Bank of the Future: The Invisible Bank

May 11, 2017 Risk Management
The bank of the future will be more of a digital structure than an physical one.

While we don't have access to a fortune teller to predict how the banking landscape will look in 10, 20 or 30 years, we can make some highly educated guesses about what's on the horizon based on what we currently know. One thing that's become readily apparent is that the bank of the future will be invisible.

What does an invisible bank look like?

An invisible bank isn't simply the end of the brick-and-mortar establishment. Nor does it mean that all banking transactions will occur on a mobile app or online portal. Rather, the evolution into invisibility will see traditional aspects of banks fade away as financial institutions become more of a white-labeled product provider. Things like customer service call centers, individual branches and even sales teams will gradually be replaced by digitized self-service technologies. 

"Banks will reduce their staff by about 30% between 2015 and 2025."

A recent Citi Global Perspectives and Solutions report estimated banks will reduce their staff by about 30 percent between 2015 and 2025. This coincides with the surge in financial technology investments over the past half decade, which rose from $1.8 billion in 2010 to $19 billion by 2015. These investments are primarily focused on automating many of the transactions utilized in traditional banking today.

As noted by the Massachusetts Institute of Technology, the digital banking edifice will have IT and analytics as its foundation. These two divisions will serve as the make-or-break factors that determine the success of an invisible bank, not its product line. With hundreds of fintech startups leveraging lots of brain power and money, the disruption of the traditional banking model is only a matter of when, not if.

Platform layer vs. product layer vs. process layer

Today's economy already relies heavily on a cashless society, and this trend is only going to exacerbate as banks adopt more fintech services.

The customer interface – the platform layer – will largely be handled by familiar global technology companies like Facebook, Apple and Google. The branding and marketing of the bank as well as the quality controls, customer assurance and actual product selection will happen at this platform layer. Financial brands will remain hidden behind these platforms. Customers will interact via digital assistants, somewhat akin to Apple's Siri or Amazon's Echo. KPMG envisioned what this personal banking assistant might look like. The source carried out a thought experiment based on this, noting that this digital persona will proactively utilize advanced data analytics, voice authentication, artificial intelligence, connected devices, application programming integration and cloud technology to service customers without these individuals having to actually interact directly with any type of bank.

The bank of the future won't utilize traditional brick-and-mortar branches.The bank of the future won't utilize traditional brick-and-mortar branches.

The bank of the future will still own the balance sheets, security, custody of access – the actual products – but the way the general public interacts with these products will differ as people rely on the platform layer mentioned above. These financial institutions will still handle the product side of things, and it is well-positioned to leverage these core strengths.

Finally, down at the process layer sits the fintech companies, major outsourcers and centralized utilities that facilitate payments and manage the administration and regulatory processes. 

What does this mean for banking customers?

Banking customers will be the ones most impacted by this transformation, yet also the least impacted. With the current operational model – individual branches and ATMs scattered across different locations handling various customer requests and dispensing cash – on its way to extinction, customers will no longer have to worry about doing any of these things personally. The experience with and access to banking products will remain the same no matter which channel or product set the individual is using.

They will receive a personalized customer experience that relies on AI and market information gleaned from social media and other behavior analytics. Using this data, the invisible bank will be able to design customized digital experiences for the customer, with products specifically configured to his or her demands and needs.

For example, by analyzing a person's Facebook posts and internet search history, the bank will know a particular customer might need a short-term loan at the same time the customer figures out she needs one. Or the bank will notice an uptick in a person's spending, with many purchases being made at stores the person doesn't typically patronize. Since research shows these trends tend to indicate a person is about to lose their job, the bank will know to lower the amount of available credit to the customer.

This reduces a bank's exposure to risk and allows the financial institution to optimize its capital reserves more efficiently.

Although the banking landscape will shift dramatically, it has the potential to deliver greater risk management and cost-effective measures to streamline financial services for customers.