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."
While Garfinkel is optimistic about blockchains, Tim O'Donnell, a managing director of PwC, says the technology has to mature or the momentum could begin to dissipate.
"The frenzy has been building," O'Donnell said. "But the next 12 months probably needs something to be proven – something tangible or there could be the inevitable fall into the chasm of despair."
While what blockchain could mean to payments has dominated the conversation about the technology, 2016 could also be an opening for other uses, like privacy, security and identity, Boskovich said.
Blockchain "underscores the foundation for any economic exchange: trust; and it automates and expedites the building of that trust while acknowledging the need to protect… all parties involved."
Comfort with the Cloud
For years, there has been talk about banks moving their IT infrastructure – in part or whole – to the cloud. But the gains that could be realized in efficiency were usually outweighed by privacy and security concerns, especially when it comes to the public cloud.
However, public cloud providers are now at a point of maturity where those concerns have largely been alleviated and banks are beginning to look at the public cloud as the next frontier, said Julien Courbe, a financial services and technology analyst at PwC.
"In some cases, I think the security some of the cloud providers have is stronger than even banks themselves," he said.
Meanwhile, it is becoming harder for banks to rationalize the cost of maintaining large data centers, and they are looking at putting their basic infrastructure in the cloud, Courbe said.
Community banks are leading the way, too.
"We've seen small banks move their entire infrastructure into cloud. It was an easy transition because of their size, since there's less to migrate," Courbe said. "For a big bank it might take two to three years to move to the cloud, and they'd have to do it in smaller steps. A smaller bank can do it in six to nine months."
The systems most likely to migrate to the cloud first are those that process a high volume of information, such as payments and analytics, Courbe said.
Don't expect a full migration to the cloud, observers say.
"Financial companies will migrate to a hybrid infrastructure of on-premise and cloud while taking extra measures … to ensure cloud data compliance to protect their data, as well as their customers," said Hugh Thompson, chief technology officer at Blue Coat, a security technology company.
The financial services industry has been slow in utilizing application program interfaces as a way to make it easier to develop a program and interact with other companies, but that is likely going to change very soon.
"Financial services providers have been relatively slow to recognize and act on APIs as an opportunity to transform their businesses and, ultimately, better win, serve, and retain customers," said Peter Wannemacher, an analyst with Forrester. "This will change in 2016, as digital business executives collaborate with CIOs to champion investment in internal, B-to-B and product APIs."
Wannemacher added that APIs and open platforms will enable financial firms to build "dynamic ecosystems of value, reconnecting a fragmented value chain." This will be part of a wider, and longer-term, shift to open platforms as the foundation of digital financial services strategy.
"APIs are a means to an end and have a wide range of uses," he added. "It's really about enabling integration and collaboration."
As an example, Wannemacher noted that Uber uses APIs for a wide range of collaborative uses, such as getting a discount on an Uber ride from the airport from the airline's mobile app.
And ultimately it is this kind of collaboration that will allow banks to thrive in the digital age of fintech.
"If a bank has embraced disruption, and embraced APIs and open platforms, they are much better positioned for success going forward," Wannemacher said.