end up 2020 in the red. This will also mean that banks will focus on improving the efficiency of their operations and controlling costs across their entire organization.
Trend 10 – New business models will evolve
A dip in profits will certainly force the banks to rethink the way they conduct business. As I mentioned before, the traditional fee-based models will not be relevant and in 2020, banks will look further at non-banking revenues.
The key trend for banks in 2020 will be to leverage their open baking ecosystem and form the right partnerships that will enable them to get further close in fulfilling the basic needs of their customers rather than providing just the financial products. The banks will form partnerships with other companies who are fulfilling the basic customer needs and the banks will use these partnerships to enable them to get better value from the collective bargain ( using the power of their customer base) that the banks can bring to the table. This could be done just as a product/service aggregator or as a fully branded service within the bank.
Trend 11 – Banks will start becoming identity and data vaults
This is something that I believe has been in the making for several years but will only take shape in 2020. Just imagine the number of times you use your Google username, Facebook Account, or Apple ID to authenticate transactions or sign-in into different websites and apps. This is because other websites trust the authentication that these tech companies provide.
The keyword here is trust. And that is what banks are known for. Banks have one of the highest trust indices across different industries.
With the emergence of national ID like social security number in the US and Aadhar in India, banks can be the pseudo-enablers of the digit ID for their customers. Imagine if you can make a transaction with your phone by using and authenticating through your bank account number. With trends like open banking and account portability, I am sure that 2020 will witness the beginning of the bank as the custodians of the digital ID for its customers.
This is a concept that I believe will witness a significant upsurge in 2020. As the world becomes more conscious of the way humans and enterprises operate, it will become even more important that banks realize that they are part of a larger society whose development is also a responsibility that the banks must uphold.
Even the United Nations, through its initiative through UNEPFI, and World Economic Forum, through its Sustainable Development Impact Summit, has called out the banking world to promote more efficient practices that will contribute towards creating a better environment.
Responsible Banking’ which nearly 80 banks recognized during the climate week, also called out the commitment of the banks in creating a sustainable bank with governance structures that will measure the societal impact of their activities. Do not be surprised if you see an increased dialogue between commercial banks, central banks and development banks on how the banking industry can promote sustainability.
The focus for 2020 for banks, then, will be to look at sustainable banking as a strategic priority and assess each new business opportunity and stakeholder commitment from this viewpoint also.
Is that all?
Yes, I did not outline certain things that I believe have already started in the world of banking – becoming customer-centric, being digital native, moving into a platform-based business model, putting cyber-security to the fore, and leveraging technology for many common practices including regulatory compliance through advancements like robotic process automation. These were trends that were niche in 2018 or 2019 and will continue to grow in the coming years also.
So, what does this mean?
2020 will be a defining year for the world of banking. Not only will it set the tone for the rest of the decade, but it will also decide on how the banks will compete against the growth of the tech behemoths like Amazon, Google, Facebook, Tencent, and Alibaba. It will also decide how banks will leverage technologies like quantum computing, neural computing, blockchain, 5G, mixed reality and a lot more. It will also decide how the banks will ride the wave of partnerships, not just with fintechs, but also with companies that may not have anything with banking at all.
This also will mean that the banks will have to focus on upgrading their business models to be in sync with the ‘new baseline and making sure they focus on their costs as much as they focus on increasing their revenue.
In a world where the growth in the number of connected devices is expected to be more than the growth in the number of people, 2020 will be the year when the revolution that started after the 2008 economic crisis will finally blossom. And I certainly look forward to it….