Introduction: Banking Enters a New Era
There is a big shift in banking services right now for various reasons: the need for new technology, a change in customer demands, and a growing fintech marketplace. The banks that were known for being conservative and having brick-and-mortar branches are now shifting to digital-first Strategies, AI, cloud, and open banking architecture. The result is a financial system that is smarter, more open, and more responsive.
CMI recently looked into it a little bit and discovered that the global banking industry was forecasted to grow at a CAGR of 6.2% over the next 5 years. Most of this growth will come from investments in digital infrastructure, AI-powered automation, and changing regulations. In this rapidly evolving world, the banks that balance new ideas with trust and compliance will be the most successful.
The Shift to Digital-First Banking
The shift from serving customers in person to digital and mobile platforms is one of the biggest changes that any business, any day, has ever seen in the financial industry. Today, customers expect to be able to open accounts, apply for loans, invest, and process their day-to-day transactions with no hassle around the clock.
The COVID-19 crisis accelerated this shift, and already, banks are racing ahead with digital transformation projects that, previously, were at least 18 months off. As a result, people from all over the world are using digital banking to a greater extent, and mobile banking apps are fast becoming the primary way millions of customers engage with banks.
“Digital-first banking is no longer a trend, it’s a standard,” says an analyst at CMI. For customers, things need to be simple, quick, and under their own control. Banks that can offer the feel of digital with the security and warmth of personal will prosper.
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AI and Automation Erase the notion of your business:
AI and automation are two critical things that are enabling the transformation of banking operability as we know it. Artificial intelligence (AI)-propelled chatbots, virtual assistants, and robotic process automation (RPA) are helping the wheels turn smoothly, and people have personalized experiences.
Machine learning is being used by banks to sift through various client data in real time. This, in turn, allows them to offer personalized product recommendations, detect fraud more quickly, and easily execute their compliance operations. Predictive analytics can make credit underwriting far more precise, allowing banks to offer risk-based pricing and, in turn, be better able to provide loans to more people.
More than 70% of the world’s tier-1 banks are using AI to detect fraud, interact with their users, and streamline internal processes, according to CMI’s latest report on banking innovations.
The API Economy and Open Banking:
Another trend that’s reconfiguring the way banks operate is open banking. It is a set of rules and technologies that allows third-party developers to build applications and services that work with a bank. Safe APIs (Application Programming Interfaces) that make it easy for banks and fintech firms to share data (with a customer’s consent) have made this possible.
Open banking is already changing the way people manage their money in regions such as the UK and the EU. It provides consumers with greater choice, visibility, and control. Open banking is contributing to pushing the envelope on serving the underbanked in emerging markets and expanding access to financial services.
“Open banking is killing the monopoly of legacy systems,” an analyst at CMI. It is getting people to cooperate instead of compete, and it is forming an entirely new realm for financial services.
BaaS (Banking as a Service):
Everything from e-commerce and ride sharing to even telecom companies can now provide financial services such as payments, digital wallets, and even loans to their customers, leveraging Banking-as-a-Service (BaaS) platforms. BaaS providers build the backend and ensure that they’re following the directives. For the customer-facing piece, it’s all about experience and distribution.
Not only is this idea making it easier for more people to access financial services, but it’s also giving banks new ways to earn money. It’s also turning banking into a real part of people’s digital lives, whether they are shopping online or using a fitness app.
CMI’s forecast is for the BaaS market to grow by over 15% annually to 2028. That’s because digital-first companies have their eye on adding financial services to their businesses.
As banks make the shift to digital and open their ecosystems to third parties, having strong cybersecurity and following the rules is more critical than ever. These aren’t good enough, and advancement in next-gen solutions leveraging AI, behavior-based detection, and the like is required since data breaches, cyberattacks, and financial crimes are becoming increasingly intelligent.
There are also increasingly complex rules and regulations around the globe. Data protection laws, such as GDPR, anti-money laundering (AML) directives, and cross-border tax regulations are becoming more severe, for example.
“Security and compliance are now the cornerstone of digital banking strategy,” says an analyst at CMI. Banks have needed to build trust while also being flexible, which requires them to use technologies that are smart, adaptive, and interconnected.
Financial Inclusion and the Rise of Neo-Banking
Digital banking is a powerful driver of financial inclusion, particularly in parts of the world where a lot of people do not yet have access to banking. Their role is being filled by neo-banks, or challenger banks, which offer minimal banking services, exactly the same as a local bank, but without the costs of having to maintain physical branches. They conduct all their business online.
These fintech-backed firms would focus on making banking easier for young people, those working in the gig economy, and small business users by offering easy and low-cost services with mobile-first interfaces.
Sustainability in Banking: More Than Just a Fad
And banks themselves are prioritizing sustainability, both in the investments they make and in their own environmental footprint. Banks are increasingly using ESG (Environmental, Social, and Governance) factors to inform decisions about loans, investments, and risk evaluation for portfolios.
There’s a massive surge in green bonds, lending for climate projects, and sustainable asset management. Some banks are also offering their retail customers tools to monitor their carbon footprints so they can understand how their purchases impact the environment.
Bank 2.0: Customized, Anticipatory, Goal-Oriented
In the years ahead, the banking business will become more personal, predictive, and purposeful. AI-driven hyper-personalization will enable financial institutions to serve the real-time needs and requirements of every one of their customers. Predictive banking will also be able to extrapolate what a user might want to do, such as alerting them to upcoming payments or suggesting savings goals dependent on what they spend.
Meanwhile, the industry’s portfolio of products and services is expanding from just banking and investing to include educating people about how to manage money, taking a stand on climate change, and doing its bit to make the world a better place. Banks are not only going digital; they are trying to be trusted digital advisers.
CMI senior analyst explains: By 2025, the defining principles of banks will no longer be technology-based, but ‘social values and morality’. The ones that do the best job of putting intelligence to work for empathy, speed to work for, well, more speed, and new ideas to work for inclusivity will win.
Final Thoughts: A New Way to Bank
The business of banking services is changing dramatically, and not just because of new technology. What it is really about is the customer being at the core of a banking experience that is seamless, secure, and also sustainable.” The next era of banking is evolving, inclusive, and full of opportunity, from AI to open banking to ESG to embedded finance. Banks that embrace this transformation and invest in digital intelligence, consumer trust, and sustainability will not only survive, but they will also lead.
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