Banks have long been at the forefront of bringing economic change and growth to society. The banking system provides the services that enable businesses to reach customers, expand business, make payments, manage accounts, and much more. Playing such a critical role means that the banking industry needs to be always ready to meet new market needs. We have seen banks set up digital banking systems in the previous two decades; these systems allowed both businesses and consumers to easily carry out transactions and manage their accounts from the comforts of their homes.

All this is, however, just the beginning of the change. Technology has already changed the way we work and play but the speed of technological development is increasing exponentially. As new types of technologies, systems, and business models emerge, it will be necessary for the banking system to continuously evolve to serve the needs of this change. The changes we can expect in the future of banking will directly affect the way we manage risks and what is asked of risk managers.

Why banks need to be ready to change

Banks will need to change in order to serve the needs of a shifting market but what is not the only reason they need to quickly evolve; another major reason is that banks now face competition from a new front. There are many non-banking financial and payment service providers that are steadily capturing the financial services market. Solutions like Stripe, Apple Pay, and Google pay are offering new ways of transferring and managing funds to customers.

Advanced predictive data analytics will soon be a necessity in the world of banking because it is the main competitive advantage that non-banking players have in the market right now. Share on X

These solutions are born-digital, and they are focusing on providing quick and painless services to customers. The technology background of these competitors allows them to develop innovative solutions based on consumer data trends.

There has been a lot of discussion in the industry about how Fintech companies and banks can work together rather than competing, with some experts proclaiming such collaborations to be the future of banking. The Apple Card is the most mainstream example; the product is a partnership between Goldman Sachs and Apple. There have however been many obstacles in these collaborations too. As the Wharton article notes, compliance management has been a struggle because Fintech and banks operate on completely different compliance frameworks.

Consumer and technology trends driving change in banking

We cannot predict the future, but we can look at how technology is progressing to make an educated guess about how it will evolve. Currently, there are four major forces driving change in banking:

The Internet of Things

We can already see that more of our devices are now connected to the internet than ever before. It is common for home electronics to be connected to a network so we can control them from anywhere. As the Internet of Things develops further, it will create new requirements for the way we buy things. There are already working prototypes of refrigerators that can automatically order essential items when it detects them running low.

Risk management will need to evolve for IoT

Risk managers will have to rethink the way these transactions are managed by banks. Currently most of the transactions that banks deal with are either initiated or have been scheduled by humans. The Internet of Things will create an environment where machines will be placing orders without any human supervision. Banks will need to create robust fraud detection and risk management solutions that can detect genuine IoT transactions and approve them.

Predictive Data Analytics

Advanced predictive data analytics will soon be a necessity in the world of banking because it is the main competitive advantage that non-banking players have in the market right now. Companies like Google and Apple have the data of millions of customers going back almost a decade. This allows them to discover insights and trends that no one else is privy to and design solutions based on those insights.

Banks also have an advantage; while they may not have the internet histories or device usage data about customers, they do have financial records going back multiple decades. Banks will need to perform big data analysis on these records to anticipate market needs and create solutions that can compete with the latest offerings by born-digital competitors.

Predictive Data for Risk Management

Predictive risk analytics are already playing a major role in the banking industry and their importance is only expected to grow. Banks will need to take a data-centric approach to risk that allow them to create complex financial models and detect new risks effectively. This is important because expertise in financial risk management is another key competitive advantage that banks have versus born-digital competitors.

Freelancing payments

Freelancing is on the rise across the world and the Covid-19 pandemic has only accelerated its growth. People all over the world are choosing to become their own boss by directly selling their services through online freelancing marketplaces. The only problem is that the banking industry was not ready to cater to the freelancing market – this has resulted in other payment service providers such as PayPal, Stripe, and TransferWise dominating the freelance payment market.

It is incredibly difficult to accept online payments as a freelancer. Allowing people to pay for services through a credit-card would require a merchant account which simply is not feasible for freelancers. As a result, most freelancers end up using expensive online payment services that take a cut from their earnings.

Facilitating payments for the freelance industry while managing risks

Important bank compliance and risk management processes such as KYC cannot be done over the internet and offering payment services to clients without first assessing them in-depth is also not possible due to regulations.

However, the growing size of the industry means that banks will have to come up with new ways to manage risk and ensure compliance while still keeping the process simple enough for everyone. This will be complicated but any bank that can successfully cater to this industry can potentially open a major new income stream for itself.

Are you preparing for the future of banking as well? We would love to show you our next-gen risk management and insights solutions. Get in touch with our risk experts to see a demo of what our solution can do for your business.