Future Bank: Navigating Uncertainty and Change

The banking industry is on the cusp of a revolution. Digital transformation is changing the way banks operate, with 80% of banks planning to adopt cloud-based technologies by 2025.

As banks navigate this uncertainty, they must also contend with shifting customer expectations. Today's customers expect seamless, omnichannel experiences, with 75% of consumers preferring to bank through mobile devices.

To meet these demands, banks are investing in digital infrastructure, such as APIs and data analytics. This will enable them to offer more personalized services and stay ahead of the competition.

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Banks are no longer the sole providers of financial services, thanks to fintech startups.

Traditional banks are losing their traditional advantages as fintech collaboration becomes more prevalent. This is because banks are partnering with fintech startups to enhance their offerings and stay competitive.

Regulatory requirements are also making it harder for banks to maintain their traditional advantages. They need to adapt to evolving regulations related to data privacy, cybersecurity, anti-money laundering (AML), and consumer protection.

Banks are having to get used to a new way of doing things, one that involves collaboration and adaptation. This is because the bank of the future will be shaped by factors like blockchain, cryptocurrencies, and fintech collaboration.

The future of banking is looking bright, and it's not just about traditional banks anymore. In fact, we're seeing the emergence of new competitive arenas and business models that are revolutionizing the industry.

The five cross-industry competitive arenas that will shape the future of banking are everyday banking, investment advisory, complex financing, mass wholesale intermediation, and banking as a service (BaaS). These arenas have the potential to grow revenues by as much as three to 30 times in the next decade.

BaaS, in particular, is an exciting development. It's not customer-facing, but rather provides highly efficient tech and infrastructure platforms that can be licensed to customer-facing organizations. This can include providing credit to nonfinancial institutions, enabling them to act as banks, or bolstering the balance sheets of existing financial institutions.

The goal of BaaS is to provide utility, giving clients robust, secure, and efficient services and liquidity through business models such as BaaS utility providers and BaaS balance sheet providers.

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In the next decade, we can expect to see a significant shift towards a cashless world. In fact, countries like Belgium, Australia, and South Korea are already leading the way, with over 70% of consumer payments being cashless. In China, mobile payments are growing faster than ever, with transactions valued at $5.5 trillion last year.

Mass wholesale intermediation is another key arena that's changing the game. It's a combination of expertise and new, efficient systems that includes corporate finance, cash management, portfolio management, and more. The ultimate goal is extreme efficiency and know-how, which can be achieved through business models like automated trading and funding marketplaces and integrated enterprise services platforms.

These new business models are not just theoretical; they're already being adopted by organizations that are winning better valuations in the capital markets. For example, BaaS providers are creating highly efficient tech and infrastructure platforms that can be licensed to customer-facing organizations.

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Standard Chartered Bank is creating a new digital agenda by innovating from outside in, which is transforming banking today. This approach is making banking simpler, faster, and better for customers.

The bank is redefining the digital agenda to meet the evolving needs of its customers. By innovating from outside in, the bank is able to create a more personalized and user-friendly experience.

Future Bank's financial regulation and stability framework is designed to safeguard customer deposits and prevent financial crises. The bank's capital adequacy ratio is set at 15%, exceeding the regulatory requirement of 10%.

The bank's robust risk management system allows it to identify and mitigate potential risks, ensuring the stability of its financial operations. This includes regular stress tests and scenario analyses to anticipate and prepare for potential market fluctuations.

By maintaining a strong capital base and implementing effective risk management strategies, Future Bank is well-positioned to provide a stable and secure financial environment for its customers and stakeholders.

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It's time to take a closer look at deposit insurance, a crucial component of financial regulation and stability. In the US, the FDIC insures deposits up to $250,000 per depositor, per insured bank.

Depositors have been relying on this protection for decades, but the system is not foolproof. In 2008, the FDIC borrowed $81 billion from the Treasury to cover bank failures, highlighting the need for a more robust framework.

The FDIC's insurance fund has been building up since then, but it's still a concern. In 2020, the fund's reserve ratio dropped to 1.15%, raising questions about its adequacy.

Some argue that deposit insurance has become too generous, leading to risk-taking behavior by banks. The US has one of the highest deposit insurance coverage limits in the world, which may be contributing to this issue.

To address these concerns, regulators might consider revising the deposit insurance framework, such as by reducing coverage limits or introducing risk-based premiums.

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The impact of data and money regulation around the world is uncertain, making it difficult to predict the winners and the time it will take for them to get there. This uncertainty is due to the differing approaches to regulation in countries and regions.

Predicting the future of digital currencies and data regulation is extremely difficult, especially considering that countries and regions have such differing approaches to regulation. It's hard to say how digital currencies and data will be regulated in the future.

Customer data may become the new oil, highly regulated and jealously guarded by institutions that capture it, or it may become the new water, a public utility accessible to all and therefore much lower in value. A more likely scenario is that customer data will become the new water.

The advance of digital currencies is unstoppable, but its regulatory future is unclear. Digital currencies might be well established as mainstream alternatives to central-bank currencies in a decade, making them more convenient for transactions and deposits.

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Financial crises often stem from a combination of factors, including excessive leverage, asset bubbles, and weak regulation.

The 2008 global financial crisis was triggered by a housing market bubble in the United States, which led to a surge in subprime lending and ultimately resulted in widespread defaults.

Excessive leverage can create a fragile financial system, as seen in the case of Lehman Brothers, which filed for bankruptcy in 2008 with over $600 billion in liabilities.

Asset bubbles, such as the dot-com bubble of the early 2000s, can also contribute to financial crises by creating unrealistic expectations and encouraging reckless investment.

Weak regulation can exacerbate these issues, as inadequate oversight can allow risky practices to go unchecked.

The lack of effective regulation in the pre-crisis period allowed banks to engage in excessive risk-taking, which ultimately led to the crisis.

In the aftermath of the crisis, regulatory bodies have implemented new rules and guidelines to prevent similar situations from arising, such as the Dodd-Frank Act in the United States.

Banks will increasingly leverage data analytics and artificial intelligence to offer personalized services tailored to each customer's financial needs and preferences.

Personalized services could include customized product recommendations, financial advice, and proactive fraud detection. This approach will help prevent risks and make banking more efficient for smaller players or funds.

Banks may adopt blockchain technology for secure and transparent transactions, and some may offer cryptocurrency-related services to meet customer demand.

Traditional banks will collaborate with fintech startups to enhance their offerings and stay competitive, which could involve partnerships for innovative product development, technology integration, or even acquisitions of fintech companies.

Here are some examples of banks already embracing the future of banking:

The end goal for complex financing is journey integration, making these processes convenient, efficient, fast, and low cost yet also as personalized as possible from start to finish.

Banks play a vital role in the economy, providing a safe and secure way for people to store and manage their money.

The average American has around $4,500 in their savings account, highlighting the importance of banks in everyday life.

Banks offer a range of services, including loans, credit cards, and investment products, which help individuals and businesses achieve their financial goals.

In 2020, the total value of outstanding credit card debt in the US was over $1 trillion, demonstrating the widespread use of credit cards.

Banks also provide a platform for people to invest in the stock market, with the average American holding around $100,000 in stocks and bonds.

The Federal Reserve, the central bank of the US, regulates the banking system to ensure stability and prevent financial crises.

Banks are also a source of employment, with over 2 million people working in the banking industry in the US alone.

Banks will be transformed in the future, and it's exciting to think about what that will look like. Banking as a service (BaaS) will be a key player in this transformation, providing highly efficient tech and infrastructure platforms to customer-facing organizations.

BaaS providers will create white-label products for retailers to market under their own brands, offering regulatory know-how and back-office services such as customer service, documentation, and HR. This will enable nonfinancial institutions to act as banks, and bolster the balance sheets of existing financial institutions.

Personalization will be a major focus in the future of banking. Banks will use data analytics and artificial intelligence to offer customized services tailored to each customer's financial needs and preferences. This could include proactive fraud detection, and even training clients on fraud prevention.

Banks may also use blockchain technology for secure and transparent transactions. Some may even offer cryptocurrency-related services to meet customer demand. This could be a game-changer for the way we think about banking and financial transactions.

Traditional banks will increasingly collaborate with fintech startups to enhance their offerings and stay competitive. This could involve partnerships for innovative product development, technology integration, or even acquisitions of fintech companies.

For your interest: Banks and Banking Services

ATM cards are becoming less necessary as digital banking platforms gain popularity. Retail and business customers are increasingly turning to digital banking, which means physical bank branches will likely shrink or disappear.

Advanced ATMs are equipped with video teller services and automated teller functions, offering extended or round-the-clock branch services for added convenience. This is a significant shift from the traditional banking experience.

You can expect future ATMs to forgo the need for cards altogether, relying instead on digital banking apps or mobile-enabled near field communication (NFC) for access. This change will likely make it easier to manage your finances, as you'll no longer have to worry about misplacing your ATM card.

Royal Bank of Canada (RBC) is a great example of a bank that's embracing change and innovation. They've launched several start-ups and explored partnerships to stay ahead of the game.

RBC Ventures was launched in 2017 as the bank's semi-independent venture capitalist function to find and finance new projects. It had a start-up-like culture and decision-making process separate from the core RBC business.

Within two years, RBC Ventures reached 3.2 million Canadians with various value propositions—and prompted tens of thousands to become new RBC banking clients. This is a testament to the power of innovation and experimentation in banking.

RBC has also introduced Ownr, an end-to-end small-business gateway focused on start-ups, which offers services like web design, business registration, and banking services on one platform.

GarbageDay is another innovative tool launched by RBC, which helps residents remember their garbage and recyclable collection days, seasonal tasks, and parking information. Roughly 200,000 Canadians now use it.

RBC Rewards became the top program in Canada, with an app providing personalized offers. It operates now as a marketplace, with merchants not only funding rewards but also paying a markup and using the program as part of their distribution strategy.

NOMI, a free, AI-driven personal financial-management tool, was launched in 2017 and is now part of the main RBC app. NOMI has three differentiating factors: NOMI Find & Save learns transaction patterns and automatically sets aside money (up to CAD $50 per day) for use in the future.

Here are some of the key initiatives launched by RBC:

These initiatives demonstrate RBC's commitment to innovation and customer-centricity, and show that banks can be more than just financial institutions. They can be partners in our daily lives, helping us manage our finances, our time, and our waste.

In the future of banking, complex financing will play a significant role. Complex financing involves services that require more sophistication than everyday banking, such as mortgages, home equity loans, car loans, and start-up loans.

These services are complex because many players are involved in each ecosystem, making it difficult for customers to navigate. For example, getting a mortgage is just one aspect of buying a home, which requires coordinating with real-estate brokers, lenders, insurers, attorneys, and other professionals.

Consumers crave a trusted expert to help them simplify this process and make it more convenient. The end goal for complex financing is journey integration, making these processes efficient, fast, and low cost while also personalized from start to finish.

Business models that achieve journey integration include real-estate-journey orchestrators and equipment and vehicle marketplace specialists. A real-estate-journey orchestrator can handle the complex process of buying, renting, operating, and selling real estate, coordinating across mortgages, insurance, utilities, and maintenance with seamless integration.

Here are some examples of business models that can achieve journey integration:

The Discount Window is a financial lifeline, but it's often shrouded in mystery. It's a facility provided by the Federal Reserve that allows banks to borrow money in times of need.

Banks are required to hold a certain percentage of their deposits in reserve, but sometimes they need more liquidity to meet their short-term obligations. The Discount Window provides a safe and reliable source of funds.

In 2008, during the financial crisis, the Discount Window was used extensively by banks to meet their liquidity needs. The Fed provided over $1.5 trillion in loans to banks through the Discount Window.

The Discount Window is not just for big banks, it's available to all banks, regardless of their size or financial condition. This makes it a crucial tool for maintaining financial stability.

In 2020, the Discount Window was used by over 2,000 banks, demonstrating its importance in times of need.

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Banks will increasingly leverage data analytics and artificial intelligence to offer personalized services tailored to each customer's financial needs and preferences. This could include customized product recommendations, financial advice, and proactive fraud detection.

The goal of Banking as a Service (BaaS) is to provide utility, giving clients robust, secure, and efficient services and liquidity through business models such as BaaS utility providers and BaaS balance sheet providers.

BaaS utility providers create highly efficient tech and infrastructure platforms, which they can license to customer-facing organizations. BaaS balance sheet providers give both banks and nonbanks access to distinct pools of capital and offers asset liability management and regulatory-required licensing for nonbanks.

Traditional banks will increasingly collaborate with fintech startups to enhance their offerings and stay competitive. This could involve partnerships for innovative product development, technology integration, or even acquisitions of fintech companies.

Banks will need to adapt to evolving regulations related to data privacy, cybersecurity, anti-money laundering (AML), and consumer protection. Compliance is also an area of burden that banks could help reducing.

Here are some key features of the bank of the future:

As we explore the Future Bank, let's dive into the everyday banking aspect, where technology and innovation meet our daily financial needs.

You can expect to manage your money on-the-go with Future Bank's mobile app, which allows you to check your account balances, transfer funds, and pay bills from your smartphone.

With Future Bank's online banking platform, you can also manage your accounts, pay bills, and transfer money from the comfort of your own home.

Future Bank's mobile app is designed to be user-friendly, with a simple and intuitive interface that makes it easy to navigate and find what you need.

The app also includes features such as budgeting tools and financial alerts to help you stay on top of your finances.

Future Bank's online banking platform is secure, with multiple layers of protection to safeguard your account information and prevent unauthorized transactions.

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Personalized services are key to the future bank, with banks leveraging data analytics and AI to offer customized product recommendations and financial advice.

Banks will use data analytics to detect potential fraud and prevent risks, training clients on how to avoid it. This proactive approach will benefit both the bank and the customer.

Blockchain technology will play a significant role in the bank of the future, enabling secure and transparent transactions. This could include using blockchain for cryptocurrency-related services to meet customer demand.

Traditional banks will partner with fintech startups to stay competitive, collaborating on innovative product development and technology integration. This partnership will provide comfort to cautious corporates and treasurers.

Regulatory compliance will remain a challenge for future banks, with evolving regulations related to data privacy, cybersecurity, and consumer protection.