Between now and 2035, the high-margin elements of traditional banking will become increasingly commoditised as the economics of core clearing and settlement come under renewed pressure. Rivalries will be reinforced as competition intensifies and new defensive partnerships are forged. A more open approach to working with third parties will also be required as firms attempt to position themselves for success.
Against this backdrop, the financial services industry must also prepare for declining demand for the traditional products and services they sell today – if not the products themselves, then at the very least how they are provided. Fresh thinking will be needed, encompassing new customer experiences powered by innovative technologies, a relentless focus on operational efficiency and reliability, and a commitment to achieving deeper trust and credibility with customers.
These will be essential elements of prosperity for banks, payments firms, insurers and asset managers of the future.
Embracing a future defined by the growing acceptance of digital assets will require financial institutions to adapt their offerings to increasingly include cryptocurrencies. In particular, stablecoins, both private stablecoins, and CBDCs.
We may also see transaction fees becoming increasingly difficult to generate in an environment where customers become less willing to pay for financial products and services, particularly when they can access alternatives free of charge from other third parties. Prices will also be easier to compare as, under pressure from consumers and regulators, they will become ever more transparent. Hence, to sustain profitability in such an environment, institutions will seek to diversify their income streams by finding new ways to generate revenue from the payments flows and associated services enabled by digital assets.
Going forward, we expect increased collaboration across industries as payments continue to be embedded wherever customers need them. Retailers and other consumer businesses will continue to enter partnerships with established payments institutions to deliver richer, more seamless end to end services to their customers. Competition – which is already powerful – will therefore, almost inevitably, intensify, as multiple participants seek to expand their respective roles up and down the value chain
Some incumbent institutions will be tempted to cannibalise their existing business to maintain competitiveness; launching new digital products in competition with existing ‘legacy’ offerings in order to retain customers. Defensive M&A will also aid in the search for new revenue streams, as larger firms acquire smaller innovators in hopes of accelerating technology modernisation, acquiring top talent, and amplifying the overall value to customers of their suite of products.
Elsewhere, balance sheet matters, particularly those relating to liquidity, will continue to be critical to the health of financial institutions and the overall ecosystem. In the future new digital assets and currencies are likely to displace many of today’s banking, insurance and investment products, or enable them in different ways. For example, consumers may ultimately prefer the flexibility of Central Bank Digital Currencies (CBDCs) over bank deposits, especially if such government coins pay interest. That said, the unintended consequences of programmable currencies remain to be seen or addressed, with lingering concerns that their creators may end up exerting a worrying influence over how individuals spend and save their money. Elsewhere, regulatory frameworks will need to adapt to support the growing adoption of digital assets as they relate to balance sheets and liquidity.
The economics of today’s banking business models will need to adapt to a new normal. For example, it may be far easier for consumers to exchange digital currencies like CBDCs across borders than traditional fiat currencies. In which case, revenues in areas such as foreign exchange will come under pressure as adoption grows. Similarly, financial institutions will need to up their game to achieve full compliance with local, regional and global standards in areas such as know your customer (KYC) and anti-money laundering (AML) as the tools needed to validate the provenance of money themselves evolve.
A summary of potential challenges, opportunities and related responses is set out in the table below.
Ultimately, successful players will be those who move with the times and provide a broad suite of financial services tailored to the changing needs of customers. For instance, consider the potential benefits of financial and non-financial services co-existing on shared operating platforms. While data privacy concerns and more complex regulations will need to be navigated, allowing customers to access all their services in the same place could also reduce risk while creating exciting new opportunities for providers to deliver new and more personalised services. In this way, the future of money will do more than change the nature of the cash in wallets. Rather, it will usher in a complete rethink of the way institutions across industries serve and support their customers.
Coming next: We consider how the evolving nature of money will require central authorities to adapt, touching on issues of financial stability, global standards and the new ways of administering core functions like tax collection and fighting financial crime. Against a backdrop of fundamental change, we anticipate that central authorities will retain their key role.