Commercial Banking

Many new ideas and developments are affecting how the banking industry does business and interacts with its customers. For example, more banks are embracing the practice of banking-as-a-service (BaaS), which is the provision of banking products and services through third-party non-banking distributors to expand one’s customer base, grow revenue, and meet other goals. “BaaS is helping traditional banks to create new revenue models,” according to Retail Banking: Top Trends 2022, from Capgemini, a technology consulting firm. “Such models enable incumbents to monetize their banking stack (data, capabilities, and infrastructure) via revenue sharing agreements, one-time setup charges, subscription fees, or a combination of these. The result? A steady stream fed by diverse sources.” Another trend is the increasing use of Web sites, social media, and mobile applications by banks to interact with customers and allow them to complete financial transactions without the need to visit a “brick and mortar” bank. Some banks are even creating artificial intelligence (AI)-driven virtual financial assistants (e.g., Bank of America’s Erica) to allow customers to check their account balances, make payments, and transfer money. Erica has helped more than 32 million Bank of America customers with their financial needs since 2018. AI is also being utilized in the front office (authentication and biometrics), the middle office (anti-fraud and risk, anti-money laundering, complex compliance workflows), and the back office (credit underwriting, smart contracts). “Although the banking industry is in the early stages of developing robust AI solutions, real potential exists in how AI may transform customer experience,” according to Capgemini. “Going forward, AI will also be leveraged for product development, by applying both qualitative and quantitative data to create financial products.” Other trends worth watching are: changing customer expectations, the increasing focus on data security, the growing use of data analytics, the rise of distributed ledger technology, and increasing competition from fintechs and other non-financial services firms.

Changing Customer Expectations

Global corporate banking and capital markets have seen substantial change in the last few years. Across both commercial bank and investment channels, banking customers are demanding more customized products, at lower costs, and with better service. Most banks are working hard to be more customer-focused and pay closer attention to how they manage risks (especially regarding data security). The challenge for banks is learning how to deliver banking services more efficiently and improve profitability. As commercial banks work through this transition, a possible outcome is more employment opportunities for risk management specialists and marketing managers with detailed knowledge of the operational side of the business.

Customer banking preferences have changed in recent years due to advances in technology. Americans are spending less time in bank lobbies than their parents, the Federal Deposit Insurance Corporation (FDIC) reports. In 2017, 44.3 percent of people used a bank teller or automated ATM kiosk to access their bank accounts. This percentage declined to 31 percent in 2021. This change in customer banking preferences will increase demand for Web designers, programmers, and user experience designers who can design and implement digital banking apps and web-based platforms and improve existing technology. In 2021, 4.5 percent of American households (or approximately 5.9 million households) managed their finances without having a bank account, according to the FDIC. (This was a decrease of 3.7 percent from 2011.) Other households had a bank account but dabbled with check cashing services, payday loans, or prepaid cards, and infrequently visited their bank branch office.

The trend toward online banking and industry consolidation, as well as other factors, have reduced the number of bank branches in recent years—from 83,663 in 2013 to 78,774 in 2017 to 72,534 in 2021, according to the FDIC. As a result, many banks are expanding efforts to attract new customers and serve existing customers via digital channels. “It is no longer adequate to wait until the customer or member walks into a branch or decides to purchase a new product online or via a smartphone,” according to TheFinancialBrand.com. “Instead, banks and credit unions must engage customers at every stage of their purchase journey—not just because of the immediate opportunities to convert interest to sales, but because two-thirds of the decisions customers make are informed by the quality of their experiences all along their journey.”

Data Security Becoming a Major Focus

“Financial services is one of the most secured industries in the world, but it remains a lucrative target for cybercriminals because of the amount and nature of confidential data it possesses,” according to Enemy at the Gates: Analyzing Attacks on Financial Services, a report from the IT company Akami. Its research has found that financial services are “one of the first and most attacked industries when new vulnerabilities are discovered, a favorite target of DDoS attacks, and continuously focused on by phishing campaigns, which are aimed at their customers who suffer the brunt of these attacks.” Financial services firms experience digital security incidents 300 times more frequently than businesses in other industries, according to The Impact of Cybersecurity Incidents on Financial Institutions. It’s estimated that global cybercrime cost businesses, organizations, and individuals $6 trillion in 2021. Cybersecurity Ventures expects this figure to reach $10.5 trillion annually by 2025. Another sobering fact: a single data breach against a financial services company has an average cost of $5.97 million, according to IBM’s Cost of a Data Breach 2022 report.

Sixty percent of chief information officers and senior technology executives surveyed by SourceMedia, a business-to-business media company, cited “keeping up with security issues” as a major priority. “Data is money and it matters to consumers,” according to one survey respondent. As major security breaches in the business world continue, look for banks to focus on IT security to protect critical financial data, intellectual property, and the private information of their customers, and to thwart denial of service attacks. In 2022, 70 percent of financial institutions surveyed by cloud computing company VMware reported spending no more than 12 percent of their overall IT budgets on security. But, given the rise in cybersecurity issues, most financial institutions surveyed planned to increase their budgets by 20 to 30 percent in 2022. The growing emphasis on cybersecurity has fueled demand for IT security specialists. In fact, employment for information security analysts in the finance and insurance sectors is expected to grow by 29.7 percent from 2021 to 2031, according to the U.S. Department of Labor.

The Growing Use of Distributed Ledger Technology

Regulatory demands, the growing number of financial crimes and cyber-attacks, the increasing complexity of financial transactions, and the growth of cross-border financial transactions are prompting banks and other financial institutions to incorporate distributed ledger technology (DLT) into their operations. DLT is a decentralized database that is used and managed by various participants. Transactions are synchronized and shared so that all users can view the most recent information on the database. “As a distributed log of records, there is greater transparency—making fraud and manipulation more difficult—and it is more complicated to hack the system,” according to BBVA, a multinational Spanish banking group. Banks and other financial companies use DLT to improve data security, more easily share data between various entities, and create more-trusted recordkeeping for use with customers and for regulatory compliance. “Distributed ledger technology could fundamentally change the financial sector, making it more efficient, resilient and reliable,” according to the World Bank. The global blockchain distributed ledger market was valued at $2.89 billion in 2019, according to Allied Market Research, which predicts its value will reach $137.29 billion by 2027.

The phrase distributed ledger technology is sometimes used interchangeably with the phrase blockchain technology. Blockchain technology maintains a continuously-growing list of records that cannot be altered, except after agreement by all parties in the chain. Each entry is time-stamped and linked to the previous entry. Each digital transaction or record is called a block in the chain of records, hence the blockchain moniker. Blockchain can be an open system, where anyone can add information, or a controlled one, where only users with permission can access the system. “A DLT can be considered a first step towards a blockchain, but importantly it won’t necessarily construct a chain of blocks,” according to TheNextWeb.com. “Rather, the ledger in question will be stored across many servers, which then communicate to ensure the most accurate and up to date record of transactions is maintained…." That said, DLT is technologically decentralized and relies on principles of consensus similar to those of blockchain.

In addition to compliance, digital security, and data-sharing efficiency uses, look for banks to use DLT in various areas such as risk management, payment clearing, and fraud detection.

Competition Is Increasing From Non-Financial Entities

Fintech companies and other non-financial services firms are offering more financial services to consumers, businesses, and other organizations that were once provided solely by traditional banks. Examples of fintech products and services include mobile banking apps, crowdfunding platforms (Kickstarter, GoFundMe, etc.), peer-to-peer payment services (e.g., Venmo, CashApp), trading platforms such as Robinhood, distributed ledger technology, blockchain and cryptocurrency exchanges, insurance (known as insurtech), small- and medium-sized business lending, robo-advising and stock trading apps (e.g., Wealthfront, Betterment), and budgeting apps. “Fintech has made inroads with dozens of applications and has changed the way consumers access their finances,” according to TheStreet.com. “From mobile payment apps like Square to insurance and investment companies, fintech has disrupted traditional financial and banking industries—and potentially poses a threat to traditional, brick-and-mortar banks or financial institutions.” The estimated 1.4 billion people worldwide who do not have bank accounts (according to The World Bank) find banking and investing fintech products and services especially useful. Many large tech companies (known as “Big Techs”)—such as Alphabet (Google), Meta (Facebook), Microsoft, and Apple—are developing fintech-related banking products and services. Nearly 46 percent of bank executives surveyed by the technology consulting firm Capgemini in 2019 described Big Techs as a “disruptive force” in the banking industry. In response to the emergence of fintech companies, commercial banks are being forced to rethink the types of financial products and services they offer and how they market their businesses to customers. Some are collaborating with fintechs to provide banking services and products to customers. “To compete with the new age players, banks may acquire capabilities through mergers and acquisitions and strategic investments (through their venture arms) in fintechs,” according to Retail Banking: Top Trends 2022, from Capgemini. Other traditional banks—such as JPMorgan, BNP Paribas, and Goldman Sachs—are building digital-only subsidiaries to compete with fintechs as a result of studies that signal customer trust in traditional banks. Sixty-eight percent of bank customers surveyed for the World FinTech Report 2021 said they would try a digital bank that was opened by a traditional bank.

The Growth of Data Analytics

Banking customers generate massive amounts of data, and banks are increasingly seeking to collect and analyze this data to understand existing customers better, attract new customers, understand market trends, better calculate risks, ensure compliance, and increase profits. They are also using data to assess employee productivity and help manage various in-house functions. According to IDC, a technology services organization, companies that take a comprehensive approach to data management and analytics see an additional 60 percent return on their data assets. “The ultimate goal and potential outcome of the attention to analytics will be a positive impact on the balance sheet from an increase in cross-selling efforts, a decrease in customer attrition attributed to improved customer relationship programs, and a heightened ability for banks to better invest in services and products that produce stable deposits,” according to an article about banking trends at Transform, a Microsoft blog. The increasing focus on data analytics is creating strong demand for data analysts, scientists, and programmers. The Wall Street Journal reports that “top data scientists can command multiple job offers with salaries well into the six figures and sometimes even seven figures.” Data scientists who have a broad range of big-data analytical skills earn salaries that are 11.5 percent higher than those who do not have these skills, according to the research firm Foote Partners LLC.

Massive amounts of data are being generated and captured by businesses (including banks) and other organizations, but some industry experts believe that banks are not doing enough to analyze and benefit from this data to improve operations, customer service, evaluate trends, and meet other goals. “Banks don’t lack data, they lack the means to unlock it, and simply and consistently turn it into actions,” according to Accenture Banking’s Top 10 Trends for 2023. “Having a data product manager and mindset could be the key to unlocking the value trapped in data—value that every bank knows it has.” Finally, another emerging career is that of chief data officer, the position responsible for managing data and analytics within a bank or a group of banks. Chief data officers “have become a key interface between technology, operations, and the business functions [of banks],” according to the Deloitte Center for Financial Services.