Banking in 2050: What does the future hold?

David Gyori, CEO at Banking Reports, outlines the biggest issues affecting banks today and outlines what he believes the bank of the future will look like.

What are the biggest challenges facing retail banks today?

There are four major strategic challenges banking executives have to solve simultaneously: low-rates; overregulation; the fintech revolution; and millennials. Each of these challenges are opportunities as well. Even though permanently low rates decrease the profitability of major incumbent banks, they also enhance operative efficiency, cost-consciousness and productivity and these things will be handy in a later expansionary phase. Even though overregulation strangles banks and major fines of billions of dollars are coming up out of the blue, this teaches banks and bankers the paramount importance of the culture of compliance, transparency and high ethics. Even though the fintech revolution has put 15,000 small, nimble, flexible, creative and dynamic finance startups on the global scene to challenge the incumbent ‘dinosaurs’, banks have the upper hand when it comes to economy of scale and access to large masses of clients. The challenge posed by fintech will motivate banks to play this strategic advantage (economy of scale) right.  And, even though millennials are more keen to go to their dentist than to a bank branch, facing the needs and preferences of this new generation helps banks propel and catalyse digital transition as well as embrace digital excellence.

What needs to be done to meet these challenges and succeed in the future?

There are two fundamental things in common between the four major strategic challenges we discussed previously:

(1) These are strategic challenges: The permanent low rate environment, the heavy burden of compliance and regulation, the immense challenge posed by fintech and the day by day rise of the millennial generation are all issues that first have to be addressed from the boardroom. These challenges all call for strategic adjustment, initiated, controlled, supported and incorporated into written strategy by the top management. Furthermore: these new strategies have to correspond naturally to the history, culture, structure, brand, position and legacy of the given organisation. Is this complex? Yes. But this is why top banking executives often take eight digit annual incomes home.

(2) These challenges all call for a new paradigm between competition and cooperation: The traditional relationship between competition and cooperation is ‘either/or’. In the traditional industrial-capitalistic paradigm a company is either a partner or competitor of another company.  In the new post-industrial paradigm, it is best represented by the internet economy. In this new paradigm of capitalism, competition and cooperation can coexist within any business relationship. This is new, and traditional incumbent players have to adjust to it. Low rates are cutting into profitability and they can be best compensated by cooperation and even mergers by otherwise competing incumbent entities, through cooperation enjoying and exploiting more ‘economy of scale’. Overregulation can best be addressed by clear research and lobbying co-funded by the cooperation of key industry players (otherwise fiercely competing each other). The fintech revolution is the ultimate call for the mixture of competition and cooperation (often called ‘coopetition’). Think about a company like Moven, a global leading personal finance dashboard. Moven provides a super intelligent, beautiful, millennial-compatible and interactive smart phone interface between banks and their clients. Moven partners one bank in each country. Is that bank a competitor of Moven or a cooperating partner? The answer is clearly: both. So banks have to learn this brave new world of competition and cooperation.

How is momentum in the fintech space impacting retail banking? Are banks most likely to collaborate with, or compete with fintechs in the years to come? 

There are four sub-groups of impacts. (1) Competitive reaction from banks. (2) Cooperative reaction from banks. (3) Coopetitive reaction from banks. (4) Undefined reaction from banks.

Type 1: Retail banks are reacting by upping their game (i.e. competing) with neo-banks, crowdfunding sites, P2P lenders, roboadvisors and to the advancement of a number of other fintech areas.

Type 2: Retail banks are happily and successfully cooperating with ATM innovators, augmented reality companies, back-office artificial intelligence providers, digital identity and video banking specialists, biometrics, risktech and regtech companies and a number of other significant areas within fintech.

Type 3: Banks are trying their best to embrace the new paradigm of ‘coopetition’ in areas like APIs, big data, remittances, wallets, social trading, wearables, personal financial dashboards and further areas within fintech.

Type 4: The momentum is so strong in the global fintech arena that even the very best banks have a hard time relating and reacting to emerging areas like virtual reality and the internet of things.

Overall, what I see is that banks are good enough in their reactions, but a concise and crystal clear strategy is missing from behind these tactical and operative steps. Banks with superior innovation-strategy will win the next decade.

What will the bank of the future look like, in your opinion?

There are many predictions out there available for the next five years and some for the next 10 to 20 years. But almost no predictions are available for beyond 20 years. Therefore, I will focus on ‘Banking in 2050’.

Banks in 2050 will be cashless and paperless, but not branchless. The number of branches will be reduced from the current global average of 14 branches per 100,000 adults to approximately one to two branches per 100,000 adults. The role of branches will be financial education, brand management and design. Design of user interfaces will be very important and branches will ‘advertise’ this design. User interfaces will hold key design elements currently known from computer game dashboards. The key channel of interaction with a bank (and almost any other entity) will go through smart contact lenses. We will call it ‘retina-banking’. Smart contact lenses will provide augmented reality solutions. Augmented Reality is the mixture of computer provided information with the vision of real life. (virtual reality is solely computer generated.) These contact lenses will be navigated by the eyes of the users, clicking by blinking and navigating by looking. One of the key functions will be to turn off the augmentation – when people want to concentrate to each other, the lenses will just act as normal contact lenses. Yet, tiny pieces of info like the time, your bank balance, your next programme in your calendar can remain on ‘screen’ permanently. Payments and purchases will all be done through retina-banking and the mobile-bank and internet-bank solutions will all run in this Augmented Reality environment. Plastics and card-substitutes (like ApplePay and Samsung Pay) will be obviously unnecessary; cards will be integrated into this system. (Smart phones will probably also disappear by this time.)

Central banks will issue digital-only currencies (so digital currencies will be not only embraced, but also controlled and regulated by sovereign countries), and central counter-party clearing and distributed-ledger-based clearing (the technology behind block-chain) will coexist. Economists, monetary and fiscal experts will be closely cooperating in 2050 about the principals of exo-banking. ‘Exo-banking’ is the concept of a new financial system on a planet outside Earth. ‘Exo-banking’ also deals with concepts like Extra-terrestrial Inflation’ which is the theory that if intelligent creatures approach Earth before we humans can approach them that event will most likely bring a violent deflationary cycle on. Why? Because if they approach us first, that means they have superior technologies and tools compared to us and those tools will be for sale (space-trade will begin). What will the price be of superior tools? Extreme amounts of our currencies. The trade-ratio for Made-in-Earth products will be very low compared to those that this new, outside, incoming, technologically-superior civilisation will offer. This will make local (Earth-made) products ceteris paribus deflate.

An issue, which will point way beyond banking – but will have effects within banking as well – will be ‘singularity’. Singularity is the theoretic moment when human-made machines will be equally intelligent as humans themselves. This point is very important, because machines get to this point on a steeper learning curve than humans. So the next step after ‘singularity’ has to be that machines overtake humans in terms of intelligence – because they learn faster. This will soon be the case with self-driving-cars. They are not only already driving better than we do, but their software is updated real time by the conclusion of analysis with all events (e.g. accidents) happening with any self-driving cars using the same software globally. So their abilities are improving fast. This is also an IoT (internet of things) use-case: self-driving fleets of millions being connected online and running mutual real-time machine-learning algorithms in the background. But singularity, and what comes after has financial consequences: money is power and intelligent machines will want to have both. Will some intelligent machines have their own wealth? Will they be allowed to open bank accounts? Will they be allowed to trade their own money and use super-intelligent algorithms to take profit from the stock-market before humans do? There are currently machines capable of reading and digesting millions of news articles globally per day. And these capabilities will exponentially increase.

Financial inclusion will be better than currently. As of now half of the global adult population lacks relationship with any full licensed bank. Financial inclusion will be near-total. People will have the so called One-Number, which is one number that stands for their personal ID, their primary phone number, their primary bank account number, their passport number and their IP address. This One-Number will be globally granted at birth.

I could go on very long about the long-term future of banking. But my main message about it is short and simple: it is a beautiful topic! I encourage every banker to take the courage and think outside the box, to be brave enough to take a long term view ahead. These views, these visions, these ideas, these fantasies will eventually shape our future. And as adults, we are after all responsible for that! I encourage every banker to – besides answering their daily emails and keeping their banks safely running – be the Elon Musk and Steve Jobs of banking, to shoot for the moon, yet be aware of daily ground-reality. As opposed to many fintech experts, my opinion is that banks have a bright and fruitful future but we are all responsible to actively shape it.