January 4, 2023

12 digital trends that will transform banking in 2023

2022 was a turbulent time for banks and other financial institutions. Banks are facing big challenges from the shift to digital banking and the wave of branch closures around the world. They are becoming more distant from their customers, with the result that 20% of customers don’t think their bank cares about or understands their needs; customer demands are evolving rapidly, with banking customers seeking frictionless banking activities, 24/7 support, and rich, meaningful, actionable and personalized engagement. As open banking adoption grows worldwide, banks compete not only with each other but also with fintech providers and other financial service providers.

As this economic turmoil also presents a series of opportunities for banks. Institutions can use this time to deepen their customer loyalty and win themselves a place as a beloved source of trusted advice and automated banking actions. Forward-thinking financial institutions do this by leveraging their biggest asset: their own customer financial transaction data. By developing deep insights into their customers’ financial behaviors, needs, and preferences, the future of digital banking will be bright.

By talking to banks and our partners around the world, we spot trends and patterns within the finance industry. We’ve compiled 12 predictions from Jody Bhagat, President of the Americas, and Dorel Blitz, VP of Business Development and Strategy at Personetics, to help you prepare for what this year will bring.

1.  Personalization will become ubiquitous and table stakes

2023 will see the move from basic personalization and traditional PFM capabilities, which delivers little, if any, business impact, to fully commercializing customer engagement for the benefit of both banking customers and banks themselves.

Personetics’ research reinforces this notion as banks struggle to raise their customer lifetime value (CLV) and conversion rates for financial products from around 2%. The need to improve this figure is driving banks to finally move forward and monetize their relationship with customers. Banks need to leverage personalization, as they have little else to differentiate them from their competitors.

Looking further ahead, Jody forecasts that personalization will lead to the “death of the marketing banner” when banks can deliver personalized product offers embedded in insights and advice that will boost conversion rates.

On the other side of the transaction, banking customers want banks to leverage data more effectively and deliver more personalized care and solutions while 44% want their bank to provide them with more personalized and timely financial advice.

As a result, Jody predicts that “a basic version of personalized insights will become ubiquitous and table stakes by the end of 2025.” Best practices already center around connected channels, which enhance both human and digital connections to foster meaningful relationships with customers.

2.  Banks will move from traditional PFM to advanced money management capabilities

As we enter 2023, banks will move on from the beneficial but limited sphere of personal finance management (PFM), into the realm of advanced money management. Recent research by Forrester confirms that in today’s turbulent economic conditions, customers need banks to provide broader money management support that improves their financial well-being, using technology to understand each customer’s financial situation and assist them in stabilizing their finances and boosting their financial health. This involves a technology partner like Personetics that can analyze customer financial data in real-time to deliver meaningful insights and advice.

Money management begins with AI-based categorization and enrichment of all transaction information – including Open Banking – so that banking customers can understand their money movements.

Truly advanced money management provides accurate cash flow prediction that shows customers how much they can spend and save based on real-time behavior and transaction analysis. This extends to automated savings and debt repayments, personalized financial insights that nudge customers towards better financial health, and management for recurring costs like subscriptions and monthly bills.

Ultimately, banks can become trusted financial advisors who provide advanced money management capabilities and automate wearisome banking actions. The impact on their business KPIs will be enormous.

As Dorel remarked: “Traditional PFM and money management tools do not increase customer engagement and sales metrics. This is due to the lack of AI-based models and predictive cashflow capabilities to provide accurate analysis. In addition, they lack product-based advice and wellness automation solutions that are connected to the customer’s existing and future financial behavior.”

3.  Connected channels will rule for customer engagement

Connected channels are the final step in the journey to customer engagement utopia. Besides delivering more personalized insights and active assistance for daily financial activities, banks will combine tools, products and insights into a unified system that nudges customers into actualizing the good habits they wish to implement.

With connected channels, banks will propagate customer intelligence across all their channels, including digital customer portals, human bankers who will reach out to banking customers, and the customer data platform (CDP) to drive more appropriate marketing messaging.

As Jody said, connected channels offer an opportunity for mid-size banks to bring their strengths to bear to compete with their larger rivals, growing a strong relationship through their deep understanding of customer needs. “Connected channels combine the foundation of personalized insights, the advanced automation of journey enablement, and the human element of the banker channel.”

4.  Banks will be defined by their ecosystem

2022 was challenging for the fintech industry, but we believe the environment has made a positive and pragmatic shift in business model value and valuations. 2023 will see the forest of fintech give way to connected banking ecosystems, which banks will create through best-of-breed solutions, either delivered internally or via a third party.

Dorel predicts that the current disparate banking solutions market won’t last. Banks are becoming more active in making automated, self-adjusting banking products more accessible to customers. The new model will be that of the bank plus fintech rather than bank or fintech as banking providers coalesce into centralized systems.

The trend is partly driven by banks themselves catching up with customer demands, moving from a passive to a proactive approach to customer relationships. “Many banks are investing in tech with the knowledge that the value system they offer the customer will be defined by the ecosystem they create, not just the products they offer,” points out Jody. “The shift will be enabled by technology which allows banks to share data in a more rigorous and controlled manner with their third-party partners, who will be able to process the data in a secure, protected environment.”

5.  The seed of green banking will continue to grow

Sustainability is a vital trend across all industries, and banking is no exception. We’re still in the earliest stages, but it’s a trend that is here to stay, despite rising concerns about the cost of living. Currently, banks are mainly engaged in largely symbolic activities which have a little real impact on the planet.

However, Dorel forecasts that 2023 could see the beginnings of the second wave of sustainability responses.

“By making sustainability a strategic priority, financial institutions can acquire and retain climate-conscious values-driven customers as well as employees. It also helps them maintain compliance and achieve better ESG ratings while potentially driving revenue growth from new sustainable finance products.

These can help financial institutions engage with sustainability-minded customers. This starts by understanding the “Green Consumer Paradox,” i.e. that customers often say that they want to support the environment but do not follow through with action. Sustainability-minded financial institutions will work on overcoming this through a combination of factors such as education and making sustainable choices more convenient for consumers.

Jody likewise predicts that “banks will help customers better understand their spending and allow them to align their spending with their values by showing customers the impact of their current spending habits and providing suggestions as to how to improve them with more eco-friendly products and services.”

6.  The cost-of-living crisis will guide consumers towards banks that support them in their daily finances

As we start 2023, it’s likely that the cost of living crisis will be the biggest influence on customer banking decisions. Our survey of over 5,000 banking customers revealed that 93% say the cost of living is affecting their daily lives and 61% have cut back on non-essential spending, but 63% have heard nothing from their bank in reaction to their changed financial situation. “Customers are pointing fingers at their banks and demanding, not expecting, them to help,” says Dorel. Forrester’s research concurs that consumers need more financial capabilities to achieve some level of financial wellbeing during this crisis.

At the same time that consumer sentiment is plummeting, financial indicators remain strong. On average, consumers have 25% more deposits than they did before the pandemic, lower credit card debt, and higher equity than ever before. Prime customers are in strong positions to weather a recession and slowdown, but there’s no denying that it will bite hard on customers living on the margins of financial solvency.

It’s challenging for banks to position themselves correctly, but those that succeed will be the ones that take a more proactive role in helping customers with their daily finances. Banks need to offer targeted advice and solutions for both prime customers and those who are struggling to win customer loyalty for the long term.

There’s an opportunity to invite account holders to take advantage of higher interest rates to save more or pay off debt more aggressively while also offering relief to those who are suffering. Banks need a personalization solution like Personetics to know whom to upsell with wealth management products and who should receive a push for debt consolidation loans.

7.  Banks will be proactive about the cause of overdraft fees

Overdraft fees cause significant distress during the cost-of-living crisis. Overdrafts are damaging for both the customer, who loses even more funds on the fees, and the bank, which sees its relationship with the customer suffer, has to service higher volumes of calls and complaints and risks increased attrition rates.

We applaud the banking industry for having responded so quickly with the “four Ps: Price, Policy, Process, and Product.” This includes lowering prices, eliminating some fees entirely, introducing a grace period before fees are charged, and introducing new products, like U.S Truist’s Bank account with a deposit-based associated line of credit to enable holders to overcome overdrafts.

These changes are lessening the frequency and magnitude of penalty fees, and Jody explains that “The next breakthrough from the industry will come from the fifth P: Proactive. The industry needs to focus on proactively engaging customers in advance of a cash flow issue. The 4 Ps ease the consequences of an overdraft for customers, but they do nothing to address the actual need. The 5^th P is where the industry needs to be, predicting a customer’s cash flow needs and proactively unleashing creativity to deal with it.

To help deal with overdraft fees in 2023, banks need to combine cash flow insights for each customer, together with a deep understanding of that customer’s financial situation, so they can recommend relevant, highly personalized solutions, whether that’s budgeting advice, overdraft protection, or moving money from another account.

8.  Banks will wake up and smell the coffee of small business banking

Small businesses represent 99% of the economy, but they’re not being treated with the appropriate digital banking solutions. 2023 needs to be the year that banks adopt a more strategic, serious approach to the banking needs of small business owners.

Small businesses demand banking products that are designed for their own needs, not replicas of those offered to personal customers. “Small business banking is the “Promised Land” for bankers. I’m a big believer that banks are going to fix their propositions and provide much better personalization for small business customers this year,” says Dorel.

In the coming year, we expect to see banks respond to this demand with personalized business banking that combines holistic financial analysis (with open banking and cloud accounting data), transaction modeling, actionable insights, and valuable forecasting to deliver customized advice and guidance to their small business customers. Personetics enables banks to deliver the tailored support for business decision-making that small business owners crave, alongside automated banking actions that ease their mental load.

9.  Midsize banks will compete better

In the short history of advanced analytics in banking, mid-sized and smaller banks have been at a disadvantage because they don’t have the resources to deploy powerful data analytics. However, the rise of advanced cloud-based, scalable data analytics solutions and dropping price threshold means that now, midsize banks can and should embrace them.

In 2023, we expect to see more midsize banks taking steps to leverage advanced data and analytics to accentuate their understanding of the customer and the relationship value. Jody recommends that such banks “leverage external parties to reach parity rapidly, then use internal resources to create differentiated experiences. By effectively combining external best practice providers with targeted internal capabilities, midsize banks can deliver distinctive solutions and experiences for their customer franchise.”

For example, Synovus Bank, a 134-year-old regional bank in the southeastern U.S., implemented Personetics to understand customer preferences and feed actionable insights back to human bankers to nurture the relationship, creating a connected digital plus human banking environment for its customers. As Liz Wolverton, Synovus’ Head of Consumer Banking and Brand Experience said, “I see it as a dance, a beautiful dance of that choreography between the digital and the human coming together. Right now, I think most banks – and we’re one of them – are in the elementary class of that. But I see the future where that comes together really beautifully.”

10.      The battle for deposits will grow fiercer

In 2022, we saw that banks and credit unions will do whatever it takes to become the primary bank for their customers. Open banking means that it’s easier than ever for consumers to open an account with a new provider, with the average American splitting their funds between five accounts. The financial institution that houses their monthly salary deposits will rank as their “primary” bank, with more opportunities to cement loyalty and win more business.

With more “money in motion” in a rising rate environment, consumers have multiple choices on where to place their deposits for maximum value.  Financial institutions can win the Battle for Deposits by amplifying their promise of looking out for the financial well-being of their members.

In the coming year, banks need to use hyper-personalization to differentiate themselves and win customer relationships. “It’s incredibly hard for a bank to set itself apart from the rest of the market,” says Dorel. “Getting to know your customers’ financial behavior and proactively offering needs-based guidance and product suggestions is one of the few ways you can make yourself stand out, retain customers and increase their customer lifetime value.”

For example, Ally Bank introduced a number of savings solutions to help customers save more wisely, including automated savings processes where the bank uses advanced analytics to move money into savings accounts on their behalf. It found that customers who engage with savings tools are twice as likely to have multiple products with the bank.

11.      Banks will use behavioral economics to influence customer behavior

We expect 2023 to see banks bringing behavioral economics together with automation to deliver a new level of support to their customers. By gathering data from across a customer’s financial touchpoints and using artificial intelligence to analyze it, banks can derive meaningful insights that help them deeply understand and act upon each individual’s changing financial situation, priorities, and needs.

Banks can then apply behavioral economics to “nudge,” boost and leverage temptation to help people make better choices, such as saving for retirement or paying down debt. These are actions that people consistently say they would like to take, but which they fail to actualize due to inertia, feeling overwhelmed in the face of a flood of options, the fear of making the wrong decision, or all these reasons.

As banks increasingly ease the mental load and support customers in making difficult financial decisions, they will carve out a place for themselves as a trusted source of guidance, boosting customer loyalty and lifetime value.

12.      Increased prominence of embedded banking services

Embedded banking services from non-bank companies will continue to rise in 2023 and claim an important place in the banking ecosystem. For example, Lyft and Uber offer business loans for their drivers. Amazon and Square push working capital advances based on businesses’ Point of Sale data. These corporations have shown their ability to leverage customer data and relationships effectively to deliver relevant products at the right moment.

Jody predicts that “embedded banking services and solutions will become more widespread by leveraging customer finacial data effectively and delivering personalized solutions within the segment they’re targeting.” By widening the number of distribution points for banking services, Jody expects that embedded banking will increase pressure on banks to compete in terms of customer engagement and personalized experiences.

We may also see embedded banking spread to new providers, like wealth management firms, that could help customers save more efficiently.

There will be new opportunities for banks in 2023, and those who overlook them will be left behind

In 2023, banking leaders won’t be using digital banking as another customer channel. They will be connecting digital and human channels and pushing deep insights down them both. Successful banks will be those who differentiate themselves with a personal relationship with their customers, deliver trusted advice and support, and prove themselves to both understand and care about improving each individual’s financial situation.

Banks already have the foundations they need for this new world of banking – customer data. By building upon their existing analytics stack and expanding insight-sharing across the organization, banks can achieve meaningful personalization that drives loyal relationships.

Ready to discuss your financial institution’s digital banking vision for 2023? Talk to Personetics today.