Driven by new technologies, consumer expectations and risks, banks are increasingly forced to think and act differently, The boldness with which they embrace change in the time ahead will determine which scenario unfolds between now and 2035. “Massive changes are on the horizon.”
So writes The Economist Impact in a white paper on the future of banking. Based on interviews with experts including the IMF, Grant Thornton LLP and the OECD, The Economist’s research arm sees three potential scenarios unfold between by 2035.
Underpinning these three scenarios are five megatrends, including accelerating digital revolution, increasing economic fragmentation and growing common global challenges such as climate change. In addition, experts note that efforts to combat persistent economic and social inequalities are facing increasing headwinds and ethics are becoming more central to business practices.
Scenario 1: radically different business models
“Once considered challengers, fintech and big tech companies are leading players in Europe and the US in 2035, having carved out a large share of the market by offering a superior customer experience built around trusted smartphone apps and free, frictionless mobile payments,” said The Economist Impact on this first scenario. A scenario in which traditional banks have embraced radically different business models, in an attempt to survive.
A scenario, moreover, where banks have clear and actionable information obligations, giving customers more control over their own money and data. Meanwhile, payments in Europe and the US go by fingerprint and bank fees have been abolished - as have cash and credit cards.
A challenge of this scenario for banks will be to modernise their systems and gain customers’ trust. An opportunity lies in making services more accessible to populations that were previously “bankless”.
Scenario 2: Paradigm shift for climate action
“After decades of division and delays among major powers on the climate crisis, substantial collective action occurs in 2035,” writes The Economist in its second scenario. “The world is on track to limit global warming to 1.5°C above pre-industrial levels by the end of the century, preventing the most catastrophic effects of climate change.”
In this second scenario, the way people live and how businesses operate has changed “substantially”. “The digital revolution that began transforming the nature of communities, connectivity and work decades earlier is helping societies reach climate goals.”
Shift away from carbon
In an outlined path to 2035, the white paper describes a surge for ESG investments, due to increasing consumer demand. “At the same time, institutional investors rapidly shifted away from carbonintensive industries, voting with their dollars for a rapid transition to a low-carbon economy.”
A challenge of this scenario lies with internal culture change at banks, as well as short- and longer-term trade-offs. “In the short term, carbon-intensive industries will continue to be profitable, making divestment difficult. But the window to secure a green transition in the long term is rapidly closing. Thus, it is imperative that banks set long-term objectives on climate action, creating a clear framework for moving away from fossil fuels in the short term. This necessarily involves a better understanding of climate risk.”
Scenario 3: A fragmented world
In the third and final scenario, the period of globalisation is over by 2035. “That liberal economic order has faded, fragmented by a deeply multipolar geopolitical landscape,” the experts describe.
“Superheated technology competition between the US and China is creating distinct spheres of influence. China dominates in some hightech realms, such as AI, quantum computers and autonomous vehicles, while the US leads in core capabilities such as semiconductors and operating systems. Internet governance rules have splintered. The US and Europe host an internet defined by openness, decentralisation and industry leadership, while the Chinese government controls a closed and centralised system.”
New markets
The new geopolitical and economic landscape created in this scenario will significantly affect the risks for banks. But opportunities will arise thanks to digital technologies and fast-growing new markets, said the experts. Where a fragmented system adds costs and increases cybersecurity risks, banks will be better able to compete with fintech players if there is a digital currency and can find new customers in Africa and Asia.
“It is entirely possible that tech companies will not have taken over the banking sector by 2035. Progress on climate change may have stalled. US hegemony of the global financial system could remain intact. But apart from the three specific scenarios presented here, the megatrends that will shape the future of banking in the coming years leave little room for doubt: massive changes are on the horizon,” concluded The Economist Impact based on their interviews with the experts.
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