Artificial Intelligence (AI)

• The banking industry is already using artificial intelligence (AI) and robotics for certain consumer banking investment products and services. There is no segment of the banking process that is not transforming because of AI.
• Some areas of deployment of this technology in the banking industry are to "address key pressure points, reduce costs, and mitigate risks." Specifically, for the consumer banking investment products and services, the technology trend makes "banking processes faster, money transfers safer, and back-end operations more efficient."
• This technology trend can evolve in various capabilities such as "social and emotional intelligence, natural language processing, logical reasoning, identification of patterns and self-supervised learning, physical sensors, mobility, navigation, and more." It is a trend that looks beyond displacing the bank teller, which is even a key component of consumer banking investment products and services. As this trend evolves with the capability to learn, financial experts are projecting more gains in new models and platforms soon.
• The most visible way how this technology trend would impact this segment of the consumer banking industry is the use of chatbots and robots for customer service. Another way this technology is impacting this segment of the consumer banking industry is the facilitation of mobile banking, which allows all-round-the-clock access "for consumers to conduct banking operations."
• One expectation of this technology in the consumer banking industry is that it will save costs remarkably. By 2023, the impact of AI would have seen about $447 billion in global savings in banking and financial services. The technology will also impact this segment of the consumer banking industry by ensuring frauds are detected easily and security is formidable.
• Another way this technology is impacting this segment is through the help it offers consumer banking products and services in "risk management and lending decisions." AI is also the foundational technology for technologies like big data analytics and others. Through it, other technology can interface and run efficiently for efficient results in this segment of the consumer banking industry.
• A study by PricewaterhouseCooper (PwC) confirmed that 52% of decision-makers in the banking and financial industry putting substantial monies into AI. 72% of these top executives believe this technology will give them a business advantage.
• JPMorgan Chase is an example of a bank experiencing this impact through the "use of AI to streamline customer service." The same goes for Bank of America and Wells Fargo.
• The United States is a country that is significantly experiencing this impact. Through a conversational AI by a US-based company, banks in the country are using this platform to "build their chatbots and virtual assistants."
• Known as KAI, this platform uses "AI reasoning and natural-language understanding and generation that can handle sophisticated questions about finance management."

Blockchain

• Although blockchain as technology was first used in cryptocurrency, it is a technology that is trending in the banking sector. According to the Harvard Business Review, blockchain "will disrupt banks the way the internet disrupted media."
• Because it is transparent and highly secure, the banking sector will find the technology cheap to operate. Financial experts believe more banks will adopt this technology for their institutions, particularly in consumer banking investment products and services. This is because this technology will improve consumer satisfaction.
• This technology trend can "provide banks with greater transparency and easy accessibility while reducing the needs of third-party involvement." However, the transparency of blockchain networks to members could be a "significant barrier to adoption at scale." This is because there would be instances where banks would want to keep the identity of certain consumers anonymous.
• According to Santander bank, "blockchain can help reduce banks' infrastructure costs by between $15–$20 billion per annum by 2022."
• Blockchain solutions will impact this segment of the consumer banking industry because it can "improve security, save money, and improve customer satisfaction."
• Also, this technology will impact on this segment of the consumer banking industry because it makes use of "a distributed database that can keep track of transactions in a verifiable and permanent way." Experts also believe that the use of this technology "will become an integral part of financial institutions’ technology and operational infrastructure."
• One impact of this trend can cause in this segment of the consumer banking industry is convenience revolution. Blockchain-powered tools can lead to all-round automate banking operations, which may encompass "self-executing loans, round-the-clock deposits and transfers, and faster transactions without ever having to deal with a human."
• The expectation of blockchain technology in retail banking could be deployed to handle "blockchain’s three key strengths — data handling, disintermediation, and trust, which cover cases of remittances, KYC/ID fraud prevention, and risk scoring." In this segment of the consumer banking industry (identity fraud alone), banks lose $15-$20 billion every year. With blockchain technology, however, this annual loss from fraud will reduce by almost $9 billion.
• This technology is a trend because many experts recognize it as a potential solution to many issues in consumer banking investment products and services. More so, many banks, like JPMorgan Chase, National Bank of Canada, Royal Bank of Canada, and Scotia bank, are adopting this technology. For instance, some banks mentioned above collaborated with a fintech company to develop "a digital identity and authentication service that simplifies consumer access to online services, including digital banking."
• A country like Singapore is significantly experiencing this impact by using this technology to detect ID fraud in consumer banking investment products and services. "HSBC, Mitsubishi UFJ Financial Group, and OCBC Bank" are three banks in Singapore that collaborated with a blockchain-based data-storage start-up to create a digital identity platform for KYC. The project predicts that these banks will mitigate costs by 25%-50%.

Research Strategy

Trend #1: The Shift to Digital Banking

• According to BusinessInsider, "The most prevalent trend in the banking industry today is the shift to digital, specifically mobile and online banking...." Today's banking customer does not want to visit a physical bank branch to carry out transactions. So banks have invested in software that enables customers to use their mobile phones, tablets, and other devices to perform banking transactions and manage their wealth.
• There is a difference in the generations that prefer digital banking to visiting a branch. "This is especially true of Millennials and the older members of Gen Z, who have started to become the dominant players in the workforce (and the biggest earners)."
• More banks are aiming their investment and other products at Millennials because of the generation's large size, their changing wealth needs, and their own increasing value. Some banks have readied new products, including “impact investing,” new "pricing models (for example, subscription-based pricing by Charles Schwab), and new asset classes (for example, music royalties by Royalty Exchange)."
•  Social media have become the primary media through which to connect, engage, inform and understand banking customers. Social media are also the places where customers do their research and "compare banks’ offerings." Millennials read reviews and post reviews of banks, stores, and every other form of commerce today.
• According to BusinessInsider, when digital banking usage is analyzed by generation, "97 percent of millennials use it (up from 92 percent in 2017), 91 percent of Gen Xers (up from 86 percent) and 79 percent of Baby Boomers (up from 69 percent)." As indicated before, today's customers do their research and comparisons. "64 percent of mobile banking users said that they would research a bank's mobile capabilities before opening an account, and 61 percent say they would change banks if their bank offered a poor mobile banking experience."
• The four largest banks offer the most digital services on their mobile apps, and that is why Millennials use these banks. Bank of America, Chase, CitiBank, and Wells Fargo together have 44 percent of Millennial business.
• The digital services available at the four largest banks include loan applications, credit score access, payments, budgeting, ATM, and 13 others.
• During the COVID-19 pandemic, nearly 17 million Americans and millions of other people lost their jobs, either temporarily or permanently, and the availability of digital banking became very important to everyone who could not leave his or her home because of government restrictions.
• The economic effects of the pandemic are expected to overwhelm the global economy, which was experiencing a financial slowdown prior to the start of the pandemic.

Trend #2: Personalization to a Segment of One

• According to Accenture and TheFinancialBrand, some banks are now directing their marketing at customers based on customer "lifestyles, values, aspirations, mindsets and underserved needs.” Banks have gone beyond personalization by age, gender, or generation, to create messages and experiences for "the segment of one." Such a high level of personalization is achieved through careful use of "data, advanced analytics, and digital technologies."
• More and more, existing banks are organizing themselves around customer needs instead of around bank products as they have done traditionally. Banks are striving to offer "seamless customer experience", through integration of sales and service in such a way that customers perceive their banks as meeting individual customer needs, not selling generic products.
• Banks are using new technologies such as Artificial Intelligence (AI) and automation to offer customers the banking services they need in a personalized manner. Two examples of these new technological offerings are available at Commonwealth Bank of Australia (CBA) and OCBC. "The CBA launched in mid-2019 its CommBank App 4.0 update which offers personalization tailored to individual customer needs. In Singapore, OCBC has embedded Clinc’s conversational AI in its mobile app to provide customers with voice-enabled instant access to their financial information."
• CBA has seven million digital customers who use CommBank 4.0. The app can be personalized to manage cash flow, tell a customer whether a payment has been made twice, and alert the customer when there is potential fraud on one of the accounts, among other capabilities.
• Trim is an AI "money-saving assistant that connects to user accounts and analyzes spending." Trim analyzes a user's finances and offers ways to save money personalized to each user. This app for smart phones can cancel unused subscriptions, find better quotes for insurance, and negotiate bills. "Trim has saved $6.3 million for more than 50,000 people, according to a 2016 VentureBeat article."
• During the pandemic, personalization is becoming more important to banking customers as money becomes tight. No one knows the full economic effects of the pandemic, but predictions from places such as the International Monetary Fund (IMF) indicate that the consequences for many countries will be dire.

Introduction

Impact Investing

•  The Global Impact Investing Network (GIIN) defines impact investing as "investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return". Impact Investing is also referred to as SRI investing which stands for sustainable, responsible and impact investing.

• As more people begin to consider their social and environmental responsibilities, impact investment is an accelerating movement focused around sustainability. It has grown by 600% in the past ten years with more than $30 trillion assets.
•  83% of consumers expect companies to do what they can to positively impact both society and the environment. Millennials want both purpose and financial achievement and are pushing companies to fulfill that demand.
• Who manages these portfolios? According to the GIIN, "Over 60% are asset managers. About one in five are foundations, and the rest include banks, development finance institutions (DFIs), family offices, and institutional asset owners." Their research revealed 58% of investors are headquartered in the United States and 21% in Europe.
• The Investments and Wealth Institute cites the following reasons for client demand in the ESG (Environment, Social, Governance) arena: Client demand, mission, social benefit, returns, risk, fudiciary duty, UN goals around sustainable development, and regulatory compliance.
•  Citi recently launched a $150 million dollar investment that will impact society in a positive way. They recognized themselves as the first bank to launch a fund of this size with its own capital. They intend to address workforce development, financial capability, sustainability as well as physical and social infrastructure to close the gender and ethnic gap.
• The Bank of Italy has recognized the importance of ESG and has woven it into the fabric of their business.

Food and Agribusiness

• Startups in the food and agribusiness has grown 250% in five years, with strong investments in vertical farming, meat substitutes and dairy alternatives.
• The growing focus around sustainability and environment has driven demand for meat alternatives like Beyond Meat who aims to replace animal agriculture. Over $800 million dollars have been invested in food startups in 2019 including Impossible Foods, the recipient of $300 million. On their website, they stated their mission is to "make food that's better for people and the planet".
• Sales for plant based foods grew 17% in 2019, while overall food sales grew 2%. Since 2009, $17 billion has been invested in plant based foods, most of which has happened since 2017. The alternative meat market can reach $40.5 billion in ten years.
•  Stifel Financial Corp's Consumer Investment Group has hired 3 new senior leaders to take on the Food, Agribusiness and automotive aftermarket sectors. They've identified these areas as "core consumer growth sectors" for their business.

Research Strategy

Typical Laws and Regulations In The Consumer Banking Sector

• The major international banking regulation is the Basel Accord, that prescribes for banks' capital reserve requirement by the Basel Committee on Bank Supervision. The first edition was published in 1988 and the latest edition was issued in 2013. The international accord is the guidance for all banks to manage capital, market and operational risks, which ensures banks have sufficient capital reserves to absorb unexpected losses.
• On the national level, legislation such as Bank's Act and Securities Act is the main regulatory guidance for overseeing consumer banking and investment products. For example, National Bank Act, Securities Act, Investment Company Act, Dodd-Frank Wall Street Reform and Consumer Protection Act in the US; Financial Services and Market Act is the main framework law for the banking sector in the UK; Banking Ordinance and Securities and Futures Ordinance are the primary legislative tools governing the banking and securities sectors in Hongkong.
• In the US, Payment Services Directive II (PSD2) was effective in promoting innovation and competition for banking payment transactions made by customers in 2018.
• Other regulations that are not specifically for governing consumer banks and investment products also have regulatory effects in protecting consumers, such as consumer and data protection acts, and employee professional conduct regulations. In the US, a new bill on Economic Growth, Regulatory Relief and Consumer Protection, was signed into law with some amendment in Dodd-Frank Act in 2018, which aimed to impose stringent rules on large banks. For example, the State of California passed the Consumer Privacy Act in 2018 and the other states are expected to enact similar regulations.
• In 2019, the European Parliament revised the Capital Requirements Directive and Regulation, namely CRD 2 and CRD5, which aimed to strengthen the capital and liquidity positions of the European banks and help establish a banking union. Moreover, banks in the European Union (EU) have made significant progress in implementing the General Data Protection Regulation (GDPR).
• In the Asia Pacific region, countries like China and Malaysia, have focused on employee conduct management, especially the accountability of senior managers. In 2019, banking regulators started to monitor the implementation of the employee conduct rules by setting harsh requirements on enforcing the professionalism of banking staff.

Regulatory Changes In Past Five To Ten Years

• Aftermath 2008 global financial crisis, there has been a synchronization trend in consumer banking regulations. However, the situation started to change in 2018, when a divergence in banking regulations emerged globally. The consumer or personal banking segment has seen an increased dynamic on regulatory changes in the US, Europe, and the Asia Pacific region. Major banking legislation changes every few years, followed by related regulations and interpretations, where safety, soundness and consumer protection are often the key focus.
• Since 2018, consumer banks have witnessed an increased level of regulatory changes, especially in the US and European regions. Banks believe that regulations are their biggest challenge and would weave regulations into their daily operation, instead of seeing regulations as burdens.
• Banking regulations have started to become prescriptive and local in nature, as national governments implement economic policies through influencing the financial system, such as incentivizing lending activities in favor of certain population groups, for example, students and mortgage bond borrowers.
• There is an increasing trend of consumer banks in emerging markets to join restricted economies such as China, India and Korea, and set regulatory barriers restricting foreign banks from entering their financial systems. This would in turn bar emerging market banks from operating overseas, except there are bilateral agreements.
• National governments are expected to privatize state-owned banks and influence the consumer banking system through regulations. With the national governments' objective to reduce sovereign risk, more stringent capital requirements are expected to be imposed on retail banks.
•  Regulatory reforms have been prevalent globally, ranging from China's liberalization of interest rates to the capping of bank card fees in the US. These reforms have resulted in lower revenues while cost-cutting measures have not been effective at consumer banks, which was exacerbated by rising regulatory compliance costs. Local regulations has been a critical factor that raises cost levels and expense ratios.
• In Europe, the Payment Service Directive (PSD2) for the European Union has recently allowed third-party financial service providers, such as fin-tech startups to share customers' transaction data with banks, which jeopardizes banks' monopolistic position of owning customer data causing rising market competition. Moreover, the European Commission was in the process to establish a banking union but faced some challenges from changing trading book capital requirements by the Basel Accord.
• In the US, the fiduciary rule of the Department of Labor is expected to be replaced by a new best-interest rule of the Securities and Exchange Commission.
• In Canada, Bank Act amendments in 2018 incorporated the G20 or OECD guidance on financial consumer protection, but many of the amendments, regarding consumer protection, is not digitally-friendly. In other words, banks' disclosure requirements have not fully embraced the elements of digital banking services and products. In comparison, the US has demonstrated a good example in this regard.

Geographical Structure of Consumer Banking Regulations

• Global consumer banking regulations on capital adequacy, liquidity and associated stress-test requirements, such as the Basel Accord, continues to evolve, which will eventually set higher standards and stringent rules on global banks. For example, banks are required to provide more detailed portfolio metrics and their development trends, while being able to develop models that quickly demonstrate various risk scenarios.
• In the US and UK, national banking regulations are expected to be more complex, with regulators being less flexible and more suspicious on how banks improve their compliance, reporting, business processes and data. For example, heavy penalties related to LIBOR and US mortgages were imposed on banks due to increased scrutiny by governments and national banking regulators.
• Post-2008 financial crisis, the converged regulations in the consumer banking sector has started to diverge since 2018, with banks beginning to shift their focus to home markets at the cost of globalization and economies of scale. Individual countries have begun to be driven by local regulatory constraints and national economic policies set out by governments in promoting economic growth. This is because banks have fully integrated the policy objectives of banking regulators and national governments into their daily operations.
• In 2017, the US, Australia and the SEPA zone rolled out the new real-time payment infrastructure as a compliance project mandated by regulators. 85% of banks expected the new infrastructure to be a future revenue growth driver, as it formed the foundation of new product enhancements.
•  Open banking regulations that form a framework allowing consumers and banks to authorize third-party financial service providers to share consumers' financial transaction data with banks, using secure online channels. It is expected to fragment retail assets and liabilities of banks Europe, Hongkong, Australia, Singapore and soon Canada. It would increase market competition and business opportunities between consumer banks and third-party financial service providers, such as payment specialists.
• Consumer protection measures have become less effective to guard consumers against all risks, such as risk derived from emerging financial technologies. In 2019, the World Bank published a discussion note and expected to see renewed regulatory approaches, regarding the design of retail banking products and their distribution processes.
•  Innovation-friendly regulatory reforms, such as fintech startups, have gained traction between 2017 and 2019. New consumer protection regulations on digital banking products and services are on the rise.
• For more detailed similarities and differences, please refer to Baker Mckenzie's financial regulatory guide published in 2017, which outlined the fundamental aspects for banks, such as main regulations, licensing and authorization requirements, among others in 41 countries.

Research Strategy