Last year the banking industry woke up to the reality that nimbler, more innovative technologies and entrepreneurs were looking to replace it. Now that bankers are fully aware of the challenge, 2016 is their chance to act.
The following is a look at what will likely be some of the biggest trends for the intersection of technology and banking this year.
The trends all speak to a rising need for the banking industry, – once considered the largest industry left to be disrupted by technology – to find new ways to approach their business, serve their customers and defend their place against a growing number of fintech companies.
Jamie Dimon, the chief executive of JPMorgan Chase, warned in his annual shareholder letter in 2015 that "Silicon Valley is coming" for banking's bread and butter. It was a pivotal moment, because banking has long had a reputation of being a fortress – sure, plenty may try to attack it, but can they really cross the moat of regulation, longstanding customer relationships and capital requirements?
Bankers' concerns about defending their position will likely only grow as fintech's reach widens and its pockets deepen; some $10.49 billion was invested in venture-capital-backed fintech companies in the first three quarters of 2015, according to CB Insights.
"We saw a dramatic rise in the concern about fintech in the C-suite. We heard for so long that there were huge barriers to entry, so bankers were not overly worried about new entrants," said Dean Nicolacakis, co-leader of PwC's fintech practice.
Much of that concern is driven by the ease in which new products and services can be built. "The fundamental barriers are largely gone. Before, you had to spend millions to build tech; now you can get it in the cloud and pay for it with a credit card."
Of course, banks still have some fundamental advantages – such as their incumbency and their size. Fintech startups often set out to change the industry and realize the difficulty of building scale is much tougher than they realized. Banks shouldn't expect that to always be the case, says Gianni Giacomelli, chief marketing officer and senior vice president of product innovation for Genpact.
Banks may have the data and the scale now, but as people grow more comfortable with using nonbanks for their financial needs, that edge could diminish.
Nicolacakis said it has already begun to happen – people are content with using alternatives, like peer-to-peer lenders. Meanwhile, many of those companies have gone more mainstream with TV commercials and other more traditional forms of advertising.
To defend their turf, banks are investing in building technology themselves, they are looking for startups to acquire and they are looking for partnerships.
On a more fundamental level, banks also need to consider why they are losing ground to fintech companies. David Klein, the chief executive of marketplace lender CommonBond, said recently at a panel about 2016 trends that fintech companies are succeeding because they put the customer at the center of the proposition, while banks do not.
Meanwhile, customers' expectations, specifically their expectations of their digital interactions, are growing at a rapid pace.
Banks could improve their loyalty programs as a way to fend off the competition – in other words, they have to come up with a better reason to stay with the bank than all the reasons they've typically relied on, said Ghela Boskovich, director of global business development for the banking software company Zafin.
"If customers are willing to have fractured services from a number of nontraditional service providers, banks will have to pay more attention to rebundling offerings and providing incentives to customers," she said. "What Brad Leimer articulated about the great rebundling of bank services bears repeating: customer centricity means surprising and delighting customers, and rewarding them for their loyalty," Boskovich said, referring to an American Banker op-ed article last year by Leimer, the innovation chief at Santander.
Last year was, without a doubt, a breakthrough year for blockchain, the technology that allows fast settlement and transparent record-keeping. Nearly all of the largest banks announced that they were exploring the technology by teaming up with technologists, like the consortium that is backing R3 CEV, and by looking at it internally in their innovation labs.
One of the blockchain's greatest opportunities is in revolutionizing payments.
Blockchain offers "an altogether simpler, faster and more efficient process, in which payment and settlement happen simultaneously within a closed system that is highly transparent to both sender and receiver," according to a recent study by Deloitte and the World Economic Forum.
The momentum is only expected to build around blockchains, but the big question is when use cases and proofs of concept will translate to real products. To Haskell Garfinkel, a partner at PwC who co-leads its fintech practice, that moment is coming soon.
Blockchain "is a bit like California in the Gold Rush," Garfinkel said. "There is definitely gold out there, it is just a matter of waiting for someone to hit the mother lode."