The Future of Retail Banking

It's all about the customer in retail banking IT

Analyst Perspective

David Tomljenovic,
MBA LLM CIM

Head of Financial Services
Industry Research
Info-Tech Research Group

“The customer is always right” has never been truer than in the current era of retail banking. Competition for customers continues to escalate among incumbents as well as from new digital start-ups and non-financial market entrants who have deep technology capabilities, extensive data sets, and existing relationships with customers.

As a result, retail banks are under increasing levels of pressure to elevate and simplify customer experiences across all channels; in-branch, online, mobile, and call centers. They must accomplish this while simultaneously identifying new areas of customer needs and building appealing products and services to meet demands. The result is that the pace and complexity in retail banking is rapidly escalating and having a similar impact on technology.

Info-Tech’s approach focuses on an analyst’s investigation of strategic foresight. This methodology helps the IT department, and the business, process what is happening in the organization’s external environment in a way that guides ideation and opportunity identification. As a methodology, strategic foresight flows from identifying signals to clustering the signals together to form trends and finally to uncovering what drives the trends to determine which strategic initiatives are most likely to lead to success on an industry level.

Executive Summary

Info-Tech Insight

Retail banking is reshaping itself. Banks are intensely focused on customer experience and product innovation. They need to leverage advanced technology to better understand their customers and anticipate their needs. To become trusted partners, banks will need to launch more sophisticated technologies that push into new areas such as NLP, AI, and ML.

Client needs are rapidly changing

Clients are demanding more from their financial institutions

Customer needs are evolving. Customers expect their financial service experiences to equal those they are having elsewhere. To connect with clients, banks must create products and services that are tailored to each customer’s lifestyle. To become a trusted partner, banks must also provide guidance and advice for clients to feel confident about their financial decisions.

Branches now support digital. The traditional model of a bank branch is changing. Digital once supported branches; now branches are redesigning their locations and premises to meet new client demands.

New market entrants are meeting client needs. Limited regulatory oversight, new risk models, and new business operating models provide advantages for new entrants over traditional financial institutions. These entrants are nimble and focused on meeting client needs.

Consumers are attracted to the changing product landscape. New products and services are uniquely meeting customer needs, such as point-of-purchase financing where goods are financed into equal payments.

Address transactional and advisory needs

Digitize transactional services that make banking more convenient. Launch advisory services for more complex products such as mortgages and investments – younger generations are still looking for advice on these products.

Deliver a fast, simple, and flexible customer experience that is accessible across channels. This will require more complex technology such as AI, ML, and NLP.

Advisory services require a deep understanding of customers. Leverage predictive analytics to deliver a personalized experience at every touchpoint. This requires a strong data center that is integrated across all platforms.

40%

Traditional banks are struggling to stay relevant

traditional branch banking is expensive and offers diminishing value versus digital

Traditional banks are using fees to boost revenue. The average quarterly US bank profit per household is $180 (Forbes, 2019). Excessive fees for simple events like non-sufficient funds (NSF) checks are prevalent and easily preventable using basic digital technologies that can alert customers before charges are incurred. This leaves traditional banks exposed to new digital entrants.

Consumers are increasing their number of financial service relationships. Individuals now have at least four financial relationships (Forbes, 2019). Traditional banks are losing their trusted and more exclusive status with customers. Branchless digital start-ups using a mobile app and a debit card combined with simple account opening are rapidly changing the competitive landscape.

In 2019, smartphone-based banking transactions surpassed branch-based transactions (Forbes, 2019). Globally, 200,000 internet enabled smartphones are sold per hour. The shift to mobile is an unstoppable trend.

Environmental, social, and governance (ESG) principles will accelerate the growth of mobile banking. Since 2009, more than one billion people in India and Africa have gained access to stored value products (Forbes, 2019). In developed nations, a significant portion of the population is unbanked and new mobile-based financial services are addressing this market.

New focused products such as embedded financing are challenging traditional banks. New technology-powered products like embedded/captive/point-of-purchase finance are superseding traditional bank products such as credit cards, lines of credit, and car loans by offering structured payment-based financing instantly at the point of sale or online checkout.

25%

The reduction in the number of FDIC-insured branches since 2009 (Arca, 2022).

Competition is reshaping the banking landscape

Scale, relationship management, and digital offerings are key

Mergers and acquisitions (M&A) continue. Scale is becoming key to viability for banks. Bank assets are a proxy for revenues that heavily influence IT budgets. The complex technology underlying modern banking requires significant IT budgets. Smaller organizations may struggle to keep pace.

Digital challengers are reshaping retail banking with their low-cost digitally enabled products, low-cost digital operating models, and viral growth. New products such as embedded and point-of-purchase financing threaten traditional banking revenues derived from credit cards and lines of credit.

Banks are shifting toward advisory-based relationship management. Advisory revenues will become more important as banks move away from transactional-based revenues. New advisory-focused products and services will eliminate some transaction revenues such as NSF and overdraft fees. New products and services that align bank and customer interests can compensate for these lost revenues.

Technologies that are Transforming The Retail Banking business

• Natural Language Processing (NLP)
• AI
• Automation
• Business as a Service (BaaS)

Top Retail Banking IT technology trends to Explore

• NLP combined with AI to better understand customer sentiment and need across all engagement channels
• AI applied to masses of customer data to drive insight leading to new products and services
• All things data, classification, governance, and insights to support data-driven decision making
• Mature DevOps, Agile, governance, project management capabilities to drive deeper alignment with business goals
• Reengineering/automation of repetitive and low-value activities
• Smaller organizations may need to explore BaaS or incumbents to start up a digital brand

80.4%

The estimated penetration of digital banking in the US by 2025 (Insider Intelligence, 2022).

Banks need a “one team” approach

Alignment between technology and the business is essential for success

Business and IT functions are converging. It is increasingly difficult to distinguish business goals from the technology that enables them. Providing successful financial products and services requires deep coordination with IT resources.

Elevated need for technology governance. Effective technology governance is increasingly important as the number of demands on IT grow and become more complex. The business needs to effectively manage its technology priorities to ensure that IT can properly align and maximize its resources.

Ongoing communication is key to success. The speed of market changes and the complexity of products and services make ongoing communication between business and IT essential.

Agile/DevOps continue to gain traction. At their core, these methodologies are about frequent engagement, alignment, and continuous conversation. Certain adaptations are required to meet banking specific challenges.

49%

The percentage of CIOs who report that poor alignment with business hampers development of products and services (ActiveBatch, 2021).

The future of retail banking is increasingly technologically complex, advisory-focused, and powered by data-driven AI

The traditional retail banking industry placed a heavy focus on segmented/siloed business lines and a branch-based customer engagement model. The result was a heavy fixed-cost infrastructure supported by a highly transactional revenue model. The prevailing regulatory environment encouraged and protected this approach. Customer convenience and service was highly influenced by the branch's location and personal relationship with customers who had limited alternatives. In most cases, banks and their products, services, processes, and business models were created well before the internet.

The Past

The technology that powered banks was costly to purchase, program, and support. These characteristics created significant barriers for new banks entering the market. They also created significant risks for existing banks to change or consolidate platforms.

Brick-and-mortar banks were expensive to build and maintain. New entrants needed a physical footprint.

Savings and loans were a primary source of revenues that were sustained by a non-competitive environment. Depositors and borrowers had limited choice over where they banked and what they paid.

The Present

Incumbents still rely on legacy foundations that flow to the general ledger but are leveraging application programming interfaces (APIs) to integrate overarching capabilities. APIs have mitigated risks and provide new opportunities for traditional banks to compete with start-ups.

Cloud/platform computing is transforming retail banking. The democratization of technology has massively accelerated the growth of neo-banks (non-branch, digital-only). Business as a service (BaaS) hosted in the cloud has enabled small banks to compete with larger ones.

The Future

The future of retail banking is client centric. Banks must anticipate client needs and focus on convenience, personalization, and advice.

Banks will deliver value-based revenue streams and move away from transactional revenues and punitive fees. The emerging needs of customers, such as digital assistants that monitor accounts, are being met by data analytics and technology.

Deep customer insight is required to drive the future of retail banking. Access to AI and ML is becoming easier. Cloud services expand access to analytical tools. Banks will anticipate client needs before the client does.

The future of retail banking is…

Customer-Centric, Integrated, and Predictive

Customer-Centric

Banks must evolve to meet customer needs. The growth of neo-banks, fueled by new low-or no-fee business models and innovative products and services, are escalating competition.

Data is driving hyper-personalization. In the new customer centric world, customer insights are key.

Technology companies are meeting client needs. Their sophisticated technology, deep customer data, minimal regulatory oversight, and ability to meet customer needs is driving innovation.

New products and services must proactively engage customers. Design alerts, bundles, and advice to meet client needs.

Integrated

Financial institutions are integrating into their clients’ non-financial lives. Location data, search history, and social media activity play an increasing role in product development and targeted offers.

Non-bank financial products are evolving into new domains. Embedded finance, point-of-sale financing, and peer-to-peer money transfers are being integrated into shopping workflows and challenging traditional banks.

Peer-to-peer is on the rise. WeChat provides payments in their highly integrated social media application. Peer-to-peer money transfer and payment options exist throughout the app.

Predictive

The advisory relationship is increasingly based on predictive approaches. Banks have access to multiple data sources.

AI is used to analyze customer interactions across all channels. AI and ML are being applied to large data sets to gain deeper, more valuable insights.

External data use is growing. This includes internal data such as spending patterns on checking and credit, but also external data such as credit bureaus and third-party lifestyle segmentation.

Digital assistants are “looking out” for customers. Banks are analyzing spending and behavioral patterns to make recommendations to their clients.

Foundational IT elements are transforming

Digital Technology is Driving Transformation

Identify potential sources of competitive advantage. IT should work with business-led strategy teams to identify areas of competitive advantage to digitize existing products and services or build new ones.

Focus on systems architecture in the context of the ongoing strategy, product, and service creation process.

Develop competitive market analysis to participate in ongoing business reviews.

Lead a culture of innovation with clearly defined roles and responsibilities.

Physical spaces are evolving

Branches are becoming advice centers. No longer do all branches require the expense and risk of managing cash.

Help clients migrate through in-branch education that teaches the benefits of going digital. In-branch transactions can be exponentially more expensive than digital.

Retrain and restaff to meet the demands for advice and to educate staff on the digitally enabled client base.

Rationalize where necessary. Staffing needs are changing. Some staff levels can be reduced as inefficient legacy activities are replaced by digital self-service tools.

Platforms improve the ability to compete

Ensure you have the right platform(s) to enable the bank to compete now and in the future.

Evaluate the organization’s financial placement. It’s important to understand the scale of a bank in the context of the market.

Develop an IT strategy that is right-sized for the organization to improve performance against competitors.

Prepare for mergers & acquisitions if required. To quickly achieve scale, a business may pursue M&A. IT should be deeply involved in this process and prepared for potential platform integrations.

Six trends driving the future of retail banking

Analytical Tools: NLP, ML, and AI

Develop deeper insights to improve decision making. Use NLP, ML, and AI to better understand customers’ needs, intent, and emotional state, and to deepen the brand connection.

Branch Transformation

Address changing client needs that are transforming the role of the branch, building deeper relationships, and leading to a better client experience.

Mergers & Acquisitions

Understand the economics of retail banking. Retail banking IT leaders need to become better acquainted with the economics of the business.

Innovation

Pursue different approaches. Banks approach innovation in unique ways. Factors such as size, maturity, type of customers, and products are among the top ways that innovation is being shaped.

Shift Toward Advisory Services

Advisory services are driving relationships. Being the fastest, easiest, or most convenient transaction facilitator is not enough to keep customers. Banks are trying to become a partner and advisor for customers to cement their relationships.

Non-Bank/Embedded Finance

Non-bank players are aggressively innovating. Increasingly, fintech/non-bank competitors are innovating in financial services. Embedded finance is a considerable threat. It captures credit transactions before bank products are considered.

Next Step

Use this trends report as a key input

Retail Banking of the Future
Trends Report

As part of your next-steps checklist, leverage the trends report for priorities that drive measurable top-line organizational outcomes and the unlocking of direct value.

Business Context & IT Strategy

The future will bring more trends and technologies, making it pivotal that your retail bank continues to establish itself as the disrupter, not the disrupted. This can be accomplished with a structured approach to innovation management that considers external trends as well as internal processes. Info-Tech’s Define Your Digital Business Strategy and Build a Business-Aligned IT Strategy blueprints offer the tools to effectively process signals in your environment, build an understanding of relevant trends, and turn this understanding into action.

Trend 01

Driving customer experience through natural language processing and AI

Retail banks must understand their customers in order to better serve them

Understand what customers need using NLP and AI

Needs can be understood even before in-person engagement happens

NLP and AI are increasingly being deployed to allow retail banks to better understand their customers before actual in-person engagement occurs.

• NLP and AI are being applied across banking services – transaction activities, alerts, and automation are driving deeper relationships and improving brand connection.
• Banks can more effectively customize offers using NLP and AI to gauge a customer’s mood, product/service needs, urgency, frustration, and other emotional dimensions – not only predicting the next product sold, but how to sell it.
• Anticipating needs will improve sales as banks using NLP and AI will act before a competitor does.
• Product design will improve using NLP and AI to better understand client needs.
• Banks are customizing their engagement channels to be more specialized for different types of customers.
• Proactively making offers to meet client needs through NLP and AI demonstrates that the bank knows their clients, has a tailored and personalized service for them, and is a partner in financial health.
• Customer experience, net promoter score (NPS), and brand consideration will improve as clients deepen their relationship.

USING NLP AND AI TO DRIVE CUSTOMER EXPERIENCE

Source: "Top 3 Use Cases," Uniphore, 2022.

57%

of customers chose call support as their preferred initial contact channel ("Top 3 Use Cases," Uniphore, 2022).

33%

of banks are developing AI-based digital advisors/voice-assisted engagement channels (The Financial Brand, 2020).

Signals

What We Are Seeing

Customer experience is key to customer acquisition and loyalty while the digital tools powering it are essential to reducing costs

Customers are using more financial options. The days of single checking/savings accounts are gone. Customers are experimenting with a growing number of financial products from a growing number of financial service providers.

Convenience is key to customer loyalty. The growing number of financial product options has made customer convenience among the top indicators of continued customer loyalty.

Differences in customer acquisition costs. It has been estimated that digital neo-banks can acquire customers for as low as $5 whereas traditional branch-based banks can spend as much as $350, making customer satisfaction essential ( “How to Deliver,” Uniphore, 2022).

Types Of NLP and AI driven customer experience and innovation

• Conversational AI
• Emotional AI
• Workflow and process AI
• Customer journey AI

Source: McKinsey & Company, 2020.

Drivers

Why You Should Care

Digital customer experience is key to new low-cost digital based customer acquisition.

Digital engagement tools have produced a 600% increase in customer retention compared to lack of digital tools.

Using AI and NLP to drive hyper-personalized offerings is driving differentiated experiences and customer loyalty.

Source: "How to Deliver," Uniphore, 2022.

Benefits and risks

Benefits

• Reduced Customer Acquisition Costs
• Increased Customer Loyalty
• Faster Growth

• Digital customer acquisition costs are greatly reduced. Digital business models are built on very different financial assumptions/cost structures. For low-/no-fee and other product and service innovations to be profitable, digital metrics (which cost substantially less than traditional metrics) are required. Low customer acquisition costs are key.
• Customer loyalty/retention is essential. Existing customers should be among your most profitable, so their retention is essential. As other organizations elevate their customer experience, winning lost customers back will be increasingly difficult and expensive.
• Exponential growth is a defining attribute of digital business models. NLP and AI are key enablers of modern, hyper-personalized products and services that allow for rapid and profitable growth.

Risks

• Poor NLP/AI Implementation
• Impact on Other Systems/ Processes
• Reduced Growth/Profitability

• Implementation is easier said than done. NLP/AI are becoming mature and more widely available technologies. However, their design and execution are still vulnerable to bias, design errors, and other complications.
• The approach to NLP/AI must be holistic. If the implementation of NLP/AI technologies focuses narrowly on customer engagement versus the entire customer journey, the results will be disappointing.
• Failure to implement NLP/AI can affect growth/profitability. High costs and slower growth rates associated with non-NLP/AI/digital customer acquisition can impact the longer-term profitability of retail banks.

What the new market development trend means to Info-Tech members

CIOs

• Become deeply connected with their business partners. To effectively support the successful launch of new products, services, and overall business lines, IT must be involved in their design from the beginning.
• Stay up to date with business focused innovation to ensure that they are well informed before business partners engage them in the development and execution of new products.
• Invest time into understanding the enabling technologies that are required by new products, services, and business lines.
• Understand business drivers of customer satisfaction and how to improve key measures such as Net Promoter Score (NPS), brand consideration, and the key attributes that define success in their organizations.

IT Departments

• Prepare for an increasing pace of change likely requiring an increasing number of activities that may be new to them.
• Become an active observer of changes that are occurring in their organization. Rather than waiting for opportunities to become apparent, IT team members should seek out ways to participate in new initiatives and volunteer for cross-functional team participation.
• Proactively embrace training/retraining. In a dynamic environment characterized by continuous new product/service/market development, IT team members need to proactively engage training in areas that they anticipate will be in high demand.

Recommendations

• Partner closely with the business. Successful new development will require IT to be closely and deeply aligned with the business. Exceptional governance and project management skills will be essential to success when entering new markets.
• Create an open and agile infrastructure. New market developments require existing infrastructure to be agile and responsive to changing conditions. Invest in API management tools and pursue a service-oriented architecture to future-proof existing infrastructure.
• Security must be a top priority. Info-Tech security diagnostics can help IT service providers evaluate the current state of client security management and governance areas, including security policies and processes.

Info-Tech Resources

• Build a Winning Business Process Automation Playbook
• Reduce Manual Repetitive Work With IT Automation
• Business Process Automation Playbook
• Build Your First RPA Bot
• IT Automation Roadmap
• Automate Work Faster and More Easily With Robotic Process Automation
• Define Your Digital Business Strategy AI Technology

With large customer data sets from multiple sources, incumbent banks are in an ideal position to reap the benefits of NLP/AI-based innovation. This gives them a competitive advantage to transform their customer experience and financial performance.

Trend 02

Branch transformation

Traditional branches need to be dramatically transformed to align with the new economic realities of modern retail banking while providing a differentiated customer experience

Digital banking has changed the role and economics of branches

Branches are moving away from being transaction-focused and toward being centers of engagement/advisory services often supporting digital

25%

The percentage of branches expected to be eliminated by 2025 (Spiceworks, 2022).

The role of branches is under further strain as generational changes in preference accelerate. Millennials avoid branches and ATMs, preferring to use mobile apps and websites.
Source: Bankingly, 2023.