For an industry that has survived for hundreds of years as a
fundamental underpinning of society, the notion of “radical change” may seem
far-fetched. The basic business model of most traditional financial
institutions will not change overnight, it’s true. But signs increasingly make
it likely that banking could be fundamentally different within ten years.
Given the pace of modern times, that might as well be
tomorrow. So decisions made now — or not made — could be pivotal in shaping the
outcome for individual banks and credit unions.
Two broad trends could bring such a change:
- The expectation that financial institutions take
a more direct role in helping to bring about societal improvements and progress
in areas more traditionally left to government. Such a shift would impact
products, marketing, revenue and growth.
- The technology-driven growth of alliances
between traditional institutions and a variety of big techs, fintechs,
retailers and payment companies. These alliances, or ecosystems, are already
being formed.
Both trends, along with sweeping technological changes could
lead to the development of different business models for financial institutions
over the next ten years, according to a new report from Deloitte on the future
of banking.
Two of the report’s authors told The Financial Brand in an
interview that while the current players won’t necessarily be radically
different in ten years, the way they operate will be.
A Broader Social Mission for Banking
A growing body of opinion maintains that financial institutions
increasingly are expected to not simply facilitate the workings of commerce —
even though doing so helps creates growth and wealth — but to proactively use
their resources to advance societal goals.
Some may argue that such opinions merely reflect the
shifting political winds. No doubt some do, yet when Accenture and Efma
surveyed 30,000 consumers in 2018 they found that nearly two thirds (62%) want
companies to take a stand on such issues as sustainability, transparency and
fair employment practices. It seems unlikely that the percentage would have
decreased since then.
Financial institutions’ ability to attract workers, raise
capital, navigate regulatory scrutiny, and sustain profitability and growth
will increasingly rely on their commitment to a net-positive social impact,
Deloitte states. “This represents a perspective shift from shareholder
capitalism to stakeholder capitalism,” says Jim Eckenrode, Managing Director,
Deloitte Center for Financial Services.
Opportunities from a Refocused Bottom Line
Deloitte views stakeholder capitalism as a long-term trend
presenting banks and credit unions with both challenges and opportunities.
Regarding the latter, the report cites a figure of $2.1 trillion as the overall
commercial opportunity (2020-2025) for funding climate-change infrastructure
initiatives and $6 trillion as an estimate for business/investment
opportunities in economically depressed Opportunity Zones in the U.S., set up
by a 2017 law.
“Financial institutions are in the best position to help
move society in a different direction because they sit at the center of the
economy,” says Monica O’Reilly, Vice Chair, U.S. Financial Services Industry
Leader for Deloitte. She concedes such a stance can be hard to embrace when
you’re looking for growth. But she believes that contributing to a sustainable
world and growth are now interdependent. “Following this path will truly set
institutions apart because stakeholders will expect financial institutions to
do the right thing,” O’Reilly states.
“It’s doing the right thing and making a profit while doing
it,” Eckenrode emphasizes. “We believe that there are ways that both of those
things can happen.”
Pressures on Traditional Banking Revenue Streams
The above views are not simply a matter of keeping in synch
with the times. The Deloitte report points out that traditional bank revenue
models are plateauing. Eckenrode points out one reason: narrowing margins due
to the prolonged low-interest- rate environment. Another is reduced
non-interest income, resulting from a decline in interchange revenue and
competitive pressure on overdraft fees.
Eckenrode points out these downward revenue trends can be
offset by expanding the range of financial products offered as well as by
expanding the markets in which they are offered, such as underserved
populations. He doesn’t expect that 100% of such populations would be
immediately profitable. However, self-service and other digital technologies
have greatly increased the efficiency of serving such markets. In time, these
customers will become new profit pools as they gain access to more banking
products and services.
At the same time, Eckenrode points out, more tailored and
socially responsible types of product options offered to higher-value customer
segments will generate additional profits, which banks and credit unions can
use to develop underserved markets. One example of such an option is so-called
green deposits. A handful of financial institutions (Citibank, Standard
Chartered and MUFG Union Bank among the larger ones) offer these deposits, in
which funds are loaned to environmentally conscious projects or companies.
Banking Ecosystems: Threat and Savior
The social-mission trends discussed above give traditional
institutions some advantages in the near term. That’s because the big tech
firms — many of them moving into financial services — are less trusted as a
group than banks and credit unions. Several have come under fire from
regulators and legislators for anticompetitive behavior or for their intrusive
data practices.
Banks and credit unions have advantages in terms of trust,
along with deep regulatory and compliance expertise. To avoid having their
customers disintermediated and their products commoditized and white-labelled,
Deloitte emphasizes the need for incumbents to fully embrace the technologies
and data strategies, including artificial intelligence, that the tech companies
and fintechs are using so effectively. More than that, the consulting firm
recommends “accelerating and strengthening co-creative alliances with
disruptors and nonfinancial services partners” in order to survive in a
transformed landscape.
In its report, Deloitte mentions Google’s Plex bank account
(officially Plex by Google Pay), offered in partnership with about a dozen
banks and credit unions as an example of the kind of emerging cross-industry
alliance it foresees. It says these “one-stop-shop” platforms will act as “a
central nervous system” coordinating data flows and rules for interaction and
participation.
“Firms that move early to establish alliance ecosystems will
secure significant advantages as they lock in the network effects that
many-to-many value webs offer,” the report states. It further expects financial
services such as payments and lending to be embedded as a “financial layer” in
a technology stack.
If that sounds like a threat to a financial institution’s
brand, Deloitte’s O’Reilly counters that these alliance business models provide
access to customers that incumbent institutions wouldn’t typically have, as
well as access to technology that enables their brand to be elevated. “They
become more tied into where technology is going — more focused on the future,”
she states.
Both O’Reilly and Eckenrode concur that such alliances are
not just for a handful of banks and credit unions. “It’s actually quite the
opposite,” says Eckenrode. “With new technologies, more financial institutions
can participate in these kinds of models than might have been able to ten years
ago.”
How Banking Will Look in 2030?
The Deloitte report makes a very interesting statement: As
consumers become more sophisticated and financial services becomes more
commoditized and disintermediated, consumers increasingly will act as
competitors to financial institutions. New platforms will allow them to service
their own financial needs. The consulting firm expects to see this become
common by 2030.
While consumers do have reservations about the privacy of
their data, Eckenrode points out that the whole notion of open banking, in
which consumers own their own data and allow it to be shared outside the
institutions they do business with, is growing. A 2020 Deloitte survey found
that a third of U.S. consumers would be interested in some sort of platform
banking offering that would be built upon that kind of data sharing.
Overall, Deloitte concludes that the banking marketplace in
2030 will be highly fluid and interdependent, requiring “innovative business
models and alliance ecosystems.”
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