A conversation with Sanat Rao on the future of retail banking

Through Sanat Rao, Infosys Finacle CEO

  • How has the pandemic encouraged financial institutions to innovate and what does this mean for the future of banking?

The pandemic has created a sense of urgency in digital transformation. According to Infosys Finacle & Efma’s 2021 Annual Research on “Innovation in Retail Banking”, 6 out of 10 financial institutions said the pandemic had made them somewhat, or significantly, better at innovation; only 14% felt it compromised their performance.

That said, banks are still moving at a glacial pace. This is backed up by the report’s findings where only 14% of respondents believe their organization’s digital transformation is at scale and happening as planned.

We are convinced that banks can develop innovation in the years to come by focusing on five key themes:

  1. Maximize digital customer engagements to drive growth
  2. Pervasive digitization and automation to reduce costs
  3. Constantly innovate to create value and remain competitive
  4. Leverage the power of new technologies such as cloud, API and AI to unlock new possibilities
  5. Leverage talented teams and a goal-driven culture to unlock true potential
  • What are the key areas that banks believe they need to improve in 2022 and beyond to ensure continued innovation in a way that makes them more competitive and attractive to customers?

Banks are considering multiple areas of future innovation to gain competitive advantage, such as improved digital delivery, lending services, payments and cards, and more. However, channel delivery innovation was identified as the most important area of ​​innovation. We believe banks need to increase their investment in digital delivery innovation in 2022 and beyond to keep pace with digital banking transactions moving from bank-owned to third-party channels as open banking and integrated finance are taking hold. As the pandemic has created challenges for banking through physical channels, banks have had to accelerate the digitalization of channel distribution across the entire customer engagement lifecycle – from onboarding and service. engagement and upselling/cross-selling. In fact, the 2021 Finacle-Efma “Innovation in Retail Banking” report found that more than 84% of respondents had increased their investments in digital delivery, with 44% of bankers indicating they had increased their investments by more than 10%.

  • How can financial institutions ensure they are building a healthy culture of innovation?

As banks are in a state of continuous transformation, the importance of embracing innovation is not just an initiative, but part of the overall culture within the organization. This approach rests on the foundation of five building blocks –

  1. Make innovation an organization-wide initiative, where employees can think independently and explore innovative ways to solve problems.
  2. Adopt modern technologies such as cloud computing, AI, RPA, blockchain, etc. as the foundation for digital transformation.
  3. Distribute data and insights through advanced analytics to anticipate customer behavior and requirements and use that insight to deliver contextual and personalized offers at scale.
  4. Cultivate external relationships and recognize the role of the ecosystem or third-party channels.
  5. Address talent gaps by mapping skills across functions to identify skill gaps and close those gaps with the help of an agile workforce
  • How important is it for banks to offer alternative digital transformation strategies, such as offering customer experience through mobile channels or using AI and advanced analytics?

We noticed in this year’s Finacle-Efma “Innovation in Retail Banking” report that banks place very high importance on the digital transformation strategies below as having the greatest impact on the banking industry over the past 3-5 coming years.

  • Improved mobile customer experience (90%)
  • AI and advanced analytics (86%)
  • Workforce skills (76%)
  • Open banking APIs (65%)
  • Cloud Computing (58%)

Respondents also identified automation of back-office processes, IoT-based solutions, and blockchain technologies as important strategies to scale digital transformation. However, they are lower on the prioritization scale compared to the first five strategies.

  • Where are banks in their digital transformation journey?

An encouraging finding from this year’s Finacle-Efma ‘Innovation in Retail Banking’ report is that 14% – up from 7% – of bankers believe their organization’s digital transformation has spread and is proceeding as planned. That said, the remaining 86% are at different stages, with the highest being 43%, confirming that digital transformation is partially rolled out in most banks.

Many organizations lack success in digital transformation strategies to achieve key objectives. Banks have achieved the lowest levels of success in areas such as skills transformation, commitment of time and money to strategies, legacy technologies and more, many of which are critical to transformation success digital.

  • What are the main challenges or threats for the future of the bank over the next 5 years?

As the gap between digital leaders and laggards widens rapidly, incumbent banks and credit unions face the treatment of being consolidated sooner rather than later. More than 19% of respondents said that by 2025, at least 25% of financial institutions will be consolidated. 38% of respondents further said that the number of bank branches would be reduced by more than 25% from current levels by 2025. The increasingly intense competitive landscape is seen as one of the main reasons for drive the consolidation. Rapid adoption of modern technologies, a culture and mindset of innovation, accelerated digital transformation cannot be emphasized enough.

  • And what are the main opportunities for the future of the bank over the next 5 years?

Digital technologies present significant opportunities for banks. They have the ability to radically change the cost structures of banks. The cost-to-revenue ratio of the world’s top 1,000 banks is around 50%, higher than the 33% of progressive digital banks, or the even lower costs of digital-only players. Artificial intelligence technologies such as robotic process automation, cognitive automation, and APIs help automate labor-intensive processes. Harnessing big data, advanced analytics, and open banking will dramatically improve the customer experience.

There are early signs of recovery in business model innovation, helping banks keep pace with change to stay relevant. New innovative digital models are constantly gaining strength. These include digital-only banking, banking as a service, integrated finance, digital financial advisors, financial marketplaces, non-financial marketplaces run by financial institutions, public services banking sector and bank custodians. There are significant opportunities that can be unlocked in all of these business models to create, deliver and realize value in new ways.

  • How can traditional banking providers take advice from fintech companies in their digital transformation journeys?

Fintech companies are today at the forefront of innovation in several products and services. They scored highest in the battle for lending services, digital delivery, small business banking, investment services and payments. They have embraced modern technology, embraced an innovative mindset, and leveraged their access to data and analytics to deliver faster, cheaper, and better products. In fact, in several instances in the report, banks ranked below fintech companies in innovation over the next five years.

Banks need to get out of their position where, despite embracing digitalization, they have retained their traditional approach to products and services. Like fintech companies, they need to adopt a customer need lens. To be able to meet customer and business needs and deploy digital solutions quickly and at scale, and better than before, banks must collaborate with fintech companies.

  • What are the most surprising and/or transformative predictions made by players in the banking sector?

With unprecedented investments in modern technologies, new-era digital businesses unbundling financial services and delivering highly personalized products with speed and simplicity, pipeline-style universal banking is slowly making way for the open platform.

Four in ten respondents to the Finacle-Efma survey believe that the consolidation of incumbent banks and service companies will reduce the number of establishments by more than 25% by 2025 (i.e. in just four years !). A further 52% believed this would happen by 2030. Around 85% of bankers believed the number of bank branches would decline by more than 25% from current levels by 2030. Almost three-quarters of respondents believed that ‘at least two fintech or large technology companies will become the top ten financial services providers by 2030.

While a large majority of banks thought cloud computing would become mainstream, and not surprisingly, very few banks (9%) thought blockchain and DLT would be used by 75% of banks by 2025. On the other hand, more than one-third leaders believed that IoT solutions would drive more than 20% of transactions by 2025.

78% of banks surveyed estimate that more than 50% of payment transactions will be initiated through non-bank channels by 2030. Additionally, more than 73% of banks said digital transformation will lead to lower cost-to-revenue ratios current globally. incumbents exceeding 20 percent.

These projections underscore the fact that only financial institutions that embrace a challenger mindset, significantly digitize at scale, sustain a culture of innovation, and leverage modern technologies will be better prepared for ongoing disruptions and ready for the future.