The pace of change is not slowing. Customer expectations have radically changed and they expect much more than ever from your banking products and services. To stay relevant, banks must be aware of these needs and create products to address them, to create value for both their customers and the bank.
The reality is that, over the last decade, bank products have converged toward functional equivalence while becoming emotionally empty. And as banks have increased their reliance on digital touchpoints during the pandemic, they have become even less connected with their customers.
To add to this paradox, zero rates have distorted the market, leading many banks to focus on individual products rather than the customer as a whole. As rates continue to rise, the limitations of this approach will be exposed, demonstrating a new reality of value for banks.
How can banks drive this change, taking advantage of a rising rate environment to innovate for the needs and values of today’s customers? We believe there has never been a better time to be in the banking industry, and banks have both the opportunity and restored profitability to prioritize product innovation and spur growth.
Banks are well positioned to take a proactive role as they are faced with changing regulations, changing consumer preferences, and rising interest rates. Today, they must rediscover their creative mojo and innovate for today’s customers.
In this guide:
The history of product innovation in banking
In the decades before the Great Recession, banks relied on relentless product innovation to fuel growth. From reward cards and free checks to adjustable rate mortgages, debit cards and instant credit, this innovation has benefited both customers and banks.
But over the past two decades, banks have shifted their focus away from innovation. The financial crisis of 2008 turned the attention of banks towards economic recovery, adhering to new regulatory standards and reducing costs by digitizing their processes and experiences.
In parallel, changes in consumer needs and the emergence of new technologies set the stage for a new operating environment. But innovation did not slow down. Neobanks, fintechs, and bigtechs began driving industry innovations such as buy now, pay later loan models, and early payday lending.
Today, new competitive threats in all shapes and sizes continue to emerge. Big tech is leveraging its consumer data, advanced analytics capabilities, and great network effects to partner with agile fintechs, capturing significant market share in their expanding global presence, all without a banking license. These non-traditional competitors show ambitions beyond becoming digital banks, and their foray into financial services is focused on creating new sources of value and strengthening their ecosystem by reimagining business models.
What impact have zero rates had on banking product innovation?
A decade of zero rates distorted the market by causing a flood of cheap cash and allowing alternative lenders and VC-backed fintechs to drive acquisition of emerging and underserved customer segments. During this period, the product calculus changed rapidly, forcing banks to focus on optimizing and marketing individual products rather than developing integrated customer propositions.
This is manifested in the reduced role of banks in relation to the financial system in general, new competitors and other intermediaries. This trend is evident in developed economies like the US, UK, Europe, Japan and others. This has been engineered in part by regulators looking to reduce risk within the banking system that became apparent in the 2008 financial crisis.
While these regulations and risk controls were intended to build a more resilient economy, legal, regulatory, and policy standards have not evolved to address the new competitive banking environment. The last decade has seen an explosion of unregulated players, such as fintechs, bigtechs, and non-banks, and these competitors have attacked the banking value chain to build and serve all of a bank’s products without the constraints of banking regulations.
Additionally, during this time, the persistence of zero interest rates resulted in four major directional changes that propelled customers and growth outside of the banking industry:
- The rise of neobanks
- Personal banking saw a proliferation of new fintech banks, reaching 250 worldwide by 2022. Cheap deposits and streamlined experiences fueled by more than $300 billion in funding helped neobanks open more than 33 million accounts since 2019.
- The explosion of digital loans
- Rock-bottom rates fueled massive off-balance sheet financing. The number of consumer and personal lenders has skyrocketed, while new entrants such as neobanks have quintupled the value of digital loans since 2010. (Even Goldman got in on the game with Marcus offering personal loans and savings.)
- Product unbundling for SMEs
- Fintechs systematically unbundled small business banking, and entrants like Square and Kabbage emerged. PayPal acquired Swift Financial to bolster its SME lending business. Brex created a credit card business for SMEs. And Shopify and Uber started offering integrated banking.
- The replacement of banks by private equity (PE) companies
- Private lending took off as companies sought to fill the vacuum caused by the withdrawal of banks from the middle market and other types of ‘riskier’ lending opportunities. PE firms offered high returns for institutional and wealthy investors, outperforming the S&P500, Russell 2000 and venture capital during a period of low interest rates.
Sources: The Financial Brand, Accenture Research, S&P Capital IQ, CB Insights, SVB, Insider Information, Bloomberg
And revenue doesn’t lie: innovation pays. The post-recession difference is evidenced by blistering fintech revenue growth while banks stagnated. Accenture research shows that fintech revenue has grown to a major share: $100 billion in the US alone. This trend is not unique to the US; New entrants have captured a bigger share of revenue in the UK and China, which are also home to some of the world’s leading neobanks and bigtech.
What is the opportunity for banking product innovation in a rising rate environment?
Today, amid rising interest rates, macroeconomic volatility and a changing regulatory landscape, banks have the upper hand. Strong and diversified balance sheets, confidence, economies of scale, and experience adapting to change set the stage for banks to return to their innovative roots.
And just as zero interest distorted the economics of products, we see rising interest rates as the force of gravity pulling product and business strategies back together. This will have a number of impacts:
- Deposits are the new rocket fuel: Low beta deposits are the premium liability that every bank wants. Rising rates will drive the separation between hot deposit banks and diversified banks that are effectively using digital experiences to manage pre-book and post-book spreads.
- From product silos to the total customer: Banks will begin to offer holistic value propositions and end-to-end functionality, developing products that link deposits and loans and amplify value.
- Disaggregation and regrouping of banking: Banks will generate growth by unbundling their legacy technology and product distribution and regrouping with partners at lower costs and faster time-to-market.
- A neonormal: Hot Deposit-Funded Neobanks Face Off setbacks in investor funding and falling valuations. Banks have a once-in-a-generation opportunity to acquire fintechs to find new customers, accelerate innovation, and absorb desirable fintech talent.
- The latent digital dividend: Coming out of the pandemic, 97% of customer touch points are online or mobile. Finding a way to leverage modern data and technology systems to cross-sell products or similar to the branch experience will unlock tremendous value in customer relationships.
Qorus-Accenture Innovation Awards leading the way in banking innovation
It’s worth noting that the Qorus-Accenture Banking Innovation Awards, an annual global awards program that recognizes the best in banking innovation, recently celebrated incredible innovations at its 2022 ceremony in Barcelona.
bank of brazil is achieving incredible success by reinventing the customer experience and engaging with new market segments. With Open Finance on Whatsapp, it was the first bank in the world to use the messaging app to complete the customer consent process. Additionally, Banco do Brasil Brablox is engaging potential clients in the metaverse by turning it into a relationship-building platform.
As many of us know, there needs to be a mention in the metaverse when it comes to banking innovation. Industry players are also driving brand value in this emerging virtual world. from Spain imaginBank is focusing on the metaverse as a connection to its younger clients by “offering immersive content and experiences in imaginLAND, its product in the metaverse.”
The awards also highlighted the increasing use of ‘forgotten data’. BNP Paribas, for example, is leveraging geospatial data to detect the climate impact of business activities and is offering advice to its SME clients based on its findings. Also, Intesa Sanpaolo is creating a new innovative path in the use of sustainability as a growth engine through its ESG training for SMEs.
We encourage you to take a moment and explore the full list of this year’s winning innovations.
What are some innovative product ideas that banks can explore now?
To kick off the ideation process, we asked our global banking team: “How can we address the changing financial needs and behaviors of consumers with products and services that can drive revenue growth in an increasingly uncertain environment? ?”
We present more than 150 product ideas, with the goal of growing and meeting the needs of today’s customers. We’re sharing nearly 50 in this guide, categorized by eight product themes, to help banks rediscover their creative mojo for product innovation.
