To achieve a profitable business model in 2022, there are several key trends banks need to pay close attention to. These include blockchain technology, regulation of open banking, digital transformation, the application of the next era of digital transformation (DT 2.0), and the use of digital insights to make more powerful decisions.
The next wave of the digital evolution will wash over the banking industry, making technological adoption a key factor in an institution’s ability to adapt and thrive. This article will discuss each of these trends and examine their current and potential future impacts on the banking industry.
1. Blockchain and NFTs
Blockchain is a decentralized and public ledger that keeps a digital record of asset transactions. The most common application of blockchain technology is trading cryptocurrency – a digital currency used for purchasing or selling online products and services. Cryptocurrencies have become increasingly popular over the past 5 years, with Bitcoin and Ethereum leading the march forward.
However, the technology enables several other innovations, with one of the most popularized examples being NFTs.
An NFT – or non-fungible token – is a digital asset that exists on the Ethereum blockchain. The technology is commonly used to tokenize digital artwork, though it can contain any digital media asset. Though there has been much debate over the actual value of NFTs, the one-of-a-kind tokenization and transaction that occurs has garnered a lot of interest from tech-savvy financial investors.
In July 2021, Reuters released a report that NFTs reached incredible highs of $2.5 billion in the second quarter of 2021, a massive increase from $13.7 million in the first half of 2020. As for blockchain, consumer adoption is growing rapidly, with more than 79 million global consumers already using blockchain wallets as of November 2021, according to Statista.
In terms of what NFTs and blockchain mean for the future of the financial industry, both have the potential to drastically alter payment processing as we know it. Yet, there’s one key factor that stands in the way of universal adoption of blockchain technologies – the ecological footprint.
The Ecological Footprint of Blockchain and Its Affect on Adoption
While cryptocurrency trading and mining has been going on for many years now, the rise in popularity and intrigue of NFTs brought the mainstream spotlight down hard onto blockchain technology. One of the most notable criticisms to arise is the significant negative environmental impacts that can result from the massive energy consumption of cryptocurrencies and NFTs.
This only becomes more of a problem with NFTs. According to a 2021 report from Frontier Group:
“One analysis found the energy footprint of the average transaction on this network is roughly 35 kWh — about the same as powering a refrigerator for a month. But NFT transactions also involve minting, bidding, selling, and transferring a digital token. All these actions are costly, adding up to an average of 369 kWh — over 10 times as much energy.”
While efforts are being made to reduce the ecological impact of blockchain and the related assets and technologies, it currently remains a major issue and inhibitor to widespread adoption in the financial industry.
Financial institutions will have to weigh the advantages of blockchain against the potential negative impacts it may have on their carbon footprint. They will need to deeply examine the benefits and risks to bring greater regulation to blockchain, as well as how they can reduce the ecological impacts.
There are several cases where the benefits of blockchain outweight the consumption requriements on an environmental level, and where blockchain has saved more energy that it has used. We hope to see more of these cases going forward in 2022.
2. Regulation of Open Banking
Open banking is a banking process that allows institutions and third-party financial service providers to share customer data and information instantaneously. This process is enabled through strict requirements, the main of which is the provision of explicit consent from the customers themselves.
Unlike the currently predominantly unregulated blockchain technology, open banking is driven by regulation all around the globe. Unfortunately, this regulation is either ignored or pushed against in many regions where the financial industries and markets are not ready to adopt this way of doing business.
Despite the pushback, open banking poses many key advantages to the global banking industry. To examine these advantages closer, let’s take a look at the use of open banking in Latin America.
A Look Into Latin America and Open Banking
Of all the regions gearing up to embrace open banking, Latin America has been outpacing its neighboring regions.
Though open banking is slowly making waves in the northern countries of the United States and Canada, Latin American countries have taken much larger steps towards total regulation and implementation of open banking processes.
A major factor in Latin America’s widespread adoption of open banking is the flourishing FinTech industry within the region – with Brazil and Mexico standing as frontrunners in this space. Brazil accounts for an estimated 3 out of every 10 FinTech startups within Latin America, for a grand total of roughly 689 in 2020. Mexico follows close behind, with around 486 FinTech startups in 2020.
Additionally, Brazil is leading the way towards open banking regulation. In April 2021, the Central Bank in Brazil published new rules to help govern the second phase of implementing open banking within the country, titled BCB Resolution No. 86. One of the biggest factors in this resolution is a focus on customer experience and UX to create an improved customer journey.
With the pace of open banking only increasing more and more in Latin America, the North American region will likely soon pick up its own speed of adoption and regulation of open banking processes. By 2023 to 2024, we are likely to see major developments in North American regulation regarding open banking.
3. Maintaining a Competitive Edge with Digital Transformation
To compete against neobanks in 2022 and beyond, traditional banks will have to move towards further innovation powered through digital transformation.
Up to this point, the key aspects of digital transformation have been centered around cloud technology, artificial intelligence, DevOps, and omnichannel strategies. While each of these will continue to be of the utmost importance in digital transformation, 2022 will require banks and financial institutions to go beyond simply offering digital services.
In an October 2020 IDC webinar, IDC analysts described 10 predictions for the future of worldwide digital transformation. Key predictions from this webinar include:
75 percent of organizations will have “comprehensive digital transformation (DX) implementation roadmaps by 2023.
65 percent of the global GDP will be digitalized by 2022, with over $6.8 trillion in direct DX investments between 2020 to 2023.
50 percent of institutions will implement organizational cultures that are optimized for DX by 2025 – this optimization will be based around a customer-centric approach and data-driven insights.
70 percent of all institutions will accelerate the utilization of digital technologies to help increase customer engagement, employee productivity, and business resiliency.
These types of predictions are coming from financial experts and analysts all around the globe. It’s becoming crystal clear that the path towards prosperity is paved with digital transformation – and that the digital transformation implementations will expand into all areas of business, not just finance.
Customers are no longer tied down by time-consuming and complicated banking applications and processes. The rise of FinTech and digital transformation has made consumers more in tune with what their financial capabilities are and what types of services they expect out of their providers.
Digital transformation is a critical enabler to future success – and embracing it beyond just what is required will prove to be one of the keys to maintaining a competitive edge in the banking industry.
4. Application & Implementation of Digital Transformation 2.0
Digital transformation – sometimes abbreviated as DX or DT – is undergoing a transformation of its own.
For DT 2.0 to be applied, banks must have a baseline adoption of all forms of technology – from mobile apps to cloud-based services. Below are just a few of the key elements of DT 2.0 that will impact the financial industry in the year to come:
Advancements in AI: Artificial intelligence and machine learning have held a crucial role in digital transformations for years now. As more institutions have undergone these transformations, the application of AI is expanding to provide more highly valuable insights and customer-centric decisions.
Open Banking: As discussed, open banking is growing immensely, reshaping the traditional banking model as it goes. The invent and application of open banking will force banks to consider what technological and digital resources they need to invest in to better collaborate with other institutions and FinTechs.
Blockchain: Though blockchain is facing ecological criticism, it is still a powerful technology that stands to massively reimagine finance and payment processing. Financial institutions will need to consider how to integrate blockchain while remaining conscious of their ecological footprint and sustainability initiatives.
The Role of Social Media in DT 2.0
On top of the growing emphasis on the above technologies, DT 2.0 will also place a hefty amount of focus on social media. Social media platforms have long been powerful enablers of digital marketing for banks – but the role of these platforms will evolve further as FinTech continues to expand outside of the traditional realm of finance.
An excellent example of this is the introduction of shopping and payment features offered directly through social platforms like Instagram, Twitter, and Facebook. Additionally, social media has the potential to partner with financial institutions through open banking technologies, allowing for omnichannel strategies to be taken to a whole new level.
In the U.S., for example, the preference for digital payments has grown immensely. According to McKinsey & Co., 82 percent of Americans are using digital payments that include browser-based and in-app purchases. As more social platforms work to integrate in-app purchasing features, this percentage will likely only expand further.
Additional Considerations for DT 2.0
Environmental consciousness is almost assured to become a major point of focus and consideration in DT 2.0. Finding a middle ground between reducing the ecological footprint of new technologies like blockchain while still investing in and adopting these technologies will be key.
Part of this will involve greater emphasis on ESG statements – environmental, social, and governance criteria set and shared by companies to assist in screening potential investments according to how they measure up against the set criteria.
This prioritization of ESG statements will help to position financial institutions as a positive influence within their communities, working to implement technologies that are as beneficial to the good of mankind as they are for boosting profits.
5. Using Data and Insights to Make Strategic and Measurable Decisions
Technologies like open banking or blockchain have the potential to provide institutions with much more in-depth data and insights that enable organizations to better measure the value of their own products, services, and strategic planning.
Banks must focus on the key differentiators within their business that excited customers, such as the ability to have blockchain inside an investment portfolio. Additionally, private banks will likely move towards serving the mass affluent – a growing pool of wealthy consumers searching for top-notch banking services.
Key measurements of value for banks to adopt include:
Employee Retention: Retaining talented employees is crucial, especially in a financial landscape so focused on growing a sustainable business model. Many new technologies assist in boosting employee retention, making this an important metric to track when implementing a digital transformation.
Revenue vs. Cost: Investing in these new technologies and trends can be expensive – but what really matters is whether or not the potential revenues outweigh the costs. Having clear data and insights – and having the ability to share such data through open banking – is critical for estimating the potential revenue.
ROI & Efficiency: When measuring return on investment (ROI), banks must consider what they are getting in terms of not just revenue, but efficiency as well. Many – if not all – of the new technologies and digital services focus on boosting operational efficiencies, making this a highly important measurement of success.
Using these insights, an organization can better evaluate the economic value new technologies and digital services bring to their institution. With this data and information, banks can then make strategic and measurable decisions that offer the optimal level of benefits to their institution.
The digital era of banking is upon us, and the year 2022 will undoubtedly reveal new technologies and truths that reshape the ways we view finance forever.
Banks and other financial institutions must pay close attention to the five trends discussed here and the changes they will bring to the industry. Along with maintaining a high level of competitiveness, institutions must thoroughly assess future investments, particularly in regards to their ecological impacts.
The future of banking is as customer-centric as it is technological. As such, keeping up with new trends in 2022 will require both digital finesse and customer-focused planning from banks around the world.