North American bankers sense danger more than most when new entrants join their market, according to a global retail banking survey conducted by the Economist Intelligence Unit. In anticipation of 2020, nearly a third of local respondents (33%) are feeling pressure from the changing competitive environment, compared to 28% globally. An even more pressing issue for North American bankers is keeping on top of changing customer behaviour and demands (cited by 34% for 2020 and 33% for 2025).

As banking clients increasingly seek speed and convenience, and with Google the latest tech giant to announce plans for “smart” checking accounts linked to the Google Pay app, new technologies are understandably seen as high impact trends on the sector for both the short- (40% for 2020) and medium-terms (43% for 2025).

In the long-term, emerging regulation of digital technology is viewed as a prime source of disruption for North American bankers (36% for 2025). Over a quarter (26% for 2025) cite open banking as a key trend.

Lessons learnt

Challenger banks are also making their presence felt in North America, be they domestic startups such as Chime or Simple—now part of Banco Bilbao Vizcaya Argentaria (BBVA)—or overseas brands such as Monzo and Revolut which are now expanding their footprint. But as in Europe, a comparable developed market, banking customers are often hesitant to switch their primary banking relationship, even when a better deal is on offer.

However, the number of banks choosing to develop new greenfield initiatives has increased from 13% in 2018 to 29% in 2019, coming closer to the worldwide average (36%).

There are success stories, but also less fortunate examples when it comes to large banks creating new digital brands. JP Morgan Chase closed its fee-free mobile bank, Finn (which even offered limited access to physical branches), after reportedly attracting fewer than 50,000 customers.

Goldman Sachs has been more successful in attracting customers to its new savings brand, Marcus. The online savings and loan platform has no checking account and no app, and has attracted around 4m accounts and nearly US$50bn in deposits.

Despite advantages in data analytics and the freedom afforded by entering the market with a clean slate, it is worth nothing that big tech’s move into banking may not always be a smooth experience. Apple has faced criticism for alleged gender bias for its new Apple Card, operated by Goldman Sachs.

Customer demands

These events beg the question: what do American customers want? Finn did not offer the high rates that Marcus does, and its app may not have differentiated itself sufficiently from JP Morgan Chase ’s own mobile offering. A 2018 S&P Global survey suggests fees are the key consideration for recent and potential switchers, with incentives and interest rates ranked ahead of the mobile app experience for those likely to move in the next 12 months.

But creating a better experience with lower overheads is hard when mobile platforms are built on old architecture, as Finn’s was. Colin Walsh, founder and CEO of start-up Varo Money, hopes to avoid the same traps.

“A new build is much easier than a renovation,” he says. “In terms of the technology, [corporate] cultures that are not in a growth mindset and a legacy of regulatory issues, it is impossible [for traditional banks] to focus on customers and innovation.”

The innovation angle may explain why payment players are seen as a far greater and more immediate competitive challenge (cited by 41% of respondents for 2020), than the neo-banks (16% for 2020). Banks are also conscious of the upcoming threat posed by big tech firms teaming up with fintechs to create hybrids (cited by 29% for 2025) where the app provider has no need for a banking licence, and is not required to comply with regulatory capital ratios. Survey respondents also note the emergence of robo-advisers as an issue in the medium-term (23% for 2025).

Regulatory developments

Although tech firms may be more than capable of launching new services that fully replicate the banking experience, they appear to be holding back. North American respondents are the least likely to agree that sandbox collaboration between banks and fintechs will be mainstream by 2025 (48% vs 56% globally).

Federal regulation of fintechs, e-money providers and data has lagged behind much of the rest of the world, although Canada is ahead of the US in developing an open banking framework. In fact, Canadian banks have launched initiatives to study opportunities around open banking and are starting to use application programme interfaces (APIs) in partnership with fintech firms to deliver new products.

As things stand in the US, it may simply be too difficult for tech giants to offer a consistent datadriven service with a relatively low regulatory burden across 50 states and 10 provinces until the rules are set. Federal agencies and state supervisors continue to argue, often in the courts, about who should have jurisdiction.

The primary focus for North American banks is to become far more agile (cited by 38% of respondents for 2020) and better-equipped to bring new features and products to market, but that is complicated when the rules of engagement have not been set.

Therefore it comes as no surprise that, when it comes to regulatory matters, North American bankers worry about a lack of international API standards (27%) and inconsistent data protection (27%). There are particular concerns about the regulatory risks of cloud-based services (41%). With a plurality of local respondents planning an open banking strategy (37% for 2025), the need for greater regulatory clarity will only become more pressing.

In the meantime, North American banks are focusing their attentions on becoming digital ecosystems which offer bank-related and non-financial services from third parties (44%). Only a few are attempting to build niche propositions (16%) or opting to become a third-party aggregator (12%).

Enhancing user experience

Digital investment in North America focuses on cyber security (45%), with significantly more respondents citing it than in Asia, Europe, the Middle East and North Africa. In line with the global average, almost seven in every ten (68%) survey respondents expect cyber-security rules to be tightened in the next five years following a systemic bank failure.

North American bankers are also investing in cloud-based technologies (36%) and artificial intelligence (AI) platforms (30%).

More specifically, North American banks are most interested in customer micro-segmentation (15%), hoping that AI will reveal new sell or up-sell opportunities. Deemed equally important, banks are seeking to boost their anti-money laundering and “know your customer” (AML/KYC) capacities when financial products are applied for or used (15%). Many also believe AI technology will help them enhance user experience by developing voice recognition features (14%) and greater customer personalisation (14%).

However, uncertainty about the security of personal financial information is cited by nearly half (45%) of North American bankers as their customers’ top concern when it comes to the use of AI.

The Bank for International Settlements recently highlighted that data-driven big tech firms could be a force for good in terms of financial inclusion. But it also underscores the downsides to a purely data-driven banking model, warning that there are “some signs that big techs’ sophisticated algorithms used to process personal data could develop biases towards minorities”.