Which way is retail banking heading? Overview of the latest market trends

The banking sector is constantly evolving, adapting to rapidly changing economic and technological conditions. Digital transformation, rising customer expectations and new regulations are forcing financial institutions to change their strategies and seek innovative solutions. What was at the top of the banks’ list of priorities not so long ago is now giving way to new initiatives that better meet the challenges of today. Let’s take a look at which trends are slowly passing and which are rapidly gaining in importance.

Overview of the latest market trends in retail banking

Changes that are redefining modern banking

2023 has shown how dynamically the global banking sector can evolve in the face of new challenges. On the one hand, interest rate rises in developed countries have boosted banks’ earnings, improving their profitability. On the other hand, high funding costs have put pressure on smaller institutions, resulting in liquidity disruptions, problems and even the collapse of several regional financial institutions such as Silicon Valley Bank and Signature Bank. 

What initially looked like temporary difficulties quickly turned into a major crisis of confidence, triggering a wave of anxiety across the financial sector and leading to increased regulatory controls. In response, banks have focused on strengthening their balance sheets, improving liquidity risk management and building larger capital buffers to increase their resilience to future shocks. 

These changes are more than just a response to temporary turbulence. They reveal deeper, fundamental shifts in the architecture of modern banking. Digital transformation, the development of artificial intelligence, the automation of processes, the implementation of open banking – these developments are not just technological innovations, but new foundations on which the future of the financial sector is being built. 

Banks at a crossroads – tradition versus modernity

Until recently, fintechs and digital banks (neobanks) were considered the revolutionaries of the financial sector. Thanks to their flexible solutions, innovative technology and ability to adapt quickly, they were gaining huge popularity among young customers, becoming a real threat to traditional banks.

Institutions such as Revolut, N26 and Chime have attracted millions of users by offering transparent terms, no hidden fees and instant access to funds. Fintechs have become synonymous with modernity and dynamic development, and their value on the market has grown at a dizzying pace.

Is the role of fintechs as providers of innovative financial services diminishing?

The situation began to change with the worsening of economic conditions. Rising interest rates, increasing regulatory requirements and difficulties in raising finance have hit the business model of many digital institutions hard. The lack of stable sources of funding has meant that some of them have had to slow down with restructuring and cost-cutting. 

According to The Fintech Times, in the first quarter of 2024 only 904 transactions and $7.3 billion in fintech funding were recorded, which was the worst performance since early 2020. The crisis of confidence in the sector, combined with regulatory challenges, has weakened their relevance. Today, many are trying to rebuild their position by focusing on profitability and stabilisation rather than dynamic growth. 

Traditional banks can benefit from this by strengthening their positions through collaboration with smaller but more developed technology partners and the development of digital services. Retail banks need to keep up with trends and introduce modern solutions if they want to remain competitive.

Fintechs have won the hearts of the younger generations with a range of activities that were previously found in vain in traditional financial institutions. And although their expansion has been slowed down, Millennials or Generation Z still expect modern banks and financial service providers to continuously create new digital experiences. 

What edge does Revolut and the other new age banks have over traditional banking? Excellent customer service, advanced payments, quick start and account setup, creating a personalised banking experience

Key trends in retail banking. Differences between “yesterday” and “today”

The banking sector, although seemingly conservative and inflexible, in reality has to be agile.

The changing trends in retail banking reflect the similarly-changing economic situation, increasing customer expectations and rapid technological progress. As a result, investments that not long ago were at the top of the list of priorities are now giving way to new ideas. And while “yesterday’s” strategies are not completely gone, they are gradually losing relevance and the sector is being forced to look for more efficient and resilient solutions. 

Yesterday’s banking trends losing priority today

Smart wards

One of the significant investments of recent years in retail banking has been the development of so-called smart branches. Admittedly, today banks continue to invest in modern facilities that combine advanced technology with traditional customer service. Through interactive screens, process automation and the support of remote advisors, they offer personalised services in these facilities, helping to build and consolidate stronger customer relationships. 

At the same time, the emphasis on improving digital platforms and customer service in online channels is resulting in branch closures and a decline in the number of facilities. According to the European Banking Federation, the number of bank branches in Europe has decreased from around 240,000 in 2008 to around 140,000 in 2021. 

Embedded finances

Embedded finances have enabled banks to enter new markets and take on the customer experience by integrating their services into non-financial platforms. In this way, banks started to offer their products, such as loans or insurance, directly in e-commerce applications, making access to financial services easier in customers’ daily interactions. 

Embedded finances had great potential to become one of the main drivers of the financial sector. However, the economic crisis has changed companies’ priorities, making stability and risk management more important than exploring new business models.

Technology companies and start-ups that previously developed services within embedded finance have had to reduce investment, which has slowed the pace of new product development.

Customers’ financial wellbeing

In recent years, banks have begun to focus on the financial wellbeing of their customers. The introduction of budget management tools, expense analysis and savings calculators was intended to help users better plan and control their finances. Banks have prioritised financial education, supporting customers to achieve financial stability and reduce stress on money management. 

Unfortunately, however, in the midst of the economic crisis, financial companies and banks have seen a reduction in interest in financial wellbeing tools such as saving, budgeting and investment applications. Customers have focused on preserving liquidity and minimising risk, and banks have had to shift their focus away from long-term initiatives that support customers’ financial wellbeing to short-term measures.

Digital identity

Digital identity has gained great importance in recent years as companies and financial institutions have begun to focus on implementing remote services and improving security in the digital world. The pandemic and accelerated digitalisation of business processes has created a favourable environment for the development of digital identification technologies such as biometrics, online identity verification and multi-factor authentication systems. Digital identity has enabled easier, faster and more secure use of services, particularly in the context of banking and e-commerce. 

Digital identity, especially advanced technologies such as biometric authentication or blockchain-based identity systems, requires significant investment in implementation and maintenance. After the crisis, financial institutions and technology companies had to reduce their investment budgets, focusing more on ensuring operational stability and financial security. 

Synthetic data

Synthetic data or algorithmically generated data (imitating the properties of real data sets) has become a key trend in recent years, especially in the context of artificial intelligence (AI), analytics and the testing of new solutions. Technology has grown in importance, enabling companies to access large data sets without endangering privacy and speeding up research and development processes. 

Today, companies are looking to maximise the return on any investment. Synthetic data, while offering many benefits, can be difficult to make a business case for. Especially when the alternative is to use actual historical data available within the organisation.

“Old” trends that continue to define the future of retail banking

Cloud computing

Although the use of cloud computing in the financial sector is no longer an innovation in itself, its role as a foundation for digital transformation is undeniable. Modern technologies, such as generative artificial intelligence (AI) or advanced data management solutions, require access to vast computing resources and the flexibility to scale that only the cloud can guarantee. 

For banks, cloud computing means not only more efficient data processing, but also increased business agility. Cloud-based platforms and modular components based on the SaaS (Software as a Service) model can be easily integrated with key banking systems, eliminating the need to build solutions from scratch. This allows banks to respond more quickly to the changing needs of the market and customers, while reducing operating costs. 

The cloud, combined with advanced data analytics, is a key tool for financial institutions seeking to create value-added services through open banking. It enables efficient data management, a better understanding of customer needs and the delivery of personalised solutions that meet the challenges of the future. 

Sustainability and ESG

Sustainability and ESG strategy (Environmental, Social and Governance) are becoming increasingly important in retail banking. Banks are beginning to play a key role in promoting responsible business practices by offering financial products that support green initiatives and environmentally and socially oriented investments. 

In addition, banks are making increasing use of ESG data, which is becoming not only a tool for regulatory compliance, but also a basis for strategic business decisions.

By analysing this type of data, banks can better assess risks, identify new investment opportunities and consciously shape their commitment to sustainability. As a result, ESG is being transformed from a regulatory requirement to a key element in building long-term value and competitive advantage.

New trends and priorities in a changing reality

Stabilisation and struggle for deposits

Mature fintechs and digital banks are beginning to redefine their objectives. The focus is no longer on rapid growth, but on stable profits and sustainable profitability. High operating costs and increased competition are forcing a more sustainable approach to growth strategies. 

Faced with a difficult economic situation, banks are stepping up the competition for customer deposits in a bid to strengthen their position on the market. Stable financial resources are becoming a priority, especially in the context of rising interest rates and changing economic conditions. Bank leaders have stated the need to increase non-interest income, such as fees and commissions, to diversify income sources.

Focus on affluent customers

In response to changing realities, banks are focusing on serving affluent customers with personalised premium products and services. Building valuable, long-term relationships with customers with high financial potential is becoming a priority.

Digital operational resilience

The rise of digital threats and the decline in cyber security are making banks pay increasing attention to strengthening their digital operational resilience. Investment in advanced security systems and risk monitoring automation is becoming a necessity to protect against cyber-attacks. 

Cost control and process optimisation

Changing macroeconomic conditions are forcing banks to control costs and optimise processes more rigorously. Reducing operational expenses, automating tasks and implementing AI technologies are becoming key in the fight for profitability.

Generative artificial intelligence

Banks around the world are busily exploring the potential of generative artificial intelligence (AI), seeking to use its capabilities to increase productivity and improve customer service. The technology can be used to create personalised recommendations, automate processes and even generate new content, opening up new possibilities of innovation and digital transformation for banks. 

However, as the Capgemini Research Institute highlights, only 4% of banks are ready for a full transformation based on generative AI. The main challenge is the lack of a modern infrastructure for comprehensive data management across the organisation. Banks face difficulties in processing diverse data sets and converting raw information into actionable insights, which inhibits the implementation of advanced AI-based solutions. 

80% of bank directors believe generative artificial intelligence represents a significant step forward in the development of advanced AI technology. See how you can start using generative AI in banking now

Banks are currently identifying three key areas where generative AI can bring the most benefit:

  • Increase productivity with AI-copilot tools. Deploying advanced AI assistants to support bank employees in daily tasks such as data analysis, report generation and automatic document generation. AI-copilots can make employees more efficient, freeing up their time for more strategic activities.
  • Support in records management and data processing. Generative AI enables the automation of the processes involved in collecting, processing and analysing documentation. Intelligent tools can easily recognise and classify documents, verify them and suggest appropriate actions, significantly speeding up operational processes.
  • Automation of customer service. Banks are increasingly using chatbots and voicebots that, using generative AI, can have high-level conversations with customers, analysing their moods, automatically routing calls (Smart Routing) and by offering proactive, real-time support (Real-time Assistance). In addition, AI supports call quality analysis (Quality Assurance), which allows for ongoing improvement of service standards.

Despite the high potential of generative AI, banks still need to focus on key priorities such as optimising customer service costs and improving the customer’s digital experience, as measured by the NPS indicator (Net Promoter Score).

As Pierre Rulmann, Chief Operating Officer of the French branch of BNP Paribas, points out, generative artificial intelligence is becoming a strategic tool in achieving these goals. By using AI, banks can not only reduce operational costs, but also deliver a more personalised and satisfying customer experience. 

As technology develops and the right infrastructure becomes available, generative artificial intelligence could revolutionise the banking sector, transforming the way financial institutions manage their resources, communicate with customers and innovate.

Ultimately, the future of banking will depend on the banks’ ability to use this technology effectively to create new value and better meet the needs of their customers in a rapidly changing environment. 

Open banking

Open banking, based on the idea of data democratisation, is becoming an important foundation shaping the future of the financial sector. It enables a harmonious collaboration between banks and fintechs, offering customers access to a wide range of financial services, integrated in a single, intuitive ecosystem.

The year 2024 could prove to be a watershed year for the full potential of open banking and even for the development of the concept of open finance. Most attention is focused on Variable Recurring Payments (VRP) which is forecast to become the fastest growing segment in the coming years.

VRP

VRPs are an evolution of traditional standing orders and direct debits, providing users and businesses with greater flexibility to make payments that vary in amount depending on changing circumstances. Although the service is mainly being tested in the UK for now, its growth potential is global – wherever open banking is gaining popularity, VRP is likely to quickly become standard.

Open banking and retail banks

For retail banks, implementing the concept of open banking is not only a step forward, but also an opportunity to stay ahead of the competition through innovation and better tailoring of services to customers’ needs. By accessing data from a variety of sources, banks can offer personalised products and create new business models that were previously beyond their reach.

However, the challenges must not be forgotten. The ability to integrate with external systems through a variety of APIs, protocols and data types will be key. The huge amount of information that will need to be stored and processed requires sophisticated analytical tools and top-level security. In addition, the success of open banking depends on building trust among customers, who need to feel that their data is safe and being used in accordance with their intentions.

Interestingly, although it was the European Union that initiated the implementation of open banking through the PSD2 directive, similar initiatives are now being developed in the US, as well as in the Middle East, demonstrating the global nature of this transformation.

Open banking is not just a trend – it is the future, redefining the relationship between banks, fintechs and consumers, putting the customer at the heart of modern financial services.

The future of retail banking

The banking sector, although challenging, is constantly looking for new ways to grow to meet changing customer expectations and the dynamics of the market environment. The future of retail banking will not just be defined by particular technologies or solutions, but by the ability to flexibly combine innovation with traditional knowledge and expertise.

Banks that know how to balance the dynamic implementation of new technologies with responsible risk management will gain a competitive advantage. Digital transformation, based on trends such as generative artificial intelligence, open banking and sustainability, will become the basis for their long-term success. However, for this success to be sustainable, financial institutions need to demonstrate not only innovation, but also adaptability in the face of new economic and social realities.

Sources:

  • Finextra Research, The future of digital banking in Europe 2024, Money 20/20 special edition
  • Capgemini Research Institute, Intelligent banks do more with less, World Report Series 2024
  • Capgemini Research Institute, Retail Banking Top Trends 2024
  • F. Bignell, A Revival of Fintech Funding in 2024 is Just a Pipe Dream… Or is it?, The Fintech Times
  • European Banking Federation, EBF Facts and Figures 2022.