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As technologies develop, a totally different way of doing banking will continue to disrupt Financial Services in more ways than one. Rapid technological advancements require banks (and the overall financial services sector) to focus on efficiency, transparency, and experience. This sentiment was mirrored in our inaugural Financial Services Horizons – Annual GCC Leadership Summit featuring Banking futurist, Brett King.
Over three days, multiple sessions and presentations were held, where our financial services leaders and clients engaged with Brett King, in discussion on what the future holds for financial services and what key trends will shape the future of banking.
Towards Banking 4.0
Brett King defined Bank 1.0 as the advent of banking, dating back to the 13th and 14th centuries. Banking at this time revolved around the concept of pledging that the depositor’s money was safe. The next era appeared centuries later, in the early 1970s when service banking was introduced. Banking 2.0 saw the rise of the first Automated Teller Machines (ATMs), which gave access to branch banking outside hours. Setting up of call centres also gave birth to “multi / omni-channel” banking.
Banking 3.0 was powered by the popularisation of the smartphone and coincides with the launch of the first Apple iPhone in 2007. For the first time, customers were able to “break-free” from the “gate-keeper” approach that bank branches had maintained for decades. Starting 2017, the world has been witnessing Banking 4.0 or the “experience era”. This has been powered by disruptions such as mobile wallets and many others, driven by fintechs across the globe.
| Bank 1.0 | Bank 2.0 |
Bank 3.0 |
Bank 4.0 |
| 13-14th Century till 1970s | 1970s-2007 |
2007-17 | 2017-50 |
Valium mortem (pledge (till) death) French – gag morte English – mortgage |
Service banking (ATMs) Access to branch banking outside physical hours via call centres “multi-channel” adaptation / omni-channel |
Smartphone era Mobile broke the “gate-keeper” model that bank branches had maintained for so long |
The experience era Disruptive business models (e-commerce revolution was Internet’s 1st disruption) Wallets fintechs |
By the middle of the 21st century, we will enter the Banking 5.0 era, which will be driven by autonomous and programmable markets and currencies.
We identified five no regret moves for our clients that will help attain Banking 5.0 and offer ubiquitous banking to their customers.
Attaining Banking 5.0
Many financial services organisations would relate to the existence of a dual culture, with elements that are traditional alongside digital ones. Without any doubt, the future is digital, and a must win for those looking for success. Digital must be woven in the organisation’s DNA, starting from the boardroom. As Brett highlighted, China’s Ant Group is a leading example having a team of technology experts across their Board (they currently have 8 board members, all are either STEM graduates or have led several digital initiatives for their previous employer(s)). Another successful example cited is DBS, which brought in technology experts from other organisations (such as Microsoft) to set up their digital bank. Brett also cited the example of JPMorgan Chase & Co. employing more programmers / coders than Meta.
Forgetting legacy is also crucial – many banks aim to become technology organisations but are often slowed down by their DNAs. MOVEN bank was the first bank to break a barrier in the US by offering digital onboarding to customers (after seeking approval from the regulator by educating them). Incumbent banks should also be comfortable with following fintechs, for instance, rather than always trying to reinvent the wheel.
There are several examples of success by following a digital first approach. A prominent one is Warren Buffet backed Nubank in Brazil that targeted unbanked customers, which were never enticing for traditional banks. Today 98% of its customer support is powered by AI, and leveraging its incredible referral program, the bank has grown its customer base to 70 million within 9 years of its existence. It became the largest bank (by Market Cap) in December 2021 with its IPO. Other emerging markets, such as India, have proven that branch banking does not drive inclusion, mobile phone does.
In the Middle East region, Brett highlighted a clear shift in consumer behaviour and predicts a rapid redistribution of wealth driven by a gig economy. He also applauded governments and regulators in the region for their forward thinking (for instance, Vision 2030 clearly calls for ‘open banking’). The existing and in-process digital infrastructure will also offer ease of digital onboarding for traditional banks (that choose to go that route).
As banks try to compete with fintechs (or Techfins, as Brett highlighted), they must keep these foundational elements in mind – creating technology stacks without legacy limitations; setting up an independent team with a technology-driven leadership; and fostering a radically different culture (and preferably establishing a fintech/techfin charter). Banks need to be able to scale, deploy and release features at Netflix/Amazon speeds. Quantum computing will disrupt banking in the next 10-15 years; traditional banks should embrace it now rather than waiting to be outpaced by fintechs.
Another major shift will be the transition to Cloud. Cloud will no longer be an option but a necessity. As Quantum computing takes over, it will no longer be viable for organisations to sustain on premise models due to the looming security threats, limited capacity to scale and huge costs of transformation. Moreover, ESG groups and consumer associations will also discourage the existence of on-premise banking, due to its high energy use.
The mantra for success is that the CEO and senior leadership drive digital top-down. A shift in mindset will also be needed for banks to comprehend that legacy is never a constraint – technology, processes, and policies, if updated in the right manner, will never hold them back.
The Industrial and Commercial Bank of China (ICBC) has successfully moved 90% of its transactions from mainframe to cloud. In India, banks are working to move 80% of trade finance and treasury to cloud by 2024. Both the countries have made massive gains when it comes to digital banking, owing to their speed to scale. All over the world, banks are delivering the same output with 20-30% smaller teams, post migration to Cloud.
Agility also demands creation of new offerings; case in point, Alipay’s credit access plus savings account. They successfully deploy technology to predict future cashflows and to identify windows when the customer will need funding. Another success story is Buy Now Pay Later (BNPL), which is mostly being captured by fintechs globally.
Artificial Intelligence is changing the world we live in. AI implemented at an economic scale results in smart economies, which is likely the future that we are looking at. Banks and financial services institutions must realise this and prepare to leverage AI to make their operations more efficient and consumer centric. In a world overloaded by smart devices, banks need to embrace data and AI to provide contextual banking services to their customers.
Open data will be crucial as we move toward a world with neuromorphic computing. Today billions of dollars are spent annually to prevent 1% of money laundered globally. Open data will allow banks on a “shared infrastructure” to call out defaulters. The downside to this is threats to data privacy. Brett highlighted the need for a clear differentiation between “needed” and “avoidable” data – e.g., medical data at an aggregate level is “needed”, but an individual’s DNA should fall into the “avoidable” domain. Supranational data is essential for AI to function and helps economies to scale up. Clearly, the newer generation is open to trading data in turn for enhanced customisation or even for monetary returns.
Banking 3.0 was largely driven by increased access to cheaper smartphones. Banking 4.0 is leveraging this into making mobile wallets the primary bank accounts for millions of previously unbanked customers across the globe, particularly in emerging markets. AI and game-changing innovations using it will be the second major enabler in this era.
Central banks and regulators across the globe are realising the inevitable dependence of banking on AI and some are already looking at regulations to assist this transition. The European Commission issued its legislative proposal for the AI Act in April 2021 [3], as part of a wider plan to coordinate EU policy priorities on AI. There might be modifications to the proposed Act before it becomes a legislation by the end of this year, but there will be an impact on financial sector organisations.
There are several examples over the last few years that have highlighted the need of and benefits for banks fostering the right partnerships to move ahead with their digital transformation agendas. For this reason alone, JP Morgan has more than 1,400 fintech partnerships. Most banks are not technology companies, and hence, it becomes difficult for them to inherently adapt to an AI and cloud-driven world. Partnerships with fintechs can be extremely fruitful in maintaining relevance for consumers in this changing landscape.
Fintechs operate differently from traditional banks – they are inherently digital first, they do not hesitate in experimenting (and failing fast, if they must), and they are not necessarily deterred by regulation (as they try to find ways to innovate and coexist with rules while achieving their end objective, which is not in the DNA of traditional banks). Many success stories exist such as the Deutsche Bank’s partnership with Traxpay, a German fintech offering discounts and reverse factoring solutions, which enables the bank to play a leading role in supply chain financing. Another is the collaboration between ABN-AMRO and Danish fintech, Subaio [4], culminating in the success of the Grip App – a digital platform allowing users a one-stop solution to manage their recurring payments online.
In addition to partnering with fintechs, traditional banks will need partners across three layers – business, technology, and legal. Most importantly, they will need a dedicated team to form and manage these partnerships, rather than relying on their procurement teams, which are often not adept at doing so. Partnerships with tech giants such as Meta and Google will be extremely crucial due to the access to rich data that traditional banks can get through such relationships. For instance, as smart glasses become commonplace in the near future, banks will be able to access this data for offering customised products and services to users of such glasses.
Traditional banks wanting to do everything on their own without leveraging partnerships, often fail. One such example is JP Morgan’s FINN that failed as it only focused on digitally onboarding customers present in the vicinity of a physical branch. RBS’ Bo failed largely due to cultural differences between a new mindset and a legacy one (it saw 3 CEOs being appointed in a brief period of 14 months).
Attracting the right talent will be possible if banks redesign their value proposition for prospective employees. In addition to attractive pay and growth opportunities, young workers are also watchful about companies’ ESG performance as well as the ability to work in a hybrid model. According to PwC’ 2021 Future of Work and Skills Survey, of the 11 risk areas related to building trust in the organisation, the biggest was: ‘making environmental issues a strategic priority and part of the organisation’s wider business management planning’. Only 31% of respondents strongly agreed doing this.
Governments also play an instrumental role in designing the right policies and facilitating movement of talent with incentives. Some countries in the Middle East region have successfully attracted technology talent through liberal visa policies (such as UAE’ Golden Visa program) and by acting as a testbed for start-ups (such as Saudi Arabian Monetary Authority’s (SAMA) Regulatory Sandbox that allows local and international firms to test new digital solutions in a ‘live’ environment [1]).
Lastly, readying the workforce of the future is also essential. Integrating technology curriculums at the school-level, for instance, will go a long way in meeting the demand for technology talent over the next few decades. There are some encouraging statistics already for this region – according to UNESCO Institute for Statistics, 43 to 46 per cent of tertiary students in Oman were likely to graduate in a STEM field in 2020 [2]. Many banks are realising that a digital upskilling journey will be needed for staff in addition to other essential skills such as critical thinking, problem solving, communication, and emotional intelligence. For example, with retail advisors working in the branch network, leading banks are focusing on building the foundational digital skills to help employees take advantage of new technology and teach new ways of interacting with clients.
Brett and our senior leadership attending the event, also identified some broader challenges. These include:
Lobbying groups in the US, for instance those driven by large pharmaceutical and hydrocarbon businesses. A major regulator in the States, OCC was the first to propose a fintech charter, but it was shot down by other regulators. Even today, real-time payments are not common in the US as they do not favour incumbent banks that control over 80% of the market
The US ecosystem versus that in other parts of the world – mobile wallets overtook plastic cards in volumes in 2017, while most incumbent banks are content using decades old technology by issuing plastic cards in the States. Apple originally wanted to go cardless, but were forced to launch a plastic card because of legacy payment giants such as Mastercard and Visa, which reasoned that mobile wallet penetration wasn’t high in the States
Regulatory issues: Access to digital services was a problem highlighted during the pandemic – education and healthcare (among others) emerged as sectors that were not capable in offering services digitally (as there was no need before COVID-19 brought the world to a standstill). Now we are seeing innovations occurring in many markets at great speeds – which leads us to the question on how do you work with data? Throw AI and climate change in the mix, and the role of regulators becomes even more complex. Brett sees global regulation as important (at least pan-regional if not global); regulations must be looked like part of core tech infrastructure (US today is 10 years behind Singapore, China, EU all of which have more advanced regulatory systems)
The Venture Capital (VC) mindset: Western traditional press questions Fintechs who are not profitable. Banks argue that if they will fail, why spend in the first place. In reality, VCs believe in extending one’s runway and showing them its value (scalability and efficiency matter, profitability comes second). Amazon was not profitable for its first 20 years but was continuously gaining market share during this time, that’s the stage where most Fintechs are currently at (Revolut is cash-flow positive; 40% salaries in the UK are being paid in employee accounts with challenger banks as they offer a much better customer experience)
Conclusion
Clearly, the way forward for banks is challenging, yet exciting. Imbibing a digital first culture and embracing emerging technologies, particularly AI and cloud, will ensure that banks sail smoothly through their digital transformation. These new technologies will allow them to remain relevant and competitive in today’s world as well as offer efficient, transparent, and experiential services that consumers are increasingly demanding. Learning from fintech’s by adapting their bold and fearless culture as well as joining forces with them (rather than trying to compete) will help today’s banks to cement their place in the future. Lastly, the excitement that futuristic banking brings, is just starting - soon we will be looking at wearable banking, for instance, powered by augmented reality (AR) and smart glasses. Predicting cash flows will also become reality - banks will be able to offer credit, for instance, to customers without them asking for it. Wallets are undoubtedly the future of banking, in Brett’s words “the Kodak moment” for the industry. Smart cities of tomorrow will require banks of the future - cashless and omnipresent.
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Sanjay Jain
Partner | Financial Services - Insurance Leader, PwC Middle East
Tel: +971 56 676 5946
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