The state of the U.S. banking industry is solid — but meeting several challenges revolving around technology will be key to continued success in the future, according to a senior Deloitte executive.
“Labor markets, monetary policies and other factors are all in a fairly good spot overall right now,” said the firm’s Scott Baret, a senior client partner and leader of its U.S. banking and securities practice. “We’re seeing corporate profits and, more recently, the sort of tax reform that we haven’t in a long time. Banks are facing a very favorable economic, regulatory and tax environment.”
In order to maintain and grow that momentum, banks must stay abreast of the ever-quickening advances in technology that their customers are increasingly expecting, Baret said, echoing the findings of Deloitte’s newly published 2018 Banking Industry Outlook.
The industry’s primary business segments – retail banking, corporate banking, wealth management, capital markets and payments – will each need to address six macro themes in the coming 12 to 18 months.
Not surprisingly, customer centricity leads that list.
“Client experiences are evolving at a much faster pace, thanks to technology like apps that make it easier for customers to conduct transactions,” Baret said. Not keeping up with those developments “could drive customers to other organizations, depending on their needs. Driving a better and more fulfilling experience for customers is the holy grail for banks and can help increase profitability.”
There are also opportunities to modernize regulatory compliance and bring together disparate silos created for individual compliance goals, Baret said. “We’re calling that ‘regulatory recalibration’ or ‘stabilization’,” he noted.
Following a decade of intense scrutiny by regulators globally, banks seem to be sensing some stabilization, especially within the U.S., Baret continued. More global firms are refocusing on varying local market needs and regulatory mandates. Integrating processes through automation – which does not necessarily mean cutting staff – can be one way of taking advantage of this current environment, he said.
Tying in with those two themes is technology management. “Stability creates opportunities to redeploy assets and resources into different areas,” Baret said, noting that some banks’ legacy systems date back to the Nixon era. “Integrating those core operating systems with new technologies that can enhance the customer experience isn’t necessarily easy, but it’s something that many banks need to refocus on.”
Mitigating cyber risk has become hugely important, as reports of large companies failing to adequately protect their customers’ identities continue to make headlines. Greater interconnectedness in the banking ecosystem, rapid adoption of new technologies, and continued reliance on legacy infrastructure designed for a different age all make for a risky environment, Baret said.
While funding for cybersecurity continues to increase and there is greater cooperation among banks, Deloitte warns that cyber risk continues to grow in complexity. As a result, it recommends building a robust culture of due care across the organization and ensuring that cybersecurity is a key consideration in the design of business processes, strategy and innovation.
A fifth theme centers on financial technology firms, or “fintechs,” and how they continue to lead innovation in the banking industry by sharpening their focus on customer experience. As Deloitte sees it, banks can either try to replicate what fintechs are doing, respond with equally innovative solutions, become more symbiotic and less competitive, or pursue a mix of these strategies that fit their unique capabilities and market positions.
“This is pushing banks to think differently about the customer experience,” Baret said.
Learning from fintechs and technology firms could help banks rethink their competitive benchmarking, he continued, especially as fintechs and other nonbank players encroach on various business lines like lending, payments, trading and wealth management. Smart bank management can take a hard look at those entities’ practices and realize dividends of their own. “Fintechs are the unpaid innovators for banks right now,” Baret said.
Lastly, the firm recommends banks rethink their workforce strategy – not just due to increasing automation but also due to greater diversity in the labor pool. In addition to permanent employees and contractors, that workforce will likely include freelancers who work with multiple banks, fintech “hackathoners” to generate novel solutions, and even robots that work alongside humans.
Banks will likely need to reorient existing workforces to be collaborative and inclusive, while providing them with more integrated employee experiences – from recruitment to retirement – to mirror the richer customer experience that the workforce is enabling, according to Deloitte.