Financial services are at the cusp of a monumental transformation driven by three dominant forces – shifting consumer preferences, rapid technological advancements, and a changing regulatory landscape. Incumbents and disruptors are devising strategies to lead the industry into the future. Let’s examine the key trends shaping financial services in 2023 and beyond.
Digital and Mobile Services Become Imperative as Customers Seek Personalized Experiences
Accelerating Digital Adoption
The Covid-19 pandemic has triggered a seismic shift in customers’ financial services consumption habits. With social distancing restrictions and new lifestyle patterns, consumers have flocked to digital channels to fulfill financial needs.
According to McKinsey’s 2023 Retail Banking Trends report, over 85% of US customers now use online or mobile as their primary engagement channel, while branch visits have plunged over 60% since 2019.
This “digital first” preference is spurred by conveniences like anytime-anywhere access, location flexibility, instant notifications, and frictionless transactions. Integrated personal finance management tools within banking apps have also grown in popularity1.
In response, incumbent banks and fintech disruptors alike are prioritizing seamless digital capabilities. Solutions like chatbots, biometric logins, digital wallets, and interactive graphs enable consumers to view financial snapshots, transact, and resolve queries quickly.
As Per Juniper Research, the number of digital banking users globally will reach 3.6 billion by 2024, reflecting a 90% rise from 2022.
Surging Demand for Personal Financial Management
Aligned with digital migration, demand for personal finance management solutions has surged rapidly. Offerings by fintechs like Chime, Nubank, and Revolut collate financial data across accounts and debt sources into unified mobile dashboards1.
This empowers consumers with real-time visibility and control over cash flows to optimize spending. Gamification features like personalized rewards and savings challenges further drive engagement.
In particular, neobanks like Chime and N26 have witnessed exponential growth in monthly active users and transaction volumes through digitized, user-centric strategies.
The appeal stems from empowering consumers with automated expense categorization, notifications, and finance overviews versus traditional manual efforts1.
Mckinsey expects mass adoption of personal finance apps to continue as consumers seek to improve financial literacy and tighten budgets amid inflationary pressures.
Transition Towards Platform and Ecosystem Business Models
Recognizing the enormous potential of digital and mobile capabilities, incumbents and disruptors are evolving into broad financial solutions platforms.
By leveraging APIs and interconnected systems, companies aim to integrate diverse financial services like banking, investments, insurance, lending, and payments under one umbrella. Customer data and insights will seamlessly flow across offerings to deliver hyper-personalized experiences.
Notable ecosystem strategies include:
- BBVA’s open platform to easily embed banking services within other apps.
- Nubank’s evolution into a super-app for banking, shopping, investments, and ancillary financial services.
- PayPal’s expansion into buy now, pay later services, personalized deals, and budgeting tools for a fuller suite of solutions.
The common thread is using technology and partnerships to consistently engage customers across financial needs on integrated platforms.
According to Bain’s research, financial institutions pursuing ecosystem models could realize revenue gains of 22% by 2025 and 38% by 2030.
Specialization Within Services
While chasing an integrated approach, firms are also doubling down on specialization within solution areas.
In banking, disruptors like Chime and Monzo target specific segments like youth and SMBs with tailored, digital-native capabilities8. Insurtechs like Lemonade leverage AI to disrupt incumbents with lower-cost, mobile-first models.
This combination of specialized competencies and large-scale convergence will shape the competitive landscape. Ecosystems that master both dimensions will lead markets.
Exponential Innovation Across Technologies to Transform Operations and Risk Management
Emerging technologies are enabling financial institutions to transform legacy systems, enhance risk management, reduce costs, and identify new revenue streams.
Process Automation Through Hyperautomation
This approach combines solutions like AI, RPA, IoT, and machine learning to rapidly automate operations. Applied to finance functions, hyperautomation streamlines everything from loan processing, client authentication, regulatory reporting, reconciliation, and data analytics10.
According to Gartner, hyper-automation will be a $596 billion industry by 2022, with extensive implementations across banking, insurance, and capital markets10.
It empowers institutions to optimize costs, sharpen data-driven insights for decision-making, and scale seamlessly.
Advanced Analytics for Risk Management
Sophisticated predictive algorithms, machine learning, and AI tools equip leaders with real-time visibility into portfolio risks and performance. Scenario analysis also improves forecasting capabilities to enact data-driven business strategies.
API Infrastructure for Open Banking
Open banking regulations are catalyzing APIs and data sharing between financial institutions and third-party providers. APIs enable core banking functions to be seamlessly embedded within other apps. This powers the distribution of financial services across vast digital ecosystems.
JPMorgan Chase provides over 700 APIs to partners and 500 million API calls a day, highlighting the scale of open banking adoption.
Blockchain to Secure Transactions
Blockchain’s decentralized, encrypted ledger properties are transforming security across financial transaction workflows. Leading applications include identity verification, cross-border remittances, clearing and settlement, and anti-money laundering.
The immutability provided by blockchain also minimizes the risks of errors, fraud, and manipulation across transactions.
Cybersecurity to Safeguard Data
With customers rapidly moving to digital channels, robust cybersecurity strategies are crucial for financial institutions. Solutions based on analytics, AI, automation, and access controls enable proactive threat detection and remediation.
According to Deloitte, leading financial institutions dedicate 15-25% of yearly IT budgets solely to cybersecurity.
Cloud platform adoption also remains high, providing a flexible infrastructure for remote work and on-demand scalability.
The Disruption of Digital Assets, Decentralized Finance and Cryptocurrencies
The growing popularity of cryptocurrencies and tokenized asset classes is catalyzing the emergence of decentralized finance models and expanding blockchain’s role across financial services:
- Digital asset ownership rising with 27% of affluent North American, European, and Asian investors already owning cryptocurrency.
- Exponential growth in trading volumes on decentralized exchanges from $129 million in 2020 to over $203 billion in 2022.
- Mainstream payments adoption of crypto, as highlighted by Visa processing over $7 billion in digital currency-based transactions.
By enabling direct peer-to-peer transactions without intermediaries, cryptocurrency, decentralized finance, and blockchain solutions offer greater transparency, accessibility, and control to consumers20.
The benefits of immutability, enhanced traceability, 24/7 operations, and immediate settlement are driving adoption across various financial use cases – from cross-border remittances and trade financing to compliance, identity verification, and data reconciliation.
As decentralized technologies gain maturity, they are expected to transform the financial services infrastructure and emerge as mainstream by 2030.
Policy and Regulation – Shaping the Next Era of Open Finance and Compliance
Proactive financial policies and regulations focused on stability, inclusion, digital rights, and data security are accelerating the industry’s transformation:
Open Finance to Foster Innovation
As open banking gains maturity in regions like the UK and EU, regulators worldwide are evolving towards open finance – a broader framework for secure data sharing across financial services.
Mandated API infrastructures will enable consumers to share their financial data beyond just banking – across investments, pensions, loans, and insurance services.
Stakeholders believe open finance has the potential to spur collaborative business models, revenue opportunities, and innovative cross-industry services by eliminating data silos.
Expanding Regulatory Compliance
Financial regulators globally are also intensifying scrutiny through robust regulations like GDPR to safeguard consumer privacy. Complex mandates around risk management, reporting, and accountability are also rising.
To address this, institutions are adopting integrated governance, risk management, and compliance solutions powered by analytics and process automation.
Overall, progressive regulations focused on stability, inclusion, digital rights, and controlled innovation are poised to shape the next phase of financial services industry growth.
The Road Ahead – Strategies for Success in the Next Era of Financial Services
Financial institutions are strategizing to thrive in the transformative environment encompassing changing consumer preferences, technology disruptions, and policy reforms.
Institutions must re-orient organizational structures, processes, and cultures to become truly customer-centric. Key focal points include hyper-personalization, omni-channel delivery, self-service, and user experience excellence.
Specialization with Scale
Pursuing an integrated financial solutions platform approach while nurturing specialized competencies across offerings is vital to leading markets. Firms must identify and dominate key niches while expanding into related services.
Operational Agility Through Technology
Technology innovation and optimization must remain an existential priority to achieve speed, efficiency, and resiliency. Automation, cloud platforms, open APIs, and analytics should permeate operations.
Co-creation and Collaborative Services
Leveraging partnerships with fintech disruptors, big tech firms, and data aggregators through open architecture and APIs can help firms accelerate innovation.
Sustainability and Social Impact
ESG factors, ethical AI principles, and sustainability should be embedded into strategies and portfolio composition. Leading with purpose is crucial for future success.
Regulatory Technology (RegTech) and Compliance
Institutions must continuously invest in RegTech and automation to stay ahead of evolving regulations while optimizing compliance costs.
The financial services industry is undergoing unprecedented transformation. Changing consumer preferences, technology disruptions and policy reforms are converging to shape a drastically different future. Legacy institutions must bring agility, customer-centricity and purpose into their DNA to thrive in this new era.Credit Police
As the financial services industry undergoes unprecedented transformation in the years ahead, institutions that lead with bold vision, human values, and technology-powered execution are poised to shape the future.