Five top banking trends for 2023

December 19, 2022 3:05 PM

Financial institutions are prioritizing improving customer experience and increasing tech spending in 2023 while keeping a wary eye on the economy – economic uncertainty could mean deja vu after a year of record-breaking inflation, rapidly rising interest rates, a cryptocurrency cooldown and the continued global pandemic.

Leaders from banks, credit unions, fintechs and advisory firms have been making their road maps for next year, and are planning to increase their technology spending to meet customer demand and they're keeping a steady watch on the economy.

Research from an Arizent survey conducted with American Banker shows customer demand for digital enhancement continues to drive the financial services industry toward innovation, and a mixed outlook on recovery means some companies are adjusting their risk appetites.

These predictions represent data compiled and analyzed by American Banker in November, based on an Arizent survey of 257 leaders, managers and staff members in the banking and fintech industry. Among respondents, 53% are from banks, 20% are from fintechs or tech vendors, 13% are from credit unions, 6% are from payments firms and the remaining are from consulting, analyst or legal firms. The companies range in asset size from below $1 billion to above $250 billion.

Here are some of the top issues that financial institutions are paying attention to as they head into the new year:

Customer demand will drive strategy

Financial institutions say meeting customers' changing demands is a concern; more than half of respondents say it's a key challenge.

Companies are working to meet the rising demand for digital channels through tech initiatives, branch consolidation and fee restructuring. Customer data platforms, which gather and analyze customer information to create personalized solutions, are among top technology priorities for about 30% of respondents. One-fifth of respondents said if they could fix one issue with a magic wand, it would be the ability to understand and react to customers' needs.

To accommodate customers' shift from in-person to digital interactions, many banks also plan to reduce their branch network in 2023, especially among global and national banks, continuing a trend that took off amid the pandemic. While it's possible the pace of closures slows next year, more than one-third of banks said they expect to shrink their branch footprint. Credit unions, though, are zigging by adding branches.

About half of banks said they plan to reduce overdraft fees, following the lead from many global banks that have cut the fees to appease regulators and drive customer acquisition. Overdraft fees dipped in 2022 for the first time in two decades, per Bankrate.com. This past year, the website found the average overdraft fee was $29.80, down 11% from 2021, though some banks are still searching for ways to make up the lost revenue.

Economic recovery will remain uncertain

Even though the economy is cyclical, macro conditions have made the last year painful for some. More than one-third of respondents said changes in the macroeconomic cycle were affecting their companies.

Most companies don't expect full economic recovery until at least the second half of 2023, and a majority of those think it won't be until 2024. Recovery timelines didn't vary much among types of companies, but respondents from larger firms generally showed more optimism for a swifter recovery than those with fewer assets, with one exception: While overall only 10% of respondents believe the economy has already recovered, that belief was stronger among smaller companies. Though Arizent survey respondents were generally gloomy about the outlook for recovery, recent Boston Consulting Group research showed bankers don't expect a recession to be too severe.

Almost all financial institutions are at least somewhat worried about the impact of inflation on customers, Arizent data showed, with only 4% indicating they weren't worried about inflation's impact. Of respondents who were very worried about inflation, more than 60% were also less optimistic about a swift economic recovery.

Effects of rising interest rates, and subsequent inflation, can be wide-ranging. For example, fintechs that work in the consumer lending space could see their borrowers begin to default on loans as cash spreads thinner. Payments and payroll firms could feel pressure to speed up services. Higher rates can provide a boon for banks due to interest-related income, but can also be offset by consumers who are too crunched to use those banks' services.

Technology spending will increase

Most surveyed companies plan to increase their tech spending by at least 10% in 2023. Half of respondents, even more among companies with less than $10 billion in assets, said the changing competitive environment will be one of the most impactful trends for the next three years as new entrants, fintechs and major corporations get into financial services.

About one-third of respondents said they don't plan to increase their tech spend next year, most of whom also said they were worried about inflation.

Tech giants like Amazon, Apple, Facebook and Google have continued to expand their financial services offerings, such as lending, payments and other products, and about half of financial institutions believe the corporations will become major competitors in the next three years.

Financial institutions plan to apply tech dollars, in-house innovation or bank-fintech partnerships to initiatives that help them understand their customers and clients and create personalized experiences efficiently and safely. Top tech priorities for 2023 include: data and analytics, enhanced security and fraud mitigation, digital payments, cloud-based architectures and mobile apps.

Crypto transactions will stay on the horizon

Cryptocurrency markets were steamrolled in 2022 as a spate of leaders in the space like Celsius Network and Voyager Digital filed for bankruptcy and FTX fell from grace. Even as the "crypto winter" dashed currency valuations and trust in its future, financial institutions were divided on how to integrate the digital assets into their strategies.

More than one-third of companies said it's likely that they'll enable crypto transactions by 2025.

As regulators in the United States work on definitive policies to supervise crypto, many legacy and traditional financial institutions' crypto plans hang in the balance. About two-thirds of respondents said Washington's interest in developing regulations around cryptocurrency will cause at least moderate change in competition among payments. The SEC issued Staff Accounting Bulletin 121 earlier this year, which requires companies that custody crypto to list those assets as liabilities on their balance sheet, an expensive guideline.

M&A won't rebound soon

The past year marked a significant slowdown in dealmaking, in parallel with the curbed economy, following a hot merger and acquisition market from mid-2020 until the end of 2021. Most companies don't think M&A will pick back up until at least 2024, and about 12% of respondents said they don't expect it to rebound.

The perfect storm that had led to increased M&A subsided: Interest rates rose, making access to capital tighter; inflation's pressure on consumers put more risk on some companies' balance sheets; and increased spending dented previous heaps of capital. As of the end of November, U.S. banks had struck 149 M&A deals, compared to 208 for the whole year in 2021, per S&P.

Additionally, President Biden's call for more scrutiny in bank deals has contributed to delays in approval for proposed mergers and acquisitions. However, according to a recent survey conducted by McKinsey & Co., 60% of bank corporate-development professionals said the next 18 to 24 months will provide more potential for merger value than the past two years. The tighter economy could mean lower valuations and higher demand for sales.