The promise of digital is still largely unmet due to commercial banks' vast technical debt.
With most commercial banks having been on their transformation path for some years, it's time to assess how these significant investments are working and the extent to which digital's potential is being realized. While there are several compelling reasons to embrace a digital-first attitude (such as better customer interaction, faster loan processing, and considerable long-term cost savings), commercial banking is still in its infancy.
Commercial banks have begun to implement digital strategies across the value chain, to be sure. However, a sprinkling of digital capabilities has evolved from the initial focus on modernisation and digitalization of core tasks. These aren't yet part of a true client-centric, digital-first culture, which is required to catapult businesses into a new age of expansion.
So, in 2022, what will be different? And what is preventing the industry from progressing?
What is preventing the industry from progressing? To be honest, not much. Commercial banks have methodically upgraded and digitized their technological infrastructures during the last several years. While not glamorous, it was an important step on the road to digitalization. Commercial banks aren't finished yet, and they'll have to keep investing heavily.
However, 2022 will be the year when banking customers begin to notice digital possibilities. Banks will need to define digital objectives to guarantee that their technology investments support attributes like empathy, responsiveness, focus, and efficiency in addition to the more apparent business skills. These, in conjunction with the competencies, will result in the desired business outcomes. In this regard, banks must transition to a culture where digital fluency and technology quotient (TQ) thrive.
As digital goals become core to the business as a whole, the days of the chief digital officer (CDO) may be numbered in this new digital world. However, by capitalizing on years of investment and making digital integral to banking culture, 2022 will be the year when the power of digital is felt across the board.
We take a closer look on the trends we consider to be priorities and expect to continue being critical to growth in commercial banking in the coming year:
1. Bank Digital Fluency
As digitalization becomes everyone's duty, the chief digital officer may become outdated.
We believe that as commercial banks become more digital, the post of the chief digital officer will be phased away. This is less a reflection of CDOs and more a reflection of the fact that technology is no longer only the realm of technical experts. The days of the company defining the "what"—the required capabilities—and technology dictating the "how" are long gone. Banks have realized that defining and executing a digital strategy is everyone's responsibility as a result of agile pandemic-driven business transformation.
Although many experienced bankers may object, this mentality shift will be necessary to create a successful digital culture. Commercial bankers who understand business leadership and become technologically aware in 2021 are likely to be successful - meaning that they understand the importance of digital fluency and their bank’s technical capabilities.
If commercial banks are to fully appreciate the potential of digital, a combination of conventional and new talents is required.
Banks that focus on digital are twice as likely to expand as those that don't - their staff has learnt to place technology at the centre of how they perform, the more digitally fluent they are, the more likely they are to realize great returns in innovation, people experience, and customer value.
Despite the benefits of 2021's digital transformation, many transformation projects still lack digital fluency. Literacy in language refers to the capacity to grasp fundamental linguistic skills like reading and speaking, whereas fluency refers to the ability to create with those tools, such as writing a poem or participating in a vigorous argument. Fluency opens the door to fresh ideas, creativity, and innovation.
It should come as no surprise that digital fluency is the key to unleashing employee agility, according to our study. Workers, on the other hand, are all too often kept in the dark about technological advancements. Individuals are often held back by a lack of digital infrastructure, culture, leadership, and skills, rather than by technology itself.
2. Bank’s Digital Foundations
Banks will continue to put money into their digital infrastructure. It will take some time to see results, but perseverance and trust will be rewarded.
Whether you're modernizing, converting, migrating, or replacing your main commercial applications, the transition to a completely digital infrastructure requires institutional attention, large available resources, and patience. Most banks have already begun their digital transformation, and many can no longer see the port from which they sailed.
Unfortunately, the majority of people are unable to view their goal. However, they may be closer to landfall than they thought.
The transformation of commercial loan origination and accounting should be a primary goal for banks. These systems are important to any digital foundation and are a vital aspect of the bank's business infrastructure.
Cloud computing will be critical to that shift. Banking executives recognize this and, as part of their cloud plans, have already invested in elastic data and technological capacity. Banking, in fact, is leading the way in embracing a cloud-first strategy. According to a 2020 Accenture poll, 47% of banks have a large percentage of their workloads on the cloud, compared to 33% across all businesses. This has been intensified by COVID-19.
The case for cloud computing is compelling. Organizations that migrate to the cloud see considerable benefits in time to market (30-50%), provisioning speed (40-50%), and operating expenses (10-20%).
Although public cloud adoption has been slow, we expect it to pick up. Cloud service providers are increasing their expenditures and demonstrating good solution performance in a growing number of corporate use cases. Public cloud use will expand as a result of this, as well as a demanding and technologically sophisticated commercial banking client base and rising competitive pressures.
Cloud is just one component of fintech, which has sparked more financial innovation and efficiency, as well as improved consumer experiences, than most previous trends. The majority of financial services firms believe that fintech will continue to aid in revenue growth. Commercial banks are shifting away from a single-pillar fintech approach to one that seamlessly integrates capabilities and services from numerous firms.
These new integrated ecosystems will lead to more disruption and the creation of new inventive business models as digital commercial banking develops and connectivity grows. We may seem to be talking about cloud a lot, and that's because we are—the importance of cloud enablement in banking is only beginning to be recognized.
As cloud use grows and digitalization increases, multi-layered, linked commercial banking ecosystems with SMEs and corporations at the center will increasingly emerge in 2022.
3. Digital ROI
Your digital foundation may take some time to create, but you may start reaping the rewards right now.
Why are we putting so much emphasis on digital capabilities? Even while fundamental technology accounts for more than 80% of a bank's digital investment, the new digital capabilities it brings will account for more than 50% of business enablement and differentiation.
While a robust foundation is crucial to a company's long-term health, bank transformation executives often receive little credit for it and are under pressure to produce results from their investments' more exciting and creative aims.
So how can your bank demonstrate real digital ROI? By allowing its digital base to unleash new digital possibilities.
Provide actionable analytics to relationship managers. To encourage self-sufficiency, provide customers with digital tools. Alternatively, you may utilize machine learning to produce accurate predictions in the face of uncertainty. Banks must find a way to shift scarce resources—financial, technological, and personnel—to leverage the foundation and generate commercial value, even if it is still a work in progress.
4. Bank Digital Experience
Clients see the value of digital in their daily lives. Commercial banks must take their users’ experience much more seriously.
Commercial banks who took the lead in building digital interactions for PPP loan clients not only cut costs, but also increased their capacity to handle huge numbers of consumers.
Furthermore, they increased client satisfaction and loyalty.
We've witnessed a significant rise in consumers' desire to connect digitally with their banks—and, in many cases, a new love of digital capabilities—along the road. In reality, this isn't simply due to their banking experiences.
Excellent digital experiences have become an increasingly important element of everyone's daily life in the last year. What's changed is that customers now expect similar experiences in their professional life.
Commercial banks have demonstrated that they are capable of providing a digital experience. However, as their retail rivals have experienced, this risks them becoming lost in a "sea of sameness."
As a result, the task has shifted from just digitizing to offering unique and valuable digital experiences.
Banks must move beyond prioritizing customer experience (CX) to committing to transforming their brand into an experience. This necessitates a new organizational perspective in which the creation, maintenance, and enhancement of the CX is the responsibility of everyone (not just the chief experience or digital officers).
Banks that embrace CX as an organization will be in a good position to make innovation a regular occurrence. They'll align their technological, data, and human objectives in order to create and deliver exceptional experiences across all channels. These experiences will set them apart from their competition, laying the groundwork for them to achieve better growth rates than their more inwardly oriented competitors.
5. Actionable Insights
Data analytics solutions will yield concrete benefits for banks if they put actionable data in the hands of relationship managers, loan officers, and clients.
Given the emergence of less face-to-face interaction and regulations regarding data privacy; commercial banks will need novel data and analytics solutions in 2022 to function effectively and develop personalized banking services that assist meet customers' specific demands.
This isn't going to be easy. In the face of too many alternatives and little financing, progress may be stifled. Then there's the issue of maintaining momentum and future scalability while managing a developing data and analytics environment.
However, the efforts will be rewarded. C-suite executives in the financial services industry are already reporting ROIs of over 60%, as well as substantial improvements in client experiences, employee productivity, and new product offers. Fast rollouts are also helping to make "fit for purpose" products and services a reality.
One-size-fits-all commercial banking solutions are giving way to more tailored, easily available information, allowing relevant account and relationship managers to spend more quality time with customers, albeit remotely, while reducing administrative duties.
Leaders will use expanded 360° views, micro-segmentation, and data-driven cross- and up-selling possibilities to assist RMs work more effectively and increase revenue in the second half of the year.
They will continue to empower digital RMs, increasing the happiness of both relationship managers and their customers. In 2022, the applied intelligence transformation path will be dominated by long-term work on customer relationship management and early warning credit insights.
However, to generate real customer growth and better predictive risk strategies and insights, banks are expected to take advantage of more modular, quick win rollouts of data analytics solutions and collaborations with fintechs or technology providers.
6. Evolution Into Fintech
Financial services are increasingly being integrated into companies' offers and experiences. Banking as a service is changing the game.
"Those who enroll, also control," a well-known fintech analyst once said, implying that organizations that are a customer's initial point of contact have an edge when it comes to meeting all of that customer's demands. Amazon, Shopify, and Apple were among the digital firms that integrated financial services into their own goods and experiences last year. This trend should continue over the next 12 months as firms discover a new, potentially profitable income stream and begin to offer financial services at the point of sale.
Shopify, a Canadian e-commerce company, provides small and mid-sized businesses with easy access to banking services (SMEs). On the Shopify platform, merchants may finance transactions with buy-now-pay-later loans, get debit cards, and take payments from customers.
How? Shopify has teamed with a commercial bank that provides fundamental banking goods and services via open APIs. Shopify is the tenth-largest platform offering financial services for SMEs in the USA; while the Bank of America is ranked 6th. Shopify is an e-commerce company on the surface, but it's a fintech company on the balance sheet.
While the commoditization of banking services is not new, it is expected to accelerate as a result of the growth of trustworthy APIs and increased collaboration across commercial banking strategies. Banking as a service (BaaS) provides the end-to-end execution of a financial service over the internet.
Commercial banks who employ BaaS as a distribution channel see returns on assets that are two to three times higher than the industry average. Westpac, an Australian bank, recently announced the launch of its new BaaS platform with the introduction of its first partner. Its partnership with Afterpay, the market leader in Australian buy-now-pay-later services, will allow Afterpay to expand the range of financial services it offers to its three million consumers, despite the fact that it does not have a banking license.
In another example, Stripe has partnered with Evolve Bank and Goldman Sachs to launch Stripe Treasury, an API-enabled service that helps millions of its business customers embed financial products into their marketplaces or platforms.
Stripe, for example, has teamed up with Evolve Bank and Goldman Sachs to offer Stripe Treasury, an API-based tool that allows millions of Stripe's business clients to integrate financial products into their markets or platforms.
7. Bank Social Responsibility
Client demand for sustainability and social responsibility is prompting banks to take steps that benefit both themselves and their communities.
Social responsibility has been more essential for many top global organizations, particularly banks, during the last decade.
The previous year marked a turning point. Stakeholders in commercial banks are beginning to demand that the banks' basic mission be linked with something other than profit—and they are expecting action. We expect this tendency to intensify in 2022, with a greater sense of urgency. While the emphasis on corporate responsibility varies by location, banks are increasingly interested in problems such as sustainable investment and renewable energy, as well as social justice, racial unfairness, and other societal concerns.
While this will have a considerably greater impact on society and the environment than any changes to banking operations, banks must nonetheless prioritize social responsibility. Customers will reward banks with measurable sustainable lending strategies and penalize those who lend to clearly "unsustainable" firms. Similarly, authorities will want more information on how ESG-friendly a bank's holdings are.
Because of its capacity to make a stronger impact—thanks to fewer loans and a greater number of external ratings—commercial banking is expected to be the bank's driving force. For example; ING, BBVA, BNP Paribas, Standard Chartered, and Société Générale have all agreed to utilize lending to assist support the transition from a high-carbon to a low-carbon economy.
Commercial banking, on the other hand, bears a duty that goes beyond the environment. We have seen CEOs of prominent global banks making formal public comments criticizing racial disparities and fighting for social justice as stakeholders have focused on corporations that exemplify social responsibility values. Banks have the chance to use their financial clout with clients to effect positive social change. As commercial banks seek to position themselves as societal change agents, we anticipate their role as metaphorical corporate good citizens to expand.
8. Strategic Flexibility
To maintain momentum and thrive in a year that will shift from disruption to distraction, banks must build the correct structures, portfolios, objectives, and leadership.
COVID-19 prompted banks to laser-focus on getting themselves, their clients, and their workers through this unprecedented and sudden economic downturn of the past couple of years - causing a wave of disruption in commercial banking.
While the disruption of 2021 has passed, the year ahead will be filled with several disrupting trends and challenges, making it harder for banks to focus on their digital agenda. The epidemic is still spreading and will continue to dominate the headlines for at least the next two quarters. We have yet to see the actual impact of non-performing loans as the global economy responds and rebounds. Corporate real estate books, which have been the backbone of commercial portfolios for so long, will be exposed, posing new and major issues. Apart from the epidemic, the fallout of Brexit and the election of a new US government changed local and international policies and dynamics.
We also predict more regional bank consolidation and the probable divestment of far-flung enterprises, such as BBVA's sale of its US operations to PNC. Parallel tactics are expected to be used by commercial banking CEOs to reconcile these very real disruptions with the need to regain momentum in their longer-term strategic initiatives.
COVID-19 put a light on the need for game-changing transformation in the midst of the disaster.
Commercial banks responded by rising to the occasion and exceeding their own expectations. Astute banks will grasp the opportunity to employ strategic investments to go ahead of the pack in order to expand on that capacity. Those in the early phases of substantial digital change should avoid being paralyzed by turbulence and instead push harder and quicker.
To be competitive, banks will need to put in place the proper structures, investment portfolios, and goals, as well as leadership, in order to retain momentum and thrive throughout this year of disruption.