Trends and challenges in retail banking

The technology evolution continues to power on at an even greater speed thanks to advances in artificial intelligence (AI), changing customer expectations and the growing ambitions of large established retailers who search for new income streams. This is forcing banks to rethink their strategies and adapt to stay relevant.

In this article, we’ll look at three key challenges and digital banking trends that should be on every retail bank’s radar - from the rise of new competitors to the proliferation of AI to changing customer expectations. Most importantly, we’ll look at how banks can navigate this new era of ‘smart banking’ and turn the challenges into opportunity.

For most of modern banking history, banks have competed with other banks. There were differently sized banks and differently structured banks, but most banks competed for current account holders to whom they could up or cross-sell different services. But the competition has changed over recent years, and there are signs that it’s going to change even more drastically in future.

The last decade was marked with the rise of neobanks and their attractive digital-only offerings. They competed with traditional banks, not by offering superior financial products and services, but by offering their customers a better user experience. Neobanks prioritised design and ease of use by enabling customers to complete every banking task easily within a single app. This eliminated the need to switch between different applications, devices or visiting a branch. The strategy has been so successful that Revolut, one of Europe’s largest neobanks, attracted one million new customers per month during 2023. Other neobanks, such as Monzo (UK) and N26 (Germany) are growing at similar speeds.

Many traditional retail banks have fought back by making their own apps more user-friendly or launching entirely new digital-only brands at great cost, such as BNP Paribas’ Hello Bank! at a reported cost of $80 million in 2013. But the next decade could see a completely new breed of competitor - not scrappy ‘fintech’ startups with global ambitions, but existing global retailers with large customer bases branching out into the world of finance.

The launch of Apple Card in 2019 marked a significant first step into retail banking for the world’s most valuable company. Despite being a successful hardware company, Apple saw an opportunity to disrupt a market dominated by big banks with a new credit card that offered more consumer-friendly features than its competitors. Crucially, Apple was able to market its new Apple Card to a large and loyal customer base. By partnering with Goldman Sachs (one of few financial institutions that considered Apple Card to be an opportunity rather than a threat), Apple gained 12 million credit card users in five years.

This trend, so called Embedded Finance, has been enabled by the rise of Open Banking and Banking as a Service (BaaS) technology, which allows non-banks to offer banking services within their services without becoming fully-fledged banks themselves.

Several other consumer brands have already entered - or are in the process of entering - the retail banking space with their own financial services, such as Booking.com (payment processing), IKEA (credit finance) and Uber (payment cards and digital wallet). But many consumer brands are eyeing up a bigger goal - to become the western world’s first true ‘super app’. Elon Musk, for example, has publicly shared his aspiration for X (previously Twitter) to emulate the success of WeChat in China, which allows users to make payments, send money and pay bills in addition to its messaging and social media functionality.

Banks could take Goldman Sachs’ approach and partner with consumer brands, seeing this disruption as an opportunity to meet modern customer expectations for a digital, seamless, mobile-first banking experience. But the risk is that banks will ultimately become the ‘pipes’ of banking services and their consumer-facing brand will become less relevant and valuable over time.

Artificial intelligence (AI) is another area that’s set to revolutionise the retail banking industry in ways we’ve yet to fully comprehend - particularly as AI is a key enabler of smart banking, which leverages new technologies to provide customers with more personalised, efficient and secure banking experiences.

While banks consider the impact of AI on important issues such as compliance and privacy, they’re increasingly using AI to transform various parts of their operations - from customer service and risk management to marketing and product development and financial inclusion and accessibility.

One of the most promising use cases of AI in retail banking is the use of generative AI (the technology behind ChatGPT) which has the potential to greatly improve both customer experience and operational efficiency. For example, generative AI can create highly personalised and engaging customer experiences, such as virtual assistants that can understand queries and respond in real-time. Not only does this improve the customer experience, but it also frees up bank employees to focus on more complex and valuable tasks. At G+D Netcetera, we’ve developed a range of AI-enabled services for banking clients, including our AI Banking Assistant that helps improve customer experience and operational efficiency. Our DocDive platform can also be used by banks to simplify workflows, enabling employees to ask questions to an AI assistant which searches thousands of stored documents to provide accurate, regulation-compliant answers and references to the relevant documents.

Another area where AI can make a big impact is in document processing and validation. Since banks handle large volumes of documents (such as loan applications, credit reports, KYC and AML checks) significant efficiency gains can be made using AI-powered document processing tools. By automating some or all of these document processing tasks, errors can be reduced while remaining compliant with industry regulations.

AI is also transforming the way banks approach risk management and fraud detection. With the ability to analyse large amounts of data in real-time, AI algorithms can identify potentially fraudulent transactions or applications as they happen - an important contribution to preventing losses and protecting their customers.

Banks are now leveraging artificial intelligence to offer customers highly personalised products and services. By using AI algorithms to analyse customer data and behaviour, banks can accurately predict individual preferences and needs, enabling them to deliver tailored content, products and services for each customer. Using AI to provide a more personalised experience not only improves customer satisfaction and loyalty, but it also opens up new revenue streams and growth opportunities.

Technology is proliferating every part of our lives. For a long time, you’d have to sit down at your desktop computer to access digital banking. Then the smartphone arrived, allowing access to banking services on the move - not just through a static website, but intuitively-designed mobile apps. Smart watches arrived soon after, offering convenient banking features such as contactless payments. Smart speakers, like Amazon’s Alexa products, enabled people to search the internet using voice commands. And it looks like we may now be moving into the era of the smart headset. While virtual meetings with financial advisors are already used via platforms like Microsoft Teams, banks are now experimenting with AI-powered advisory agents that take this to another level - can you imagine receiving personalised financial guidance from an AI agent directly within your banking app?

As we continue down this path of ‘technology everywhere’, the distinction between platforms is blurring. It’s easy to start watching Netflix on your smart TV and finish watching it on your tablet or phone; why should banking be any different? Customers are learning to expect this multi-channel continuation feature to exist across all of the services they use, including retail banking. According to Deloitte's research, 70% of consumers consider a consistent experience across channels to be extremely or very important in choosing their primary bank.

However, it’s important to note that while many customers are happy to switch channels to complete tasks, most still prefer to complete the task quickly on a single device. Not only is it faster and easier for customers, it’s also a positive for banks since task completion rates are higher when customers don’t need to pause and resume tasks later. So while banks should ensure that customers can seamlessly continue tasks across different channels when needed, it’s equally important to optimise the self-service journey on each individual platform for speed and ease.

Yet some banks are discovering that as well as valuing a consistent experience, their customers want to complete tasks in a single session. It seems that for many customers, what matters most is the ability to pause and continue more complex activities (e.g. opening an account) between different devices.

But many banks are struggling to meet these rising expectations. Without continued development, outdated technology can result in disjointed customer experiences. For example, you might start applying for a loan on your bank’s website but find that you can’t continue the process on your mobile banking app because the two platforms aren’t connected. This kind of experience can be so frustrating that customers abandon the task altogether.

Traditional banks often recognise the need to modernise but find the process of modernising their systems technically difficult, time consuming and expensive. Some banks, though, are finding ways to offer a modern, omnichannel banking experience by partnering with third-party software solutions companies. For example, G+D Netcetera works with banks to provide flexible and modular solutions, enabling banks to integrate their services into new channels without overhauling their entire systems.

Despite the challenges, it’s also an exciting time for retail banking. Banks still have a unique advantage - they have direct relationships with customers through their various banking channels. This existing trust and regular engagement is an incredibly valuable asset that can continue to be nurtured with ongoing product development.

Banks that embrace these emerging trends - such as partnering with consumer brands, integrating AI into their operations and providing seamless multi-channel experiences - are well-positioned to thrive in the era of smart banking. By investing in these areas, banks have a great opportunity to position themselves for future growth and success.

To see how G+D Netcetera could help your bank turn these challenges into opportunities, get in touch with our expert team