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01. 03. 2018

What’s ahead for 2018 in digital banking?

The outlook for digital banking won’t be too rosy in 2018, to say the least.

Digital Banking 2018

With the new year already in full swing, bank executives are probably wondering what 2018 may hold for them. We’ve put together some of the key trends and predictions – spoiler alert: it won’t be all sunshine and rainbows.

Digital banking: the good news

There will be even more opportunities for growth. The number of online payment transactions by any device, for example, is expected to increase by 17.3% compared to last year. What’s more, the volume of mobile payment transactions will rise even more, by 24.4%, according to Capgemini and BNP Paribas.

The outlook on mobile payment revenues is even better. The total value of mobile payments are forecast to rise to $930 billion worldwide from about $780 billion in 2017 and only $450 billion in 2015. Revenue growth influenced by digital alone will jump to 12% in 2018 from 5.3% in 2015, unlocking about $180 billion per year, Cognizant and Roubini Global Economics say.

Digital engagement is becoming easier, prompting even more banking customers to switch from physical structures to new sales channels. In fact, most financial organizations will not see half of their customers or clients in 2018, Forrester predicts.

To no one’s surprise, the share of millennials and Gen Xers using digital banking will see an all-time high. TSYS expects that 92.1% of U.S. millennials will use digital banking in 2018, up from 89.6% a year earlier, with the same share rising to 79.2% from 76.9% among Gen Xers in the U.S. over the same period.

Big spenders

Customer demand and stronger competition are forcing banks to splurge out on digital transformation. The hottest areas for digital retail banking development will include analytics, cloud systems, artificial intelligence (AI) and robotic process automation (RPA). The digitalization of back office structures is also expected to spread in 2018.

A whopping $2.2 billion: this is the sum corporate banks will invest in analytics and big data projects in 2018, up by 20% from 2017, IDC expects. Spending on next-generation authentication methods will increase by 20%, and 15% of global banks with assets of $10-500 billion will have partnered with cloud-based lending-as-a-service platforms by the end of the year.

Unlikely friendships

2018 can be the year when incumbent financial institutions team up with their most dreaded rivals to boost business. Yes, we’re talking about tech giants, like Amazon, Facebook and Alibaba, who are already testing the waters with certain financial services.

This new breed of partnerships will move beyond working together with smaller fintech startups, the Financial Brand reports. Of course, it will be quite a challenge to determine the conditions of teaming up with tech companies, as banks don’t want to rely too much on their ecosystem competitors.

Open banking blues

Everyone seems to be in the dark about how open banking will evolve in 2018. By the end of the new year, 50% of the biggest (Tier 1 and Tier 2) banks will offer at least five external APIs, but IDC expects revenue from digital business to be disappointingly low, at least at first.

Most banks have already failed to convert customer data to strategic advantage over tech giants, fintechs and challenger banks. And more than 50% of them will fail to make use of open banking in 2018, Forrester adds. Their fate might be turning into an ’unintentional utility’.

Penalty for laggards

Delaying digital developments will have grim consequences for banks in 2018. Let’s say they don’t mitigate digital disruption at all: in this case, the global average return on investment (ROI) would drop to 7.4% from 8.6% in 2016, McKinsey says. In a more optimistic scenario, with no digital disruption whatsoever, average ROI is estimated to fall back to 8.2%.

Some banks will be doing better than others in becoming digital and those lagging behind are expected to pay a high price, AKA the ’laggard penalty’. This is the difference in both cost and revenue performance coming from technology. Penalty, accumulated since 2015, is expected to add up to a handsome $951 million on average for each digital laggard by 2018, Cognizant and Roubini Global Economics say.

Sigh of relief

On the regulatory front, banks have won some time. The EU’s revised Payments Service Directive (PSD2) will come into effect in January 2018, but two of its provisions on stricter security measures for payments and the abolition of screen-scraping will now be partially delayed.

This is good news for most banks, no doubt, as the industry still seems to be scrambling to be PSD2-ready. Three-quarters of respondents in the latest Marketforce survey about retail banking said they expected fewer than half of banks to be ready for the original deadline.

Digital wake-up call