The world of commercial banking is in flux. For years, it has lagged behind its retail counterpart in embracing innovation. Attitudes are changing, however, as shown by a recent study we commissioned into the views of UK and US-based commercial banking employees at middle management level or above.
The introduction of new banking regulations and consumerization brought on by increased competition and growing demand from businesses to have access to the same digital banking capabilities they get in their personal lives have proven to be the key drivers of attitude change.
As commercial banks begin to adopt a more consumer-driven approach, we are seeing a great many changes taking place, not least the use of technology to greater effect.
PSD2: Challenges and Opportunities
The advent of open banking regulations like PSD2 in Europe, make innovation and change a necessity for banks. After all, PSD2 stipulates that if customers authorize it, banks must make relevant details of their account available to third parties through an open API. However, a key challenge to many large commercial banks is the relative inflexibility of legacy IT systems, which make it difficult to adopt new technology quickly. And the key data they need to access to comply is often unstructured and kept in silos.
In our study, when we asked commercial banking employees what impact they believed increased regulation would have on commercial banking over the next five years, the top response, highlighted by 45% of the sample, was that it will ‘drive the adoption of new technologies’.
For 17% of respondents the biggest threat to commercial banking over the next five years is ‘competitive pressures’, while 14% referenced ‘unwillingness to adapt or innovate in changing times’.
Competitive pressures are certainly a growing threat within commercial banking. There are so many new players bringing dynamic new technologies, services and business models to the table that commercial banks often find that they are continuously competing to gain and retain business. That’s why most commercial banks today face the stark reality that they must change to survive and thrive. The ever-growing expectations of commercial banking customers are making this need even more urgent.
These days, many businesses are looking both for more automation and a greater focus on online banking. So, banks need to ensure that the innovation they are bringing in allows them to fend off the competition and address what their customers are looking for.
In line with this, our study highlights a growing understanding of the likely transformative impact of new consumer-focused technologies amongst decision-makers in the commercial banking space and a willingness to adopt and implement them. In the survey, banking apps are seen as the technology area likely to have the biggest impact on commercial banking in general over the next five years. 64% of the overall sample cite banking apps among the technology areas they foresee having the biggest impact on their industry in that timeframe.
Banking apps are also predicted to be among the most disruptive technology areas in commercial banking over the same time period. Just under half (49%) of the survey sample said they expected these apps to play a disruptive role within the next five years. Cryptocurrencies (45%), whose potential impact on traditional retail banking has been well documented, and digital wallets (42%) were projected to be the next two most disruptive technologies.
What this highlights is that commercial banking is shifting towards a more consumer-focused approach. Business executives are increasingly used to leveraging the latest technology to gain a real-time view of their personal finances. Now, they are increasingly demanding similar capabilities within the organisations they work for.
We are also seeing commercial banks increasingly planning investment in key technology areas to make consumerization possible. It is not surprising that enhanced IT security systems are seen as the main focus of future spending, with 65% of respondents saying that their organisation is likely to invest in enhanced IT security systems over the next five years in order to counter the threat to commercial banking.
Below that, we see data analytics (referenced by 55% of the survey sample overall), big data initiatives, including investment in AI and automated processes (53%) and enhanced mobility (41%) also featuring highly in likely investment strategies of respondent organisations over that time frame. These are all technology areas which have been widely used in the consumer arena for years, but now commercial banks are beginning to more clearly understand their importance in delivering the best possible customer service and providing a competitive edge.
As we look to the future, change is in the air for commercial banking. With competition more intense, regulations more complex, and customer demand for innovative and intuitive technology increasing, commercial banks are shifting to a more consumer-focused approach - and that should position them well as they look to tackle the challenges the future will inevitably bring.