A possible recession, combined with heightened demands from customers and the continued shift to digitization, present a challenging year for the industry.

Traditional banks, it seems, are fighting a war on multiple fronts. They face intense competition from fintechs which, unburdened by legacy tech, have been embraced by younger consumers. In many nations, the regulatory burden for banks has never been greater. This was challenging enough during boom times—and now a recession has been added to the mix. Small wonder that major players are closing branches and otherwise tightening their belts.

Faced with this fragile economy, banks need to double down on providing guidance and high-quality customer experience in 2023. However, their position as a natural home for financial products and advice is under threat from Fintechs and new market entrants providing banking services and a range of adjacent businesses offering broader financial needs.

To meet these challenges, traditional banks must become more agile and rethink operations. But many are still constrained by legacy infrastructure. To stay on top, banks must focus on developing customer-focused products and experiences that are data-driven and cross-channel, and must offer guidance during these volatile times.

Cognizant’s 2023 banking outlook offers six key trends that are likely to impact the market over the next 12 months:

1.    Balancing modernizing the core and tackling technical debt

In a recessionary environment, banks will be put under pressure, facing added scrutiny over the investments they make. As a result, some will be tempted to shift technology and innovation budgets away from transforming core systems to digital engagement solutions.

Technology investments will likely be required to demonstrate faster returns and long-term projects paused to focus on short-term wins. However, players that fail to tackle their technical debt will lose out to agile rivals, risking their position when the inevitable economic upturn takes hold.

The longer banks wait to modernize their core, the higher the risk of losing business to competitors. Those that dial up digitalization in 2023 will be best positioned to harness technology to drive revenue and innovation at scale in coming years.

2.    Building skillsets for the future

The World Economic Forum’s 2020 Future of Jobs report estimated that by the middle of this decade 85 million jobs could disappear, mainly due to advancements in technology. Conversely, the report added, another 97 million roles could be introduced to supersede those redundant roles. 

The broader financial services industry—and the banking sector in particular—is expected to undergo significant change regarding requisite skillsets. This year, banks should do more to future-proof themselves, taking action to narrow both current and potential skills gaps.

Banks are caught between managing legacy tech and attracting, retaining and developing the talent to digitize operations. The most successful banks will look to build hybrid skills pods that combine business domain expertise, DevOps, data scientists, digital engineers, coders, and agents of change. These hybrid groups will enable agile operations that drive innovation and allow for digitization at scale.

3.    Empowering back-office operations to shape strategy

Banks have made significant advancements in modernizing their front-office, customer-facing systems, but many struggle to align front- and back-office systems. The lack of digitization in the middle and back-office environments limits the ability to fully realize the impact of front-office investments, resulting in an inadequate user experience.

The back office is expected to follow through on the commitments made by the front office, which is causing tension. This is compounded by the fact that back-office operations continue to affect customer satisfaction, putting a strain on resources and capacity.

To address this, the back office needs to view itself as a new front office. However, legacy infrastructures, technical debt and complex processes make it tough to be reactive enough to meet customer needs.

Investing in front-to-back modernization, aided by cloud migration and robotic process automation, can link customer-facing businesses with operations and back-end servicing to reduce inefficiencies.

In today's digital age, in which data management is crucial for business success, it’s essential that banks empower their back-office operations with the information and resources needed to drive strategy and shape the future of the organization.

4.    Nurturing the decentralized finance movement

The decentralized finance (DeFi) movement is intrinsically linked to cryptocurrency and distributed ledger technology. So some will understandably view the downfall of crypto exchange FTX as a reason to take a pause on DeFi.

But that may be a missed opportunity. DeFi and crypto should be analyzed separated, and there is much potential in the former. Paradoxically, the fall of FTX and crypto’s market stagnation will actually trigger significant reform in this space.

DeFi, after all, uses emerging technologies from third parties to provide financial services that remove traditional centralized intermediaries. It encourages collaboration beyond traditional banking boundaries and enables a more democratic financial system.

Open finance has widened its scope to include mortgages, wealth management, insurance, savings and capital markets. These use cases are giving rise to concepts such as embedded finance, buy-now-pay-later, and super apps, which allow banks to deliver hyper-personalized products and become more customer-centric.

5.    Serving a multi-generational society

Digital natives expect a banking experience far different from the one that satisfied (and satisfies) their parents and grandparents. So how does the banking industry cater to multiple generations?

The UK’s Financial Conduct Authority has calculated that running a bank branch costs $730,000 per year. In its current guise, a branch can’t compete with digital outcomes in 2023, which is precisely why there must be a transformation.

There is an opportunity to rethink branches to serve communities better. The cost-of-living crisis is likely to hit those with the lowest incomes the most—and access to financial services brings with it a “poverty premium,” so the level of inequality will widen. Shifting the purpose of a branch from selling financial services products to well-being, economic enablement, and education could be differentiators.

Whether or not retail banks retain their branches, the direction of travel is clear. Recently, banks have been teaming up to launch shared ‘banking hubs’ to help offset branch closures, improve accessibility, and service a range of generations. Meeting customers where they are most comfortable, either online or offline, will be critical in 2023 and beyond.

6.    Continued maturation of the metaverse

It may seem today that the capabilities of the metaverse have been massively over-hyped—but believe it or not, they may well be under-hyped if you take the long view. Understandably, many question the potential of the Metaverse’s value for businesses, but it’s only at the start of the maturity curve.

The metaverse will develop in 2023, and some big banks have already placed their long-term bets. Last February, JPMorgan became the first global bank to invest in a popular metaverse platform by establishing a presence in Decentraland. HSBC soon followed, buying a plot in the Sandbox, a gaming platform.

But the challenge most banks have this year is working out how to engage with the underlying technology and determining what platforms they want to build on to inform business strategies and visions.

A mindset shift is required. Banks must not try to simply replicate their existing business models in these digital worlds by, for example, creating virtual branches. Furthermore, interoperability is not widely adopted by the big tech companies building the hardware for digital worlds. Hence, there is a unique and exciting opportunity to provide that missing element that will trigger mass adoption and innovate around identity, verification and payments.

For more insights, read our 2023 outlook series on Cards & Payments and Capital Markets, visit the Banking section of our website, or contact us.