Slideshow 9 tech challenges facing banks

  • June 28 2018, 11:46am EDT
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A host of different factors are intersecting to subtly but distinctly change the way the banking industry will operate in the near future.

Demographic shifts are feeding new customer expectations, which are in turn creating an opening in the market for nonbank competitors and upstart firms. Industry observers now predict that within a decade, the biggest bank will be a technology firm.

A number of recent industry reports have attempted to detail how banks are responding to the challenge, whether through investment, data management or new strategies to engage with customers. But with every step, there are obstacles.

Even as customers primarily conduct transactions over mobile, banks are discovering they still expect branch service to be an option. Traditional apologies for service interruptions may not sit well with a customer base both expecting efficient service and potentially able to choose technology firm offerings as an alternative. And technology investments themselves are up for scrutiny, either because of potential workforce impact, or just the burden of increased costs.

Here is a look at some findings in recent industry studies of banking technology trends.

The outsider challenge is real

Young consumers are open to change in financial services. That's creating opportunities for tech firms to consider entering the industry. In a recent global survey, Accenture found 31% of bank customers would consider Google, Amazon or Facebook if they offered such services. Oracle found the same level of readiness among global consumers in its own research.

While big tech firms explore the possibility, upstart fintechs such as Acorns and Robinhood are already trying to take advantage of this sentiment, developing new offerings that can convert their existing personal finance management and investing accounts into checking and savings customers too.

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Digital or physical? Both

Early digital efforts by banks have uncovered a challenge: Customer expectations are continually shifting.

For instance, more customers are using their phones for transactions — in its 2018 Digital Banking Consumer Study, PwC reports 50% of customers now primarily rely on mobile banking, and mobile is the only channel that has seen increased engagement in the last five years. But consumers still expect in-person options for service too: the same PwC survey found that 25% wouldn't open an account with a bank that didn't have at least one local branch, and 65% felt it important to have.

Even tech-savvy millennials want a virtual experience with tangible offerings: Chase's mobile-only service, Finn, is adding an option to order checks through the app after users said it mattered in their decision on where to bank.

According to J.D. Power’s new direct banking satisfaction study, customer satisfaction with direct banks’ mobile channels has fallen from last year, and direct bank customers’ awareness of and engagement with basic functions they could perform in the mobile app had also declined.

Beware the inconvenienced customer

Digital banking glitches have hobbled some big names in very public fashion. But there's another risk for banks beyond enduring a barrage of angry customer tweets for outages: becoming irrelevant. Millennials are setting their own expectations for how quickly they should be receiving services, according to a global survey of 8,000 customers by software-as-a-service firm MuleSoft.

Fifty-seven percent said opening a bank account should take no longer than one hour, and 47% said a mortgage application should take no longer than one day. Young consumers also noted the banking transactions that proved the most inconvenient because of a need to resubmit information: Opening bank accounts and credit card applications were the top sources of frustration.

Embracing open banking?

Banks will respond to competition from big tech by shedding their reluctance to adopt open banking strategies, industry observers predict. According to Celent senior analyst Alenka Grealish, "early movers have been building table stake capabilities, beginning with open application programming interfaces for secure data exchange. Those on the leading edge are filling service gaps or enhancing their offering by embedding third party services into their platform."

A PwC report on open banking offered up the experience of a global bank that implemented APIs through partnerships several years prior. Forty percent of its customers are now digital, the report noted, and that segment generates "more than twice the revenue as its traditional customers."

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Change from within

Cultural shifts inside the financial services industry will also help firms better orient themselves to meet new customer demands, observers said. According to a FIS survey of over 1,500 senior executives, the top 20% of firms are changing policy to promote and emphasize digital innovation. The report noted there are a number of steps being taken at leading firms in the past 12 months to accommodate digital innovation: 50% are recruiting for digital technology expertise; 43% said they were encouraging more open innovation across roles; and 39% were appointing board-level roles with responsibility for digital innovation.

Best uses for customer data

A wealth of customer information is one advantage that banks have over fintech competitors. But firms have grappled with how to utilize their data assets effectively. FIS reports the leading financial services firms are leveraging data to improve their customer relationships and work with customers on how to make their services more relevant; 57% said data management investments have improved how they share data and helped build closer relationships, the survey noted, compared with 25% of the rest of the industry.

What tech is hot with banks?

There are a variety of technologies that banks are considering in their effort to adjust to a digital-first market and fintech challengers. But according to EY's Global Banking Outlook 2018, three technologies have attracted the most investment from banks and will see more resources devoted to their implementation: Mobile technology, biometrics software and cloud technology. Despite industry-wide discussion over the potential of blockchain technology, though, less than 20% of the 221 banks surveyed by EY indicated they not only had no plans to invest in blockchain, they had no plans to do so over the next three years either.

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AI, too soon?

Banks around the world see artificial intelligence as another tool to cope with digital demands — EY's global banking survey found 40% to 60% of firms plan to increase AI investment; in a survey of AI in banking, Accenture reported 77% of banks were planning to use AI to automate various tasks.

But early adoption poses its own challenges. FIS found that even among industry leaders, just 41% said they had some AI applications live, compared to 18% of respondents from the rest of the industry. According to Accenture, 26% of the 1,200 executives it surveyed believed just 1 in 4 of employees were ready to work with AI. It also found that in response to AI adoption, only 3% of banks were planning to significantly increase investment in retraining programs for employees over the next three years.

Build or buy new tech?

The decision to either build or buy technology has been an enduring debate in financial services, but has been renewed for a digital banking era. Despite outsourced tech options, EY reports that 37% of banks globally still expect to develop technologies in-house. To spur tech development, even smaller banks are emulating the strategies of the largest banks, sponsoring accelerator programs and seeking out fintech partners. But tech demands weigh more on these same banks: At small and midsize banks, technology claims roughly 8% to 10% of revenues and expenses, according to a study by Gartner.