Jeff Hindle is a global segment leader for Mastercard’s retail financial services team. Views are the author's own.
A couple of years ago, Mastercard dropped the uppercase "C" in its name. The change was made to reflect its evolution from physical cards to a technology company pioneering payments beyond a piece of plastic.
The same evolution is happening with "digital banking." It turns out, we don’t need the “digital” anymore because it’s largely inherent to banking. Regulations might have impeded things for a while relative to other sectors, but banking has finally joined the online and offline fusion.
People in 2020 won’t be talking about whether a bank is digital enough or not. The concern will be whether a bank is digital for a reason, or just for the sake of it. Banking will emphasize digital presence with a purpose: to expand digital capabilities to serve consumers better and more securely.
Here are five ways this is expected to happen in 2020.
1. Financial Services Adopt 'As-a-Service' Model
Banking is, at its core, a service industry. With the advent of banking-as-a-service (BaaS), 2020 is going to question what this service truly represents.
BaaS is defined as the sharing of a bank’s technology platform with fintechs and other third parties. It goes hand in hand with open banking, which has enabled the sharing of consumer-consented financial data. Open banking started in many regions as a mandate. It spread around the rest of the world for another reason: customer service.
Now, BaaS wants to transform the consumer experience by grouping a variety of mobile-first financial solutions into a single platform. These platforms will allow consumers to access a suite of services, including budgeting, loans and stock trading. BaaS-enabled banks will no longer be single, end-to-end service providers. Instead, they will start to open up their platforms to collaboratively build suites of consumer financial services. Yet, effective implementation will depend on a data-driven and enterprise-wide BaaS strategy to ensure high returns on investment. Making BaaS successful in the market against a growing number of competitors will require organizational buy-in at every level and a commitment to internal and external change.
2. Businesses Demand Paperless Payments
Despite the rise of new payments technologies, many U.S. businesses still use paper checks. However, 55% of business professionals pointed to real-time payments as their top B2B payments priority, according to the Real-Time Payments Innovation Playbook.
Access to these technologies — real-time payments, tap-and-go and cryptocurrencies — will be critical for engaging and retaining commercial customers in 2020. Faster payments will enable improved liquidity management, quicker supplier invoice settlements, instant disbursements of insurance claims and reduced exposure to fraud.
Improved commercial payments technologies provide opportunities for banks to enhance customer experiences and grow profit through increased transactions and fees. But as more digital players enter the B2B payments space, incumbents will need to act quickly to avoid being left behind by more nimble competitors.
3. Big Techs Become Big Banks
Fintechs have radically changed financial services for banks and consumers. Yet incumbents still hold major advantages over most of these smaller players in budget and brand. But what happens when the newcomer is just as established, if not more? Enter Big Tech.
Google plans to launch a "smart" checking account in 2020, and Amazon and Uber have also announced plans to enter banking. These companies combine agility, cutting-edge technology, scale and brand recognition, making them formidable competitors for fintechs and incumbent banks. Their Chinese counterparts Alibaba and WeChat have already demonstrated they can add banking on the back of an existing customer base.
Big threats also can be big opportunities, and financial institutions will need to develop creative collaborations in the evolving landscape. To avoid disruption, current players should carefully consider their strengths in the market and make data-driven decisions around partnership or direct competition.
4. Digital Connections Bring Digital Crime
As the economy digitizes, so do criminals. As a result, more than 80% of risk managers name cybersecurity as a priority, according to the annual EY/Institute of International Finance study on global bank risk management.
One cause is the internet of things (IoT). More IoT-enabled customer touchpoints for banks mean more possible entry points for cyber criminals to steal financial data. Other digital innovations, such as BaaS and mobile wallets, introduce similar challenges.
As risks mount, banks will need comprehensive cyber strategies that proactively protect consumer data. With a single data breach costing an average of $8.19 million in the U.S., according to a recent study by the Ponemon Institute, failure to act can cause long-term damage to a bank’s finances and reputation.
Efficient and effective cybersecurity strategies should be contextually embedded at every level of an institution and at the outset of any new offering. Banks will need to continuously assess their risk and take action to maximize the return on their cybersecurity investments.
5. Going Cashless to Enable Financial Access
Two-and-a-half billion adults worldwide transact only in cash, according to the World Bank. They are more vulnerable to financial crimes and often struggle to accumulate wealth or manage incomes.
However, with some digital banks and fintechs offering cheaper and faster services than incumbents, banking is becoming more accessible. For example, companies such as WeChat and Ant Financial have given millions of underbanked Chinese consumers and small business owners access to secure payments and credit.
Financial inclusion can benefit consumers and banks by reducing poverty and expanding the market. But opening up banking through digital innovations can also introduce risk. Credit defaults could weigh heavily on fintechs’ low margin operations. And financial regulations could introduce data privacy concerns stemming from greater network integration. Careful testing and contextualized consumer strategies are key to managing such risks and ensuring sustainable financial inclusion.