The future of retail banking in four industry scenarios

15 February 2023 Consultancy.uk 5 min. read

The world of retail banking is set for change in the coming years, with niche players, neobanks, FinTechs and big techs all seeking to grow their slice of the cut. A new report has hinted at four futures for the sector that these trends could result in.

Throughout the banking sector, new challenger banks and FinTechs are attacking business models, with newcomers rapidly making inroads into the sector’s profits by offering agile, digitalised alternatives. In retail banking, the disruption of challenger banks is visible across the value chain, from customer contact and lending to mortgages, payments and alternative financing.

PA Consulting asked 600 executives from across the industry to share their insights. Opinions differed between key markets – while 66% percent of leaders from the Netherlands expected full-service banks to dominate by 2030, for example, in the UK that figure was just 34%. Meanwhile in Sweden, one-third of business leaders expected to see big-techs dominate, the same number as full-service banks. But from those conflicting insights, PA has drawn up four potential outlooks for retail banking in 2030.

Our FutureWorlds scenarios for retail banking in 2030

Centralised Big Tech

Big Techs, also known as the Tech Giants, are the most dominant companies in the information technology industry. Most notably, these include the five largest American tech companies: Alphabet, Amazon, Apple, Meta, and Microsoft. A 57% chunk of leaders around the world said they felt that the emergence of these players as financial leaders would threaten the existence of banks as they currently exist.

Tech firms are seen as well positioned to make such a shift, because of their adoption of AI and automation for core services. To that end, 61% of Big Tech leaders told PA that they thought AI would take on the role of traditional bankers by 2030. As terrifying as this might sound to traditional bankers, however, this is a remote prospect. As each new terrifying road-test of self-driving cars continues to show, AI is some distance from being trust-worthy in high-impact situations – and, as was the case with FinTechs over the last decade, it is probably more likely Big Tech will simply end up collaborating with banks. To that end, 71% of respondents said they expected traditional banks to act as ‘a front’ for these other players.

Equivalent evolution

In this scenario, PA suggests that retail banking markets in most countries would become dominated by a relatively small number of full-service incumbent banks offering a wide portfolio of products and services. Established financial institutions offering a full service – including many of today’s leading incumbents – would still face growing competition from non-financial companies, like Big Tech, but not in a way that threatened their revenues.

One of the biggest drivers for belief in this scenario is the fact banks have, just about, earned consumer trust. Despite their central role in the colossal financial collapse of 2008, the far-reaching historical reputation of banks means that 65% of respondents told PA they believed they had a trust advantage over tech companies. As low as that bar might be to clear, it is hard to dispute – not so much due to banks having a solid reputation now, but possibly more because Big Techs like Meta are connected to more recent scandals regarding their use of user dater. This will only cut the mustard if banks can still evolve their digital offering to improve their services, though, with 62% adding they will need to make major structural changes to adapt to the threat of tech-savvy challengers.

Fragmented finance

PA also suggested there was a chance that this conflict could yield a world in which neither side comes to dominate. Instead, a vibrant, innovative ecosystem sees the provision of retail banking increasingly shaped by specialised technology firms, originating outside traditional banking: the FinTechs. According to 67% of respondents, traditional banks will lose market share if they do not keep up with FinTech innovations, so the simple solution may be to collaborate with them, rather than compete with them.

Why FinTechs would want this – rather than simply to disrupt the sector for their profit – is clear, when it comes to sustainability. ESG matters have become increasingly important to financial services firms, and those looking to win customers are struggling if they cannot demonstrate their sustainability credentials. But FinTech leaders are traditionally unconvinced that their products can address climate change – putting off consumers who hoped their investments could meet social or environmental goals. Banks are more comfortable in this area – 70% of banking leaders believe their innovations can help meet ESG goals, in contrast to 51% of FinTechs – presenting a clear opportunity for FinTechs to elevate their sustainability credentials, by collaborating with banks.

Disparate domination

Finally, PA contended that a scenario could arise where banks could learn that playing to a niche – rather than generalist offerings – could yield them specific dominance in segments of the market. While this scenario is easy to overlook amid the more dramatic discussion about technology and traditional banks, this trend has steadily built momentum in recent years. The drive towards specialisation has been a natural response to growing regulatory burdens and increasing competition – both from other banks and digital natives offering more personalised experiences.

A 32% chunk of respondents said niche banks wield a higher level of trust among consumers, due to this level of specialism and expertise. Meanwhile 70% of niche banking leaders view strong employee engagement as an important part of their strategy – compared to only half of conventional banks. This could give them an advantage when it comes to courting consumers, and talent – of which there is a major shortage in the industry at present – helping them build momentum after the coming recession.

Speaking on the overall findings, Mark Griep, PA Country Lead Netherlands, commented, “It is crucial for traditional banks to invest now in the ability to meet changing customer needs at an accelerated pace, in order to ultimately maintain or increase their market share. After all, newcomers are more than willing to sacrifice short-term profit for growth.”