The financial services sector is changing rapidly. Customers increasingly prefer to interact with financial institutions such as banks and insurance companies online, often through mobile apps, a trend driven by growing broadband access and ever-more-powerful smartphones running on fast 5G networks.
At the same time, new and disruptive start-ups in the sector are providing innovative ways of providing financial services, such as peer-to-peer lending, automated customer service, mobile wallets and integrated buy-now-pay-later services.
Financial services organisations cannot assume that a steady-as-she-goes strategy, focused largely on cutting costs, will still be sufficient. The major incumbents have the advantage of being highly trusted brands. But if they are to meet the challenge of rapid change, they will have to engage far more closely with their customer base, using the savings that automation can bring to provide enhanced levels of service and new, and possibly less profitable, propositions.
The increasing importance of data
Perhaps the most significant trend in financial services is the increasing importance of data. Increased bandwidth means more data can be collected, and AI and other big data analytics techniques mean that this data can be analysed in real time and converted into highly valuable insights.
A better knowledge of consumers makes it easier to comply with know-your-customer (KYC) requirements, especially by strengthening fraud detection and risk-assessment tools. Data can be used to identify consumer trends and develop new services that take advantage of them. And by collecting huge quantities of data about individual customers, financial institutions can provide the personalised and targeted services that generate increased profits and stronger loyalty.
One particularly significant trend in this area is the move towards data being shared between institutions (with the data subject’s permission). The most obvious example of this is Open Banking, where third-party financial services providers gain access to customer data held by retail banks.
Open Banking gives consumers better insights into their finances together with the opportunity to find the best services for their personal financial circumstances. However, it is a threat to banks in that it weakens their hold on their customers and increases competitive pressure. Banks cannot ignore this threat and must use this increased pressure to develop new strategies. These could include partnering with innovative start-ups as well as accepting that they will have to provide better customer service and launch fintech services that match the effortless customer experience of disruptive new sector entrants.
Enhanced consumer experience
Digital technology provides opportunities to improve customer experience. At its simplest, this involves providing comprehensive, intuitive and secure online and mobile banking services.
But digitisation can go much further, especially when powered by AI. Personal financial management (PFM) tools will help people understand their finances and how to improve them; they can also help people with tasks such as making payments or adjusting how much they save each month. Customer service chatbots that are helpful (rather than simply enhanced versions of IVR systems) can be developed and may go as far as the provision of personalised financial advice by “robo-advisors”.
Wearables are another opportunity for banks. Increasingly, people are forgoing physical wallets and relying on their mobile phones to make payments when they are away from home. But mobile phones can sometimes be unreliable. Having a backup in the form of an app in a wearable device such as a smartwatch will enable people to make payments, check balances and receive notifications about financial transactions even when their phone battery has died.
Huge effort has gone into ensuring that online banking services are safe to use. Customers are often the weakest link when it comes to securing money against theft. Unfortunately, people are often fooled into making inappropriate transactions by highly credible fraudsters. The industry is investing heavily in measures to identify and prevent fraud and these measures are greatly strengthened through the use of AI.
Fraud will always be a problem. For instance, dating scams are very hard to prevent because people so desperately want to believe in the person scamming them. But the fraudsters can at least be identified, and the victim advised that they are in danger.
Another improvement to security comes from using biometrics (fingerprints, facial scans and voice recognition) rather than passwords and PINs, to prove identity. Biometrics offer high levels of convenience to the customer as well as increased security (they tend to be stronger than PINs and the passwords many people use) which is why they are increasingly being used to secure online and mobile banking transactions. And where biometrics fail for some reason (perhaps it is too dark for facial recognition to work), the customer can always be offered more traditional routes to customer service as a backup.
The future of financial services: the metaverse
If Facebook’s owner Meta is correct, the virtual world of the metaverse will become increasingly important, and people might be able to bank in the metaverse using virtual banks, ATMs and other financial services including insurance and currency transactions.
In addition, banks might create virtual branches where customers can interact with bank staff. This could be a more convenient and immersive way for customers to bank, and something that would at least in part solve the problems caused by so many bank branch closures.
However, the metaverse will bring with it many challenges, including security. Someone walking into a branch of a high street bank can be sure they are talking to genuine bank employees and using genuine bank services. The same may not be true in the metaverse, and financial institutions will need to develop new security measures to protect their customers’ data and assets. In addition, new regulation may be needed to protect consumers banking in a virtual environment.
Maintaining financial inclusion
The percentage of the UK population who are “unbanked” (do not have access to an account at a financial institution) dropped from 3.6 per cent in 2017 to 0.2 per cent in 2021. That equates to 120,000 people who are totally reliant on cash. However, the number of people who use cash regularly is far larger: over eight million adults in the UK (17 per cent of the population) rely on cash to make payments every day. Cash is declining in popularity. But it is still very much in use, especially by certain sections of society such as older people and the less well off.
For society to be fair, it should be the case that everyone can have access to basic financial services, such as obtaining cash, making payments and saving money securely. And these services should not only be offered online because many UK households (2.3 per cent in in 2023-24, some 650 000 households) do not have internet access. As well as using digital technology to reduce costs and offer better consumer services, the financial services industry must work to expand access to financial services to underserved populations.