What are the key challenges facing commercial and retail banking in 2022? (2024)

Looking to the rest of 2022, companies and individuals will have reflected on the past 12 months and look forward to the upcoming challenges of 2022.

As with all industries, there will always be challenges. No doubt, both retail and commercial banking will have their own hurdles to overcome throughout the year, however they both must keep up with mounting regulations, stay with or ahead of the technology curve and face up to competition from FinTechs, challenger banks and alternative lenders.

This blog will highlight some of the key challenges these industries will face during the rest of the year and beyond.

1. The exponential growth of competition

Something that has increased in recent years is the exponential growth of competition. The banking industry is rapidly shifting by way of new competition from FinTechs, challenger banks and alternative lenders. With the influx of start-ups that specialise in a small number of products and a unique customer service (i.e. flexible journey through digital banking), revenue is being diverted from traditional financial services (big banks) to FinTechs / challenger banks. FinTech companies are bridging the gap between traditional banks and what the modern consumer has grown to expect.

This leads me to wonder:

“Should traditional banks invest more in FinTech to try to maintain a competitive edge and to meet with rising consumer expectations? Should banks seek partnerships or acquire opportunities with FinTech companies to maintain their competitiveness?”

2. Artificial intelligence, is this the future of banking?

FinTech companies are accelerating to new heights using artificial intelligence (AI) to gain and retain clients through personalised (and more efficient) customer experiences.

Banks have a wealth of data, however many of them may also have significant technology gaps. This is where AI can help elevate service levels to new heights. AI is not new to banking, many banks have been using AI to build their own virtual assistants / chatbots for quite some time. Banks are seeking to personalise the banking experience through digital interactions, especially given the younger generation (millennial and Gen Z) are far more likely to switch to digital banking compared to older consumers. However, there is still work to be done to ensure these digital interactions are truly effective and beneficial to the end-consumer (as well as the organisation itself). I am a millennial and my personal experience with the chatbots has rarely been a good one. I always seem to find myself repeatedly answering the same question, going round in circles or playing a game of snakes and ladders. In the end, I hastily search the website or Google for a contact number to call and speak to a human being!

This leaves us with the question:

“What role should be given to AI and what role is best suited to humans?”

AI can provide great insight into customer behaviour and with the right application can support banks shifting to a more customer-centric position to stay competitive. Systems and processes in banks currently generate vast amounts of data; banks should therefore be using this data to discover customer insights and target and service clients better.

It is clear that AI and machine learning is critically important for businesses to succeed in today’s world. There is no doubt that automation will affect every industry, so business leaders must prepare their organisations, and their people, for the changing nature of work.

3. ESG matters, it is too important to ignore?

While 2021 has seen an increasing global focus on climate change, the wider topic of sustainability and the integration of sustainability-related risks is also high on the regulatory agenda for banks and insurers. Environmental, Social and Governance (ESG) considerations are a permanent part of financial services activities, transformation, and risk management.

Financial institutions should prepare for more rigorous disclosure requirements set by regulators in addition to forming sustainable and material criteria to achieve their publicly disclosed emission-reduction goals (reduce their portfolio exposure to carbon emissions and to adopt net zero pledges). A key element to holding a bank accountable and adhere to their pledge on how they measure risk, transparency, and ethical behaviour is through creating new performance metrics to measure progress. As I mentioned earlier in this blog, banks have a wealth of data; this sustainability data is yet to be structured and put into tangible metrics. This is where FinTechs and BigTech companies can really make a difference by developing new solutions that allow banks to address ESG objectives.

As banks disclose their objectives and roadmap on how to reduce their exposures, we will soon see them solidify their stress testing and credit risk modelling capabilities. Not only will this better banks’ risk management, but also prepare them for the anticipated regulatory pressures of increased disclosure on the topic, as more information and expectations are set out in the coming months of 2022.

4. Navigating regulatory compliance changes

Meanwhile, regulatory compliance continues to be one of the most significant banking industry challenges. The Financial Services Regulatory Initiatives Forum sets out the planned regulatory initiatives for the next 24 months. This allows stakeholders to understand and plan for the initiatives which may have an operational impact on them. You can find the latest initiatives grid on the FCA websitehere.

In accordance with the FCA’s regulatory landscape there are several regulations that have been implemented and/or submitted to the Bank of England (BoE) and FCA in the first quarter of 2022. One which I am very familiar with is the Resolvability Assessment Framework (RAF). This framework builds on the work that has been conducted since the financial crisis to create a resolution regime that ensures firms can fail in an orderly way. This framework was requested for top-tier companies first and moving onto mid-tier firms from 2022. These firms had to assess their own resolvability and publish a summary report on the progress made to achieving that goal; which the BoE in turn would assess in a public disclosure. These firms will have already issued resolution outcome reports to the authorities. In June 2022 the first public disclosures will take place. Mid-tier companies will have until January 2023 to establish their framework and submit reports to the authorities to show they can meet resolution outcomes.

By mid-March, merchants and Payment Service Providers will need to adhere to a new set of rules that will change how consumers confirm their identity when making purchases online and online banking. SCA (Strong Customer Authentication) for e-commerce will require companies to enhance the security of payments to limit fraud during the authentication process.

Regulatory reporting has been a hot topic for a while now. ESMA's (European Securities and Markets Authority) review of transparency requirements under MiFIR (Markets in Financial Instruments) are due to be launched in 2022, creating the potential for divergence from the UK transparency regime. Divergence might also be on the horizon under EMIR (European Market Infrastructure Regulation) – although the UK and EU proposals for changes to reporting requirements under the REFIT (Regulatory Fitness and Performance Programme) are broadly similar, they are not identical and so will need careful review, particularly for firms reporting under both UK and EU regimes.

In summary

To summarise, retail and commercial banks have a lot to contend with again this year, from increased competition to AI, ESG and changing regulatory requirements, it’s therefore vital banking firms stay ahead of competition and remain compliant.

The consulting team at Be UK have a wealth of knowledge and experience in helping clients of all sizes (from tier-one to mid-tier firms) navigate these challenges. This experience allows us to deliver projects successfully tailored to different client situations. Get in touch if your firm need to navigate through the sea of challenges that are coming up in 2022, and we look forward to helping shape your company for future success.