Leading banks must follow a technology-driven strategy

Technology equals banking strategy, as product and customer strategies will be driven by technology.

What new products and client services can a bank really envision for the future without technology? We know from other sectors that the business and technology sides have converged. We believe that the implementation of ‘New Tech’ will decide how banks compete now and in the future. In the first article of a series on banking and technology we argue that technology has become the most important driver for success in banking.  

All banks’ strategic business drivers are directly affected 

All areas of banking strategy are affected by new technology. The revenue growth that comes from new products and customers is dependent on new technology, whether in improved product functionality or customer distribution mechanisms. Reducing cost by automating and standardizing the operating model primarily lies in the implementation of new technology. And to mitigate risk banks need to be able to gather, process and analyze risk data intelligently – and at scale. This also lies in the ability to harness new technology. 

The new tech architecture creates benefits across the three strategic bank drivers of revenue, cost and risk in all business lines.

We estiamate a large triple-digit Euro growth across all three bank drivers p.a. if implemented.

Revenue growth through new products  

Business clients are increasingly utilizing digital assets and tokens to streamline transactions and enhance security. These new types of payment are also more cost-effective and therefore very popular with clients, e.g., Coinbase, Kraken and Binance. The digital asset market is projected by Fortune Business Insights, to grow to USD 12.3b by 2030 (so banks will pursue this growing and profitable market. Although there is still considerable regulatory uncertainty and ambiguity, banks’ experience with their own control and regulatory frameworks gives them a competitive edge in these products. 

• Crypto-currencies like Solana, Avalanche and Ripple enable faster and more efficient cross-border transactions and reduce reliance on traditional banking systems. These markets are still volatile and therefore require solid risk management attention and frameworks from banks. 
• Digital accounts enable instant access and transaction capabilities. They provide bank clients with instant access to their funds and make possible fast, seamless, and transparent bank transactions. This has the advantage of removing intermediaries and increasing transfer speed and reliability. Most banks are still in the process of connecting their account universe to the crypto wallet universe. For now, most banks run two parallel systems with associated costs and risks. 
• Instant loan products enable faster service and decentralized finance. Digital loan products enable approvals to happen in a matter of minutes (rather than days or weeks in traditional loan markets). Also, the risk profile can be very different, as peer-to-peer lending is possible, spreading lending risk across the different market participants. 

Cost reduction and revenue growth via new tech platforms

• We believe traditional banks are not future-proofed, especially for the requirments of newer younger customers.
• Incumbant banks need a major peerformance upgrade soon, otherwise they will not be able to process the necessary volumes.
• Data and transaction volumes for products and services have grown exponentially and will continue while existing legacy systems are already at their processing limits.
• This task is even more urgent as it will determine the type, number and speed of product innovation and customer service quality in the future. For example, driven by the introduction of the 5G standard and increasing market democratization of propositions (e.g. asset management).

Cost efficiency through streamlined processing and data 

The new technology stack enables process automation and standardization in a radical way. Traditionally, manual process steps are largely automated in the front-to-back workflow in all processing areas. This is particularly the case for relatively easy tasks and repetitive process steps in the operations units of banks. We believe that the more basic product and customer offerings are more like to be automated. In a follow-up paper we take a closer look at the products and services side of the future bank. 

We estimate that cost reductions could range from 30-90%, depending on the specific underlying banking business. In mass retail banking many client and product processes can be largely automated, enabling large-scale operational cost reduction, e.g., Nubank of Brazil whose total cost of service is under USD1 per customer. We have seen new digital banks in Asia already implementing fully automated, AI-driven client onboarding/KYC processes, which allow banks to onboard customers in a matter of seconds with minimal costs and no human interaction. 

We also estimate that in the mid-term at least 50% headcount reduction is possible at large banks, especially in mass retail banking businesses, which will largely focus on digital products and distribution going forward. When some new banks from Asia are included, as much as a 90% reduction in some areas of banking would not be unrealistic. There will be a shift from relatively low productivity, back-office jobs to higher productivity front-office jobs with a focus on client advice and service, product innovation and business management analytics. 

The principle of streamlining processes via automation and standardization extends into all front- and back-office banking functions. Many tasks will be automated in the new technology universe, especially in the first and second lines of business, namely, the front office and Anti-Financial Crime (AFC) compliance departments of banks. For example, the area of AFC, which oversees key activities such as KYC, AML, transaction monitoring and sanctions screening, is ripe for productivity improvement. The next serious candidates for streamlining are in the areas of finance, risk, overall compliance, product management and processing.  

Cost reduction and revenue growth via new tech platforms

Risk mitigation through better analytics 

The advent of new technology has revolutionized risk mitigation in banking, providing faster and more accurate data, which is crucial for effective risk management. With real-time data processing capabilities, banks can now access up-to-the-minute information, allowing for more accurate risk modeling. This immediacy of data benefits all risk models, as it enables a more dynamic approach to assessing and responding to potential threats. 

Moreover, the integration of advanced analytics and big data technologies has led to a more accurate assessment by banks. By better aggregating data from various sources, financial institutions can gain a holistic view of their risk exposure. This comprehensive aggregation aids in identifying correlations and patterns that would have gone unnoticed in the past. 

In essence, the benefit of fast and precise data for risk management is twofold: it not only enhances the accuracy of risk models but also accelerates the bank’s ability to update its risk position. This rapid response capability is essential in today’s fast-paced financial environment. Consequently, banks that leverage these technological advancements are better equipped to protect themselves and their customers from the ever-present risks in the financial landscape. 

 
In the next article we will explore the underlying new technology stack and the possibilities that AI offers.