The Future of Finance: 5 Banking Trends to Watch
Bitcoin. Watson. Millennials. These are just a few of the buzzwords that have come to embody the important changes facing the financial industry. Here are 5 banking trends to watch.
No matter the time of year, it’s important for financial professionals to ask the question "What will this year look like?" And more importantly, what’s the future of finance going to look like?
We've scoured the news and are looking into our proverbial crystal ball to see what the future will bring.
Below, we’re highlighting 5 banking trends that we believe will have a serious role in shaping the future of banking and finance.
How are you and your financial institution experiencing these trends? How will you respond to them in 2018 and beyond? Here are the latest trends in the banking sector:
1. The Rise of Cryptocurrency and the Prevalence of Blockchain
In the summer of 2015, I was on a trip in Indonesia with a few of my college friends when we decided to check out some live music. When we got to the venue, we were surprised to see a rapper from Detroit performing. We were even more surprised when, during the show, the chorus to one of his songs was “Bitcoin, Bitcoin. Put your money in Bitcoin!”
At the time, my friends and I all thought this was ludicrous. But if any of us had invested at that time (when Bitcoin was trading at $229 per coin), we could have made thousands. And that was only two years ago! Since then, we’ve seen cryptocurrencies skyrocket in popularity, dominating headlines and markets, despite the volatility.
That said, there's still a lot of uncertainty about what cryptocurrencies are and what they can do. One of the most important features of cryptocurrencies is that they rely on a technology called blockchain.
In a very general sense, blockchain is a technology that relies on a global network to jointly manage a shared database that records transactions on a public ledger. It's renowned for its security, as you'd have to break into each and every computer to have access to the data. If you're interested in learning more about cryptocurrencies and blockchain, I recommend this Cryptocurrency for Dummies article; it really helped me grasp the subject.
What Do Cryptocurrencies and Blockchain Mean for Banks?
You should expect blockchain to make further advancements into the mortgage lending space. HousingWire's Rahim Kaba wrote an extremely helpful article on how this new technology can impact banking mortgage lending, and why it matters. In it, he notes:
- For many financial institutions, lending is still a paper-intensive process.
- "The documents involved in these processes – mortgage notes, vehicle loans and equipment leasing contracts – have cash value tied to them, often in the hundreds of thousands or millions of dollars, and if these documents are destroyed, their value is completely lost."
- Blockchain's digital ledger has the potential to make this process much more secure.
- "When a transaction occurs, everyone who has permission on the network knows about it. It’s tamper-proof and everything happens in real-time."
- Blockchain could also be helpful from a regulatory compliance perspective.
- "Banks and lenders are under increasing regulatory compliance pressure and need the ability to quickly demonstrate how processes take place. One of the most exciting features of blockchain from a legal and compliance perspective is its 'immutability,' meaning that as soon as transactions are recorded into the blockchain ledger, they cannot be altered or deleted."
- Blockchain may even make the process of lending faster and cheaper, in addition to being more secure.
- "Distributed ledger technology has the potential to dramatically reduce costs related to the manual processing of loan documents."
- "Blockchain fundamentally eliminates the need to manage paper-based assets as financial institutions can significantly reduce manual intervention when transferring digital assets to parties in the lending ecosystem."
While it’s tough to predict specifically how cryptocurrency and blockchain will impact lending, it’s important to understand that blockchain technology is truly disruptive and has the potential to turn the industry on its head.
2. Artificial Intelligence is on the Rise
Artificial Intelligence, or AI, technology is on the rise. In fact, some experts estimate that by 2020, we will see a computer with the same processing power as the human brain.
Financial institutions are figuring out how they can use artificial intelligence to “decrease costs, enhance revenue, reduce fraud and improve the customer experience.” From chatbots to BSA/AML compliance work, AI and other analysis-heavy advances like deep learning and predictive analytics will have a big impact on financial institutions in the years to come.
If you attended the ABA Regulatory Compliance Conference a few years back, you might remember a keynote session that showed how IBM's Watson has the potential to revolutionize BSA/AML compliance.
But what really is AI? To give you a high-level view, AI can be broken into three main types:
- Cognitive automation: These are tools that are used to create “deep domain-specific expertise and then automate related tasks.”
- Cognitive engagement: These systems use “cognitive technology to engage with people, unlocking the power of unstructured data (industry reports / financial news) leveraging text/image/video understanding, offering a personalized engagement between banks and customers with personalized product offerings and unlocking new revenue streams.”
- Cognitive insights: This refers to “the extraction of concepts and relationships from various data streams to generate personalized and relevant answers hidden within a mass of structured and unstructured data. Cognitive Insights allow to detect real time key patterns and relationships from large amount of data across multiple sources to derive deep and actionable insights.”
How Can Artificial Intelligence Impact Financial Institutions?
The answer to that question depends on who you ask, because the possibilities are seemingly endless. Here are a few examples of how AI is changing different departments of financial institutions globally:
- AI is used in compliance primarily in investments management and banking, because of the volume of data and transactions. It's helpful for screening for money laundering, market manipulation, insider trading, and third-party risk, according to Compliance Week.
- In the UK, regulators are looking at using AI machine learning in order to enforce financial compliance. While they’re still investigating how to properly implement this new technology, their leaders have mentioned that they are looking to “support the adoption of automated, digitized compliance.” This will be a game-changer, and could have huge repercussions if adopted by American regulators.
- AI has the potential to improve the customer experience by analyzing the data and providing better insights into consumer behavior.
- Cutting-edge voice and chatbot technology will likely be incorporated into the process for online sales. In addition, the insights AI delivers can be used to support marketing and sales communications.
- Bank of America recently introduced an intelligent assistant called Erica to share financial guidance with their 45M+ customers.
- Because AI has the potential to supplement and even replace certain human functions, the technology and automation may result in reduced costs.
- JPMorgan is using AI to analyze legal documents and identify the most important details and clauses with their recently adopted COiN technology.
With the utmost certainty, we can say that AI will shape compliance and banking significantly in the years to come.
3. Changing Consumer Behavior Leads to a Changing Branch Network
Customer behavior in all industries, including banking, is radically different than it was 5-10 years ago.
With the surge in mobile banking over the past few years, the idea that “more banks = higher profitability” no longer accurate. The bank branch is no longer the only, or even the primary, way that customers can interact with their bank. This is particularly true of millennial customers.
Related: Creating Reliable Risk Assessments
At the same time, regulatory scrutiny on Fair Lending, CRA, and Redlining is still dependent on an understanding of the markets you serve. Changing your branch and ATM network can result in positive or negative impacts to your Fair Lending, CRA, and Redlining compliance risk.
As you look to the future, the question you need to ask yourself is whether your branch network strategy has evolved with these changing consumer behaviors and regulatory expectations.
How A Better Branch and ATM Network Can Lead to Growth
In 2010, opening up a flagship store on the main corner of town used to mean more foot traffic and better business. Today? Not so much. The everyday customer is just as interested in the quality of your website, mobile app, and ATM locations as the locations of your physical branches. Some ways that banks are responding are:
- Replacing older ATMs with on deposit-taking ATMs in strategic locations.
- Investing in online and mobile banking that really meets their customers' needs.
- Assessing the location of their branches, to determine if any can be closed without negatively impacting their CRA or Fair Lending performance.
- Identifying locations for new branches that will attract customers of all demographics, and serve the unique needs of the community.
- Evaluating ways to save money and reduce risk throughout their branch network through branch relocations, downsizing, and strategic renovations.
4. Uncertainty in Regulation and Deregulation
In today's political climate, the potential for increased regulation seems just as possible as the potential for dramatic deregulation. The issues are polarized, and the discussions tend to be rather emotional.
From the management conflicts at the CFPB to the various legislations being proposed in state and federal governments, the regulatory future of the American financial system is uncertain.
Here are some current trends we're seeing in banking compliance:
- A New Age of Governance: In order to improve effectiveness, the Federal Reserve Board is “signaling a new age of governance and accountability” by introducing new proposals and rating systems specific to board governance. Among the components that will be scrutinized will be senior management accountability, fostering a culture of controls, and “conducting self-assessments in line with the proposed guidance with scope that includes capabilities and governance structure.”
- Consumer Protection: Despite the current upheaval at the CFPB, it’s important to note that this will not eliminate the topic of consumer protection. Today's consumers are more educated about this topic, and community action groups still see themselves as essential protectors of communities. As a financial institution, it's a good idea to prioritize consumer protection and Fair Lending compliance. Not only will this signal a commitment to compliance, it can also serve as proof that you understand and prioritize the needs of your community to potential customers.
- Democrats in Washington Focus on Financial Reform: Since the 2018 midterms, we've seen a rise in Democratic Congressmen and women talking about financial reform. With Senators Elizabeth Warren and Bernie Sanders, both Democrats, likely to run for President in 2020, financial reform will remain in the spotlight.
How Can Financial Institutions Respond to Uncertainty?
Despite the changes, here is tactic financial institutions can use to respond to the regulatory uncertainty: pivot from rebuilding after the Great Recession to encouraging intelligent, sustainable growth. This idea is based on a recent report released by Deloitte about the 2018 regulatory landscape.
We wrote a blog earlier this year about 5 trends that will shape banking compliance that you may find valuable.
Here's the bottom line: Make sure that your compliance is strong, and your growth plan clear and sustainable.
5. The Increasing Cost of Compliance
As we've discussed earlier this year, the cost of compliance is rising. It’s also something that you as a bank leader or compliance professional are probably dealing with daily.
Over the next 5 years, regulatory costs are set to double, with 10 percent of banks’ total operating costs being attributed to compliance. In addition to an expected increase in salary for senior compliance staff, banks are turning to new and innovative technologies in order to help them manage costs that can quickly grow out of control.
At the same time, banking consolidation is likely to continue or even increase. A number of factors may drive additional M&A activities: bank profits in 2018 reached record highs, there appears to be some regulatory relaxation, and continued competition from FinTech companies. These FinTech companies are even exploring moving into banking; Square just filed for its own banking license.
During a merger or acquisition, compliance is an essential consideration. While a merger or acquisition can streamline compliance and even reduce costs in the long run, unchecked compliance risk during a merger or acquisition exposes your financial institutions to risk that can be very expensive.
How Can You Respond to the Rising Cost of Compliance?
Again, you can maximize your compliance budget by adopting cost-effective softwares and technologies to save time, reduce the need for additional staff, and even gain expertise. Community banks spend an average of $818K annually on compliance. To contextualizing this, we estimate that most of companies will save at least $35,000 by using Ncontracts Analytics, due to savings in time and staffing, versus not having a compliance analysis software.
53% of firms expect the total compliance budget to be slightly or significantly more over the next 12 months. Nearly 90% expect costs to rise, as well as the amount of revenue that is purely dedicated to compliance, you really have to ask yourself if you and your company are doing enough to squeeze as much out of your budget as possible.
Ncontracts Viewpoint: The future will bring monumental changes to banking and finance, and your institution will need to be prepared to evolve to grow and thrive. These new technologies will change the finance industry in ways we can’t even imagine. And while we at Ncontracts aren't going to be able to really explain cryptokitties, there is one thing that we’re great at: compliance.
These are just a few of current banking trends. With rising compliance costs and a shifting regulatory landscape, our dedicated team at Ncontracts is here to help you come out on top.
Editor's Note: This post was originally published on December 13, 2017. It has been reviewed, edited, updated, and improved to reflect the current financial industry landscape.