Banks are bracing for tougher economic conditions and a possible global recession in 2023, says Forrester in “Predictions 2023:Banking”. “But the smart firms will ensure that the investments they do make will put them in a strong position for the subsequent economic upturn,” says the consultancy. Banks will continue to invest in digital for good reason, the report predicts.
“Banks will redirect 60% of innovation spend to tangible, real-world innovation. Two ways lead out of a recession: Innovate your way out, or rampantly cut costs — digital 2.0 enables both.” But some banks won’t get the opportunity, the consultancy warns, suggesting that 15% of banks will fail to tackle their technical debt and become uncompetitive.
Forrester traces the technical debt — the direct costs and opportunity costs of maintaining outdated legacy systems — starting as far back as the Y2K scare followed by the financial crisis of 2009 and large acquisitions.
The year ahead won’t see much improvement. Before the war in Ukraine, over 70% of banking professionals said their organizations would invest in modern technology, but now direct cost-cutting has become a priority for the majority of banks.
“In 2023, the dire economic situation will force many banks to shift tech spending again. Banks will further reduce the IT spend that financial services firms allocate to transforming their applications and infrastructure.”
And although banks need modern banking cores, much of the investment in the year ahead will be on digital engagement rather than core transformation, according to Forrester.
Tim O’Connor, banking leader and principal at Deloitte Consulting LLP, is more optimistic. Earlier this month he told me that a number of modern, flexible new core systems had appeared in the last three years and banks were showing a lot of interest in implementing them, which is a recent development.
Core replacement is often seen as a career threat because it is so complex and costly. New technological developments — cloud, modular cores, consumption based pricing of services rather than massive hardware investment, and gradual transformation — have made core replacement safer and less capital intensive.
Forrester warns that banks which don’t adopt modern flexible cores will lose out to more agile competitors. Competitors like Apple, which it is poised to exploit the declining trust in banks that had built up during the pandemic, starting with a high yield savings account from Goldman Sachs that it announced in October.
The honeymoon between banks and consumers is over, says Forrester, and consumer trust will be cut even more if the economy deteriorates and banks reduce lending, increase loan costs and engage in more foreclosures.
“Banks must lead with empathy and take a data-driven approach to maintain and earn consumer trust with concrete, targeted actions that help them navigate the cost-of-living crisis.”
During the year ahead, green finance will grow to $1.2 trillion across the U.S., European Union and Japan. But Forrester warns against investing in some green programs.
“We will also see at least 100 banks globally launch carbon trackers, offering customers insights into their transaction-linked CO2 footprint. Banks should avoid these, as they will be a wasted effort; trackers will fail to make a material contribution to financial services firms’ climate-related goals.”
Look for some big changes in fintech.
“By the end of the year, roughly 10% of current fintech companies will either be acquired by a bank or have them take an equity stake of at least 50%.”
Banks will take advantage of plummeting fintech company valuations to make the acquisitions. In addition to buying fintech companies, banks will poach their talent as fintech firms cut employees, and, presumably, some prized perks.
Buying fintech firms or hiring their employees is not without risk — for years banks have had difficulty hiring, and holding, tech experts, and Forrester warns that won’t change without a lot of work by the banks. “Incumbents must ensure that they offer diverse and dynamic cultures to retain new employees when the cycle turns in startups’ favor. This is vital to tackle the 25% churn rate they’ve seen in their tech teams — double the bank-wide number.”