With fintechs under pressure, 2024 offers traditional institutions a rare window of opportunity to regain ground lost to digital disruptors over the past two decades. But to be successful, banks need to shift from product-centric to customer-driven innovation. The pace of innovation seems poised to only accelerate in 2024 and it is wanted to understand how banks can keep pace. To remain competitive and relevant, banks must create products and services that both solve their customers’ challenges and meaningfully differentiate their offerings from competitors’. Over the past decade, however, two forces have distorted this imperative: Greater reliance on digital channels has created functional equivalence among many banks’ offerings.
Meanwhile, near-zero interest rates encouraged banks to focus on optimizing and marketing individual products rather than developing integrated propositions for whole customers. Rising rates are now exposing the limits of the product-centric approach and are finally pulling business strategy and product strategy back together. With access to low-beta deposits and legacy infrastructures, banks can take advantage of this environment to drive innovation.
They now have the opportunity and restored profitability to prioritize product innovation and fuel growth in the era of shifting consumer preferences. Over the past decade, banks have taken a backseat to fintechs in regard to product innovation. Banks can now deliver growth by unbundling their legacy tech and product distribution and rebundling with partners at lower costs and faster times to market. Fintechs are facing pullbacks in investor funding and falling valuations. Banks have a once-in-a-generation opportunity to scoop up new customers, innovative technology and desirable talent.
In the decades before the Great Recession, banks relied on unrelenting product innovation to drive growth. Things like adjustable-rate mortgages, no-fee checking, debit cards and instant credit benefited both banks and customers. However, over the past two decades, banks shifted away from innovation and toward economic recovery, new regulatory standards and digital initiatives to reduce costs. In the last decade, digital banks and fintechs have driven most innovation over the past decade. The role of 0% interest rates, a decade of 0% interest rates distorted the market by flooding it with cheap cash and alternative lenders. The changing equations led banks to focus on optimizing and marketing individual products rather than developing integrated propositions for customers. As a result, the role of banks relative to the overall financial system began to shrink. Banks are well positioned to take a proactive role as they face changing regulations, shifting consumer preferences and rising interest rates. Today, they must rediscover their creative mojo and innovate for today’s customers.
During this time, the market saw an explosion of non-regulated players attacking the banking value chain and building new banking products without the constraint of regulations. Four main directional changes that drove customers outside the banking industry over the past decade. This includes the rise in digital banks, the explosion of digital lending, the disaggregation of products and the replacement of banks by private equity firms. Opportunities for banking product innovation in a rising rate environment: While banks now face rising interest rates, new regulations and macroeconomic volatility, they also have strong and diversified balance sheets and decades of experience managing change. Banks can offer holistic value propositions with end-to-end functionality, developing products that link deposits and lending and amplify value.
Innovative Product Ideas for Banks-Loyalty-as-a business: Loyalty is often taken for granted, and customers are increasingly willing to try brands that serve them better. Customers want to be rewarded for loyalty, not just on single products, but across the banks’ offerings. Several examples where companies have deepened loyalty offerings to maintain relationships. This can include rewarding customers with complementary, automatic tax benefits, incentivizing them to pay off debts early or offering cash-back rewards at the point of sale. De-commoditizing products: Rising rates are now creating a window of opportunity for banks to “de-commoditize” products by developing solutions like those of Amazon Prime that rewards total engagement with the bank.
For example, banks may help students manage their money with a product that personalizes services or provide renters loans with pre-verification to help them get the homes they need. Another opportunity is to enable housemates or partners to integrate personal accounts with sharing expense tracking and reimbursement. Democratization of advice: Some leading banks are now democratizing advice products and services historically provided only to wealthy investors, making advice accessible with analytics and digital tools that deliver more meaningful, contextual and personalized services. For example, tools like Max help customers optimize their savings rates by automatically moving money to products with the best rate. Purpose-driven products and services: Banks should focus on solutions that address the diverse needs of communities and consumers.
Organizations that innovate to provide greater access to credit and capital can win a wider segment of consumers, especially those who are unbanked or underbanked. New “save now, buy later” programs also enable customers to enroll in a savings plan for specific retail purchases and then get cash back when they buy. Longevity and legacy: The world is changing, and many now consider traditional retirement to be an antiquated concept. Accenture notes Boomers were the first to have new retirement needs with second careers and trends like “silver divorce.” Meanwhile, younger generations are also redefining financial success and looking at new concepts like FIRE (financial independence, retire early).
As a result, banks must now shift to longer-term planning focused on health and wellness. Potential ideas include things like solutions that connect retired customers through a virtual community or could calculate a customer’s FIRE number with advice on how to improve it. Reimagining commercial banking: With more economic uncertainty on the horizon, banks will have to get back to the basics, like process effectiveness and control, or ensuring the new LOS is adopted effectively. Yet banks must also be ready to build on the foundational work they have been doing and to deliver fully digital experiences. Some ideas could include serving as a financial intermediary between buyers and sellers of used equipment, dynamically adjusting pricing based on expected customer lifetime value and integrating financing into customers’ supply chains. Being better together: While banking is a fiercely competitive industry, there are many areas of the industry where banks perform better together. The advent of commercially-driven embedded banking, the movement towards loyalty and rewards and the growth of AML/KYC should give banks cause to think beyond their four walls and find new ways to collaborate. Banks could explore QR codes to empower bill payments or P2P payments, collaborate with a BNPL provider, or use third parties to expand the capabilities of their bank app.
Banks represent one of the most computerized industries in the market. At the same time, they face growing expectations from customers, requirements from regulators and the need for constant innovation. The pace of adaptation of technological innovations varies at each institution, making it difficult to clearly identify specific areas that will dominate their development. On the other hand, from the perspective of a key IT solutions provider, working with almost all representatives of the financial sector, it is possible to identify the factors that will influence technological changes in banks:
1) Cybersecurity – due to the increasing digitization of the banking market and the growing complexity of cyberattacks, the need for customer support in the area of security has been growing. We are not only talking about the technological sphere and the implementation of detection and anti-fraud solutions, but also in-depth customer education. More often than not, it is not the lack of security features, but the user’s ignorance that makes a social engineering attack possible. Banks, regardless of what security features they have, will certainly invest in more solutions in the following areas: customer: behavioral biometrics, U2F dongles; bank’s IT: threat detection systems using artificial intelligence, tools for automating security procedures in the context of customer identification (e.g., in call centers);software building: additional elements of development processes focused on security, i.e. threat modeling, static and dynamic security testing (SAST and DAST tools).
2) Migration to the cloud and the use of various models that delegate responsibility for IT areas – after a temporary increase in bank profitability thanks to higher interest rates, we will most likely return to lower financial results in 2024, which will directly affect the need to reduce costs on the IT side. To this end, banks will continue to move some part or even whole of their IT to IaaS, PasS, SaaS (infrastructure, platform, software as a service) models, respectively. The vast majority of these services operate in the public cloud, hence we will see further investment in cloud solutions. It is also important to note the greater availability of public cloud regions within Poland, which gives impetus to increased interest in such services among banks. So far, the use of external data centers has been problematic, due to legal aspects. Nevertheless, now, having at least two big players in the public cloud market (Microsoft, Google), the transfer of their services will be much simpler.
3) Ecological banking – banks are increasingly focusing on sustainability and taking steps to reduce their carbon footprint, both operationally and in the products and services they offer. This will entail investments in both software that can reliably measure the carbon footprint, as well as in IT services that contribute to its reduction. An example of this is migrating from an in-house data center to the public cloud, where the negative environmental impact may be lower, thanks to the sharing of resources among the many institutions using such services.
4) Digitization of business processes – in order to reduce the cost of operations, while allowing the learning curve of processes operating in the bank to decrease, they will continue to invest in workflow class systems such as Asseco ABP. This solution enables automation of many activities and simplifies the way complex products such as loans are handled. This includes sales, as well as hundreds of different types of post-sales processes.
5) Artificial intelligence (AI) – it can be said that we are beginning to get used to the widespread presence of tools based on various types of artificial intelligence algorithms. Banks have long been the forerunner of the use of such tools in the area of sales support (cross-sell, up-sell), and in the coming time we will see the adaptation of more solutions. Banks are sure to find widespread use for generative artificial intelligence (LLM – large language models such as ChatGPT), for example, in supporting online banking users (making it easier to navigate banking systems) or in communicating with customers.
Things aren’t all upbeat
Photo : Messenger
The growth projections for the buy now, pay later business in 2024 are generally optimistic. But things aren’t all upbeat. A new study by Juniper Research projects that the global buy now, pay later transaction value will more than double in the next four years, from $334 billion in 2024 to $687 billion in 2028. Activity will spread to new markets. Getting into it a little deeper, it realised that a lot of the volume was discount-driven. That didn’t change the numbers, but nevertheless took some of the wind out of their sails.
So far, I haven’t seen an increase in cost, and haven’t seen an increase in unemployment. But when it sees what is happening in the AI area, I would be very surprised if we didn’t see growth in unemployment associated with artificial intelligence. As the BNPL business evolves further in 2024, banks will also play an increasing role in the business, both through installment financing extended via their credit card programs and through more specialised programs. The field could shift significantly. In a late 2023 report, Moody’s Investors Service wrote, “This year and next will be crucial for many [BNPL] firms as they strive to reduce costs and increase revenue while maintaining volume growth and market shares. Failure to achieve these goals may result in incumbent banks dominating the market and displacing most BNPL providers. There’s also the matter of funding. Banks can raise insured deposits, but nonbank fintech BNPL players typically need to obtain funding from investors.
Much of the banking industry’s participation in BNPL is through the credit card installment plan options offered by the largest players, including Chase, Citibank, American Express and others. There is also a growing group of large institutions providing merchant-side BNPL programs. But down the road, there may be openings for smaller depository institutions with smaller card programs that are agile and willing to think outside of the card. There could be opportunities to develop new revenue in several ways. These could range from actually offering a BNPL program yourself to offering wholesale funding lines or access to a deposit-heavy balance sheet.
Sources of the Growth in Buy Now, Pay Later: The growth in BNPL has been driven to a large extent by a higher interest rate and inflation-fighting efforts. Even though real personal disposable income grew a little at the end of 2023, for many consumers, a gap remained. Savings buffers have worn thin for many adults after several years of sustained price growth, leading consumers to more often supplement their income with debt to cover purchases. In the context of high-interest rates, however, consumers’ preferred means of debt usage is evolving and the added pressure to spend on holiday shopping has accelerated the adoption of BNPL as an alternative to credit card debt. Following the 2023 holiday season, press coverage about people getting in over their heads with BNPL has been growing. For perspective’s sake, remember that before BNPL existed, the same kinds of stories appeared about credit cards. For all the marketing, debt is debt.
Apple Pay Later, matched by Google Wallet BNPL Partnerships: It can’t talk about the future of buy now, pay later without touching on Apple Pay Later, which is now available to all Apple Pay users. This option is contained in the Apple “walled garden” If it doesn’t have an iPhone, you can’t use any of it. But now Android users will have an option of their own. In late 2023, Google Pay announced a pair of joint efforts to bring BNPL to its users. Beginning in January, the company is piloting BNPL options for users with both Affirm and Zip. Apple and now Google’s moves have dual significance. First, this reflects a shift in how consumer purchases are financed. Decades ago, credit cards melded a payment vehicle with a financing vehicle, the credit line. Apple decoupled the two and coupled the financing piece to the digital wallet. The second aspect of the change concerns distribution, which is how Google Pay’s strategy differs. Apple Pay Later is financed by an Apple subsidiary, but Google Pay represents a pair of collaborations that give two BNPL companies entrée to new transaction streams.
In the context of the Bangladesh buy now-pay later mechanism, the analysis shows that education, an increase in the demand for luxury goods and an improvement in the standard of living availing of this payment mode have a significant impact on increasing the value of the yearly purchase of products through the buy now-pay later mechanism. This increase in the expenditure also reveals the impulsive purchase decisions of the consumers. The findings of the study suggest that a more developed banking and financial system, minimising the inter-bank variation regarding payment mechanisms, increased availability and accessibility of information, and the availability of buy now-pay later mechanisms in retail stores and all possible places can lead towards a better outcome.
The current era is highly competitive. With the passage of time, consumers are demonstrating diversified demand for a wide variety of products. But resources are limited. So, there crops up the problem of meeting unlimited wants with limited resources. Different modern payment mechanisms such as buy now-pay later, have evolved as an art to meet the unlimited wants with limited resources. This mechanism puts the customer at ease. They can purchase the required commodity in the current period, overcoming the cash constraint and make the payment later on. Consumers’ purchases vary with the nature of the product and also the payment mechanism. The decisions to buy inexpensive, daily necessary products, expensive appliances and luxury items are quite different. Companies are coming up with new marketing strategies. Government policies to increase the literacy rate, support higher education and establish subsidised educational institutions with quality education can create awareness among the consumers regarding how to maximise their utility with a limited budget using different payment tools.
There is an overwhelming need for bringing a change in the buy now-pay later mechanism for moving towards a much better outcome for the consumers. Currency outside banks is really high in Bangladesh, indicative of the poor banking habits of the citizens of this country. A more developed banking and financial system, minimization of inter-bank variation in the condition of lending, backed by adequate infrastructure, a trained workforce, 24-hour customer care service, increased availability and accessibility of information and development of credit card guidelines can benefit the customers.
Moreover, at the time of the installment sale, both sellers and credit card issuers should provide the consumers with proper information regarding payment mode and period, and the rate of interest. If shops and sales outlets keep the option for making purchase via credit cards and relevant payment mechanisms offering buy now-pay later option, consumers will be highly benefited. Extension of the maximum period of payment with 0% interest can add to the satisfaction of the customers. In addition, customers are often dissatisfied at the security issues of credit cards.
PIN (Personal Identification Number) should be used for making all kinds of transactions through credit cards. Transactions without the consent of the card-holder should not be allowed until the matter is notified to the card-issuing authority. Though most of the banks assign PIN number for the credit cards, there are still some banks whose do not have any PIN. The concerned authorities should be very strict to deal with this issue to safeguard the interests of customers. cards do not have any PIN. The concerned authorities should be very strict to deal with this issue to safeguard the interest of customers.
