6 Trends to Watch in Banking and Lending in 2023
Several years of global upheaval have left banks and lending institutions facing myriad challenges and an uncertain future.
This past year saw the impacts of rising inflation and higher interest rates affecting demand for mortgages and other consumer loans. Meanwhile, supply chain disruptions, lingering COVID-19 effects, geopolitical instability and the threat of recession portend a tightening economic environment in 2023. Banks have started building up their cash reserves in anticipation of flat income amid an uncertain economic outlook.
But while cost containment is a reality for 2023, banking executives must maintain a long-term view, as evolving consumer preferences, increased regulatory requirements and growing competitive pressures will not wait for the economy to recover.
This is why banks must focus on future-proofing their institutions by investing strategically in growth initiatives while maintaining an emphasis on flexibility and adaptability in the face of an ever-changing financial services landscape.
Celent predicts IT spending in banking to climb to $308 billion over the next five years, while research from Gartner reports that 78% of CFOs will increase or maintain enterprise digital investments through 2023, even if inflation persists.
To help banks and lending institutions select the right path forward, here are six top trends in global banking and lending for 2023, and beyond.
1. The distribution landscape continues to evolve and shift
The way banking services are accessed and distributed has evolved significantly over the past few years. The trend began with the emergence of neo- and challenger banks like Chime, which offer digital-first services.
Since then, Big Tech firms such as Amazon and Meta, along with big-box retailers, have made forays into financial services via strategic fintech partnerships. Embedded finance—a broad term to describe banking services integrated into the point of sale of nonfinancial businesses—emerged during the pandemic and is now well-positioned to explode over the next few years, with Deloitte predicting a tenfold increase in the segment by 2025.
At the same time, the role of the traditional retail bank branch is changing as branches continue to shutter though the drop-off has slowed as execs imagine a “phygital” strategy combining the benefits of a physical footprint with digital advancements. Some banks are also taking their first cautious steps into the metaverse, as evidenced by JPMorgan's introduction of its first metaverse branch in 2022.
Incumbent institutions can’t afford to stand still, and the ability to innovate will be key to maintaining competitiveness in an evolving, disruptive marketplace.
2. Better experiences are essential for customer acquisition and retention
Before banks chart their innovation journeys, they must understand their customers’ preferences and desires for outstanding experiences.
According to BAI research, new customer acquisition is the #1 priority for banks in 2023. To unlock their full growth potential, banks must tap into younger generations—segments that desire more convenient, digital-friendly ways of accessing services.
These younger consumers are already comfortable transacting digitally. According to BAI, 70% of Gen Z and millennials have already opened an account online, and half have applied for a loan online. Moreover, 44% are taking notice of gaps in onboarding and account opening and are asking for streamlined, less intrusive identity verification processes.
Unfortunately, if the gaps are significant enough, these younger consumers will jump ship, as more than 70% claim they would switch to a financial services provider with better digital offerings.
It’s no wonder 91% of banks cite mobile experience as a top transformation focus area.
One way banks and lenders can improve customer experience is by reducing friction in the form intake and agreement process. Taking foundational steps like collecting information via intuitive, self-service forms, embedding personalized applications with dynamic content into web or mobile experiences, and exchanging important information and documents via text can significantly improve the customer experience and reduce abandonment rates.
3. Seamless integration of platforms in the ecosystem is a top priority
Another top investment priority for banks in 2023 is technology integration. Early in the pandemic, banks made rapid investments in digital to meet the unique challenges of that crisis, and they now have the opportunity to better harmonize front-to-back operations for the long term.
This will be especially important as open banking eventually takes root in North America—as it has already in the U.K. Investments in automation and efficiency will help banks enhance speed to market and innovate faster. Many organizations have already transitioned to cloud-based infrastructure for cost-effectiveness, scalability, and improved data security.
To achieve these goals, banking institutions should automate workflows and eliminate manual handoffs between teams while integrating disparate, siloed software via connectors and APIs. This is especially important as banks seek to maximize efficiencies from their existing vendors and minimize their vendor footprint.
According to the Financial Brand, 83% of banks list data and analytics as a top investment priority. Maintaining a data continuum between systems and documents will be increasingly valuable, especially as institutions look into employing more data and analytics for strategic decision-making.
While cost constraints will continue to be critical considerations in light of challenging market conditions, banks must recognize that strategic investments in technology and data analytics will help reduce operational overhead, enhance staff productivity and help improve margins over time.
4. Security and fraud mitigation stay top of mind
Heading into 2022, fraud and security were among the highest risks facing financial institutions. According to the FTC, fraud losses increased by 70%, with cyber risks heightened by geopolitical tensions. These concerns are likely to persist into 2023.
As fears of a recession remain strong, data shows that rising fraud correlates with economic downturns. And the financial services industry suffered one of the highest rates of data breaches in 2022. Per Flashpoint’s Risk Based Security division reports, “As of Dec. 9, finance and insurance entities across the world experienced 566 data breaches, which has so far amounted to over 254 million leaked records.”
Given this backdrop, it’s no surprise that in the last two years, the FFIEC has refreshed guidance covering information security and cyber incident reporting best practices, and the FTC has updated its Safeguards Rule with more prescriptive language on information security practices.
It is important for firms to select vendors that demonstrate value for trust and security by meeting and exceeding high security standards and continuously working on expanding their scope of certifications. Firms should additionally invest in better security posture via access controls, authentication, and continuous monitoring of core activities with detailed visibility into the telemetry of the transaction.
5. Investment in regulatory compliance grows
But security isn’t the only focus of regulators, and 79% of banks anticipate increased regulation in 2023. The Consumer Finance Protection Bureau (CFPB) is cracking down on junk fees and excess fee income, and industry watchers suspect that buy now, pay later (BNPL) programs will be the next focus area.
At the state level, new commercial financing disclosures are an emerging focus area for non-depository institutions, where states are looking for commercial financing companies to issue disclosures resembling current consumer lending requirements per Regulation Z. These types of rules may also trickle over to the depository side as these regulations gain steam across multiple states.
As banks navigate a more challenging regulatory landscape, they need good processes and systems in place to deliver required disclosures to their customers, while maintaining a clear audit trail. They’ll also need the ability to easily analyze contracts to identify and monitor obligations and risks.
6. The spotlight on sustainability increases
Lastly, environmental, social and governance (ESG) initiatives remain a strategic and compliance focus for banks, and they offer both a significant challenge and opportunity to make a positive impact.
According to Economist Impact research sponsored by analytics firm SAS, 41% of global banking executives cite ESG among their organizations’ greatest opportunities. Indeed, it’s important to customers too, as over 60% of Gen Z and millennial consumers would switch to institutions with better ESG standards.
The focus on ESG has multiple implications for banks. From a product standpoint, they should look into launching eco-friendly solutions like green loans or green bonds. With the focus on sustainability in the Inflation Reduction Act’s incentives, banks could see more demand this year for home improvement and electric vehicle financing projects.
Sustainability should also be incorporated into a bank’s internal operations, starting with reducing energy consumption and paper usage.
As the regulatory focus on banks’ ESG impact mounts, institutions should invest in data analysis tools designed to track progress toward net zero goals. Banks should work with their vendors to define the impact of ESG efforts.
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