Banking 2025: Digital Revolution Meets Economic Reality

Jim Marous (00:11):

Welcome to another episode of Banking Transformed, the podcast that dives deep into the trends, innovations, and strategies shaping the future of banking. I'm your host, Jim Marous, owner and CEO of Digital Banking Report, and co-publisher of The Financial Brand.

Jim Marous (00:26):

Traditional financial institutions are rapidly evolving in response to technological innovation, changing customer expectations, and economic uncertainties. From the rise of the digital first banking solutions to the decline of cash transactions, from embedded financial services to the emergence of digital currencies, the very foundation of banking is being reshaped.

Jim Marous (00:51):

Jan Bellens, leader in the global banking practices at EY just joined us today on the Banking Transformed Podcast. He's providing a global perspective on the state of banking transformation, regulatory frameworks, and the unique challenges and opportunities financial institutions face during these very uncertain times.

Jim Marous (01:12):

Banks must reinforce their foundation for sustainable growth with innovative products and services that meet customers’ needs. As the banking industry adapts to a low growth, lower rate environment, this must be achieved with higher amounts of discipline and a great leadership vision.

Jim Marous (01:32):

So, Jan, as one of EY's global banking leaders, you really have a unique perspective on the industry. What's been the most significant change that you've seen in the retail banking industry globally over the past few years, and what do you see as we approach 2025?

Jan Bellens (01:48):

Thank you, Jim, and thanks for having me here. Yeah, as I've traveled and also, lived around the world, Jim, we've seen significant shift.

Jan Bellens (01:59):

I was in Asia, I was based in Asia also, when we saw there the rise of the super apps and a lot of the digital drive that has come to consumer banking and to retail banking in the world. And I think we've seen that shift globally.

Jan Bellens (02:16):

I think where we are now, is one, I think the shift to digital banking is not yet completed. Not at all. And I think it's still very, very patchy. Of course, some banks are fully there and are digitally native, and are growing strong with some great examples both in developed markets and in developing markets.

Jan Bellens (02:40):

And I think also, a lot of the legacy banks have made major progress, but I think there's still a way to go in the digitization of retail banking with a lot of diversity across different institutions, but also, across countries.

Jan Bellens (02:58):

And then I think that the second wave that has really started, and I already mentioned the super apps, is really about embedded finance. And making financial services and banking services in particular, integrated into customer experiences and to daily life of consumers.

Jan Bellens (03:20):

And again, a trend that has been under the current for a long time, but I think this is really the time where that will take center stage for the years to come. And I think this is really a pivotal time for that trend really to take off.

Jim Marous (03:41):

It's interesting, Jan, as we look at what's going on in the world, and we look at the banking industry, we've become more aware that really the only changes we've made in the mass amount is that we've made regular banking, digital, which really hasn't changed banking as we've known it.

Jim Marous (04:00):

However, I think you referenced the fact that we're seeing banking change a little bit. That the reality is the future of banking won't necessarily be a faster mobile banking app on your phone that's going to look just like it would've looked on a PC before.

Jim Marous (04:18):

Where are you seeing some of the biggest innovations today in the world? And can you name a few of the things that really excite you?

Jan Bellens (04:28):

I think a lot of the … and this is also, where I think we got to give credit to, as I highlighted, digitally native banks. But also, a lot of the FinTechs, Jim, that have really been at the forefront of this innovation. And of course, we have great successes. We also, see challenges.

Jan Bellens (04:52):

Where I see the most exciting developments really is — and I'll come back to embedded banking. I think what are really trigger points is where (and I'm not talking about the financial industry here) an industry is changing and financial services are changing with it and are being integrated in it.

Jan Bellens (05:16):

I'm very excited personally about the mobility space where we've seen a complete change in mobility. Of course, we've seen the rise in, at the moment, somewhat slower growth of electric vehicles.

Jan Bellens (05:30):

But we've also, seen a lot of changes in the industry there where we're moving to a direct-to-consumer model. Where the dealer networks are being challenged, and where also, we move to different models. We move more towards leasing, we move even to subscription models, and they all have challenges.

Jan Bellens (05:55):

But what I find exciting is that in a lot of these cases, financial services, sometimes FinTech, sometimes progressive banks have been part of that journey and are really integrating themselves into those models. And that I find exciting, and it's also, the way forward.

Jan Bellens (06:17):

It doesn't mean it always works out but I think being part of an industry transformation as a financial services company is I think absolutely the way forward. We see examples also, in the health and in the healthcare space.

Jan Bellens (06:36):

But I think one of the things, to your point exactly, is maybe step a little bit away of how do I digitize my bank, but how do I support the economy? How do I support the specific industry in financial services support and being integrated in that.

Jan Bellens (06:59):

In the end, that's what banks are for. They are there to support the economy and to support where those different industries are going.

Jim Marous (07:10):

So, it's interesting, we're seeing retail banking and banking in general being attacked by a lot of different things from the way they have currencies to the way they manage customers, to what they bring into, as you said, what's the definition of financial services. And we're seeing really an acceleration of digital products innovation.

Jim Marous (07:28):

But given current economic conditions (and I'm not going to necessarily put a thumbs up or a thumb down if they're positive or negative, but they're certainly uncertain) how are banks balancing the need to innovate when they also, have these profitability concerns?

Jan Bellens (07:44):

Yeah, I think that's really the challenge. And that's probably why certainly a lot of the traditional banks have seen a challenge, Jim.

Jan Bellens (07:55):

And I think it's not only the economic challenges, but sometimes it's also, challenges in terms of the regulatory agenda, which has hit the bank's hard in terms of upgrading their technology stacks and upgrading their processes and models that certainly take cost away or investments away from the innovation space.

Jan Bellens (08:20):

I think that's a real challenge. But I think certainly if you want to think and if you want to survive long-term as a bank, it's just important to carve out those spaces. And it might mean that you may not be able to do everything.

Jan Bellens (08:45):

And I think that's really where I think then the difference lies between those that have done that well and less well. If you are indeed in a situation where you have less investment capacity, you have less talent to commit, maybe then you need to think harder about prioritizing the agenda.

Jan Bellens (09:03):

And that's also, what we've seen, I think, in retail banking globally, Jim. I think some banks have had to make some really drastic cuts to their overall business portfolio, to their product portfolio, because it's just impossible to keep up with the investments that are required to innovate and to stay relevant in the market. And that's just absolutely required.

Jim Marous (09:30):

Yeah, it's interesting. You also, referenced embedded banking and it's certainly gaining traction internationally. How do you see this trend evolving, and what opportunities and threats do you see it presenting to traditional financial institutions?

Jan Bellens (09:47):

Yeah, I think it's interesting, Jim, at the moment, I think there's already quite a few assessments that show that embedded finance is going to be big.

Jan Bellens (10:01):

Certainly, at the moment we see that if you look at the overall balance sheet for embedded finance is growing a lot faster than the direct or the traditional retail banking balance sheet. So, I think that's certainly a trend.

Jan Bellens (10:17):

And look, I don't think that is necessarily a challenge. Well, it is of course, a challenge for the traditional banks, but there's no reason they cannot play an active role in there. It just takes an effort. And I think, yes, oftentimes it is the FinTechs or the digitally native banks that are at the forefront of driving embedded finance and playing a role there.

Jan Bellens (10:45):

But I think there's certainly a role for the traditional banks to play in there as well. And I think we see a lot of good efforts across the world actually of banks that are playing an active role in these ecosystems and in these models. And that are also, being invited by some of these embedded finance players to do so.

Jan Bellens (11:12):

So, I think it's actually an opportunity to grab for the traditional banks. Yes, there's lots of challenges. There's challenges in terms of what does the partnership model look like? How do we think about customer experience? And particularly customer ownership and customer data which are challenging.

Jan Bellens (11:36):

But I think traditional banks shouldn't rest on their laurels and sit back and give that market away. I think they should be at the forefront of it. And think about who to team up with and how to divide the pie that comes out of this.

Jim Marous (11:55):

It's interesting, we talk about the fact that it's possible for traditional banks to survive here and to play a role in embedded banking. But you personally, do you really see this happening? Or do you see the M&A, and the acquisition, the consolidation really going to be changing the banking landscape?

Jim Marous (12:15):

Because I look at things like embedded banking and I just can't see the same number, the same size, the same type of organizations being in the future. And I certainly don't see banking being the way it is today. We've seen some FinTechs in South America, and in Asia, and in Africa really succeed where banks didn't.

Jim Marous (12:40):

And we're seeing a lot of banks that I believe are playing a game of catch up, and there just seem to be too many banks doing banking the same exact way. When banking's being taken over by retailers, by car companies, by mobile phone carriers, things of this nature.

Jim Marous (13:02):

How do you see the whole M&A landscape playing out with everything going on the way it is? And do you see a heavy consolidation taking place?

Jan Bellens (13:11):

I do, Jim. Yes, I do see that. But to be honest, I've been saying that for years, so-

Jim Marous (13:19):

I know. Yeah.

Jan Bellens (13:21):

So, I would be hesitant to say, I think now, is absolutely the time and we … but, yes. And I think it goes back a little bit, Jim, to what you highlighted before, because I think the bar is always rising and the investments, and not just the investments but also, the agile management and governance required to basically keep up in the space will only rise.

Jan Bellens (13:53):

And I think that's really what's going to lead to more consolidation, particularly in the US and in Europe. And there's some interesting movements across both sides, perhaps a more lenient regulation in the US or a regulatory environment in the US. And similarly, in Europe, we might see some changes.

Jan Bellens (14:26):

I think a lot of this has not happened because there is an element ... well, first of all, the banks got a little bit help by the rising interest rates. So, it was a bit of a delay of execution, so to speak. Because a lot of the retail banks benefited from that rise in interest rates in terms of their ROI.

Jan Bellens (14:49):

And then I think there's just a lot of inertia still in the system that has held back more accelerating and more rapid consolidation.

Jan Bellens (15:07):

But as I said, I think it has to happen. Not all of the banks will be able to keep up with the change that is required to serve retail customers going forward.

Jim Marous (15:20):

So, we're talking about the global environment and regulatory environment in a state of flux in many countries. Looking at the current macroeconomic environment and the geopolitical uncertainties that have come with things such as the US elections most recently, but elections elsewhere.

Jim Marous (15:38):

And there's a lot of disruption and anxiety about status quo and wanting to have great amount of change in the way we view each other and the way we view businesses. How do you see what's going on globally right now, possibly impacting the banking sector?

Jan Bellens (15:59):

Yeah, I think it's really quite dramatic, Jim. And I think the first element to note is I think certainly in the board discussions that I see and in the executive committees, I think geopolitical risk is very, very high on the agenda from a risk perspective.

Jan Bellens (16:27):

And it's really, really very difficult to understand where the world is heading with a lot of the geopolitical conflict and the geopolitical divide that has really come forward.

Jan Bellens (16:44):

So, we see a lot of banks preparing through scenario planning and really hoping to build some more muscle on the operational risk side on how to deal with some of those geopolitical risks. So, certainly geopolitical risk is very, very high on the agenda.

Jan Bellens (17:04):

I think secondly, stepping a little bit away from the risk component, I think there's also, a real challenge here that is going to be difficult for global institutions, but also, regional institutions or local institutions with growth ambitions to figure out where am I going to grow?

Jan Bellens (17:29):

And I think in particular after the recent US elections, of course, there's quite a lot of concern about are we going to see more division in terms of the regulatory agendas in particular across Europe and the US for example.

Jan Bellens (17:48):

So, if you look at Basel III reform and capital, if you look at the ESG agenda, if you look at even the data agenda (data and AI), if we see too much of a divide across transatlantically, I think that's going to be a challenge for the banking system as a whole to figure out where are we going to grow? Are we going to see a major disparity in growth?

Jan Bellens (18:20):

And I think that is something that I think on a global perspective we'll have to deal with, and the boards will have to deal with how to figure that out going forward.

Jim Marous (18:37):

And I'm making a lot of very broad generalizations here, but if you look at what happened in the US and what's happened in many areas of Europe where there's a lot of anger, for lack of a better word, around the lack of ability to move ahead by the masses. The middle class is expanding, but it's becoming less and less stable.

Jim Marous (19:00):

When I grew up in my younger years, middle class was really the aspiration and really a good place to be. Well, the middle class right now, is a much lower level in context of the overall ability to move forward.

Jim Marous (19:18):

We just saw some recent numbers in the US around employment and the number of people that are no longer switching jobs because they aren't available.

Jim Marous (19:27):

And it's amazing how so much has happened, just a number of two years. Technology has been hit as hard as any place where the demand for the people and the ability for people to move ahead has really been limited. But that hits on the financial side.

Jim Marous (19:42):

And when you look at the “establishment”, again in quote marks, is banks are part of that establishment, but have avoided being hit by, for the most part, globally, by people getting at the banking environment for not making the world better.

Jim Marous (20:02):

It's going to be interesting to see what happens, because I think that as disruption happens, as fear takes over in a lot of different ways, both from a people-to-people basis, but also, as far as how businesses help other people. Banking is going to have to take a forefront on this.

Jim Marous (20:21):

And as you said, they have to prepare for the unknown that we've never seen. I mean, this isn't a depression, because there's people making money, it's just not as much, not compared to the overall environment. It's tough to live, it's tough to feed your family, it's tough to find housing.

Jim Marous (20:42):

All these elements, banking takes a role in it. I don’t know what your perspective is on, is banking be able to step up to the plate and actually be a proactive force as opposed to in some ways being viewed as a restrictive force.

Jan Bellens (20:57):

Yeah. No, I think it's a good time, and also, a challenging point, Jim. I'm certainly optimistic and hopeful there. One of the positive signs I see there, Jim, is that this can further accelerate, I think the transformation of banking and the digitization of banking.

Jan Bellens (21:19):

And what I mean by that is I see some really good examples of mostly digitally native banks around the world that step away from this traditional sometimes (and I'll probably be guilty there too) consultant driven view of, “Hey, let's all go after high-net-worth individuals, the affluent segments, because that's where the money is.”

Jan Bellens (21:46):

And I think where I've seen really positive signs is a lot of the digitally native banks that are growing again, as I said, in emerging markets in Latin America or in Asia but also, more and more so in the developing markets, is actually by serving efficiently, mostly digitally, and by serving well, the broader consumer segment, the middle class as you highlighted, or even below.

Jan Bellens (22:15):

And if you can do that efficiently with a digital proposition and still make your shareholders happy, I think that's a very, very positive sign. And I hope to see, and I think we see more and more examples of banks doing that well.

Jan Bellens (22:38):

We will always have that competition in the affluent in the high-net-worth space but that's a pretty crowded arena as well. And I think it'll put more and more pressure on the overall banking system to become more efficient and basically be able to also, make money serving those segments that you highlight.

[Music Playing]

Jim Marous (23:08):

So, let's take a short break here and recognize our partners.

Jim Marous (23:15):

So, welcome back to Banking Transformed. Today I am joined by Jan Bellens, a global banking leader at EY. We've been discussing the future financial services as we enter 2025.

Jim Marous (23:26):

So, Jan, we've been playing around the edges, around as you said, the digitally native FinTech firms, organizations that are taking care of certain elements of banking in the most efficient ways.

Jim Marous (23:38):

And when we're talking about that, we're a lot of times talking about payments. And as we look at the cash use declining and digital currencies being discussed more widely, how do you think banks need to prepare for what's becoming a very major shift in our payment’s ecosystem and in the ability to deliver efficiently?

Jan Bellens (24:00):

Yeah, I think payments has been a very dynamic space for the last few years, Jim, and I think it certainly hasn't landed yet. I think first, certainly going forward, we'll continue to see a lot of changes. And frankly quite a lot of changes in the infrastructure landscape for payments.

Jan Bellens (24:27):

We have already seen quite a lot of changes in what I would call the edges. But I think we will now, also see ... and sorry, not edges, but certainly on the front end and on the backend of payments, we've seen quite a lot of changes.

Jan Bellens (24:45):

But the payment rails itself have been relatively stable. And I think going forward, we will also, see a lot of changes there that's driven by a lot of the trends that are in the markets, instant payments, account to account payments, and to your point also, CBDCs and digital currencies.

Jan Bellens (25:07):

So, I think we'll see a very dynamic landscape there again, with successes and failures, because in the end, one of the tricky bits about payments is you need to get quite a lot of players moving in the same direction to make real changes to that infrastructure. And I think that's really been what's holding back some of the more radical changes.

Jan Bellens (25:37):

We've seen some great initiatives sometimes government driven or government certainly sponsored in some key markets that have been able to make the change.

Jan Bellens (25:48):

And then often that because it is driven by government or regulator, it's not easier, but it certainly happens faster than through creating a stakeholder forum that all gets on the same page.

Jan Bellens (26:07):

I think the big takeaway for the banks here is, I think this is definitely something where I think the banks need to pay a lot of attention. Although and I think many of them have, payments is often certainly on the retail banking side but even on the corporate bank side is often the real lifeblood of banks.

Jan Bellens (26:33):

And it's one of the main reasons for customers to be with the bank, it's what they look at on the customer experience front, et cetera.

Jan Bellens (26:44):

And so, I think already have lost some of that relationship on the payment side to FinTechs or to other players. I think they should continue to pay attention and make sure that they are certainly in the game on payments.

Jan Bellens (27:04):

I think the second component is certainly with those changes in the infrastructure, they should look at what kind of intermediary role they are still going to be able to play if we see some of those changes coming up. And in particular, how are they going to frankly also, make money from that.

Jan Bellens (27:27):

It's already challenging for a lot of the banks to make money or to charge relevant fees in the payment space. How will that look going forward when they are being disintermediated in the payments landscape?

Jan Bellens (27:44):

So, definitely a key point of attention, I think for retail banking and a challenging one at that.

Jim Marous (27:55):

Along the same line, but quite different, we've seen a rise in digital currencies and a lot of talk around CBDCs. How should traditional banks prepare for this potentially very major disruption of their business model?

Jan Bellens (28:13):

Yeah, I think that's the ultimate example of how to make sure that they don't get disintermediated. And I think if we look at some of the movements across the world also, in Europe now, in the US, I think it's really important to make sure that they really understand what would be the impact of their model.

Jan Bellens (28:45):

And then also, finding a way to make sure that they can still add value to the model going forward. I do think there will always be a role for the banking system in that space, but I think would be really good to one, highlight that with regulators and with the various stakeholders.

Jan Bellens (29:07):

But then two, also, to find creative means to highlight what that value add is and how that can project into the future even if we get into the digital euro or the digital dollar for example.

Jim Marous (29:31):

So, as we look forward to 2025 and beyond, and EY obviously has so many clients globally, that they work with in the financial services space, what are you recommending for your clients as being the most crucial capability that they have to have as soon as possible to remain competitive?

Jan Bellens (29:52):

I think the key thing is really to build agility in your governance and in your management model, Jim. And what I certainly see a lot of the successful banks around the world is when you look at responding to all of the uncertainty and all of the very dynamic landscape coming, is that it's almost impossible in a large institution to really be prepared for everything and to have a clean sheet strategy going forward.

Jan Bellens (30:39):

So, to say, here's what we're going to do for the next three to five years is very, very difficult in the current context and in the current environment. So, it's really about building the muscle to respond to changes.

Jan Bellens (30:59):

And we see that across the board. We see that on the risk front and how to respond to operational risk challenges or other challenges. And I think it's the same in the growth space, how do I quickly capture specific product opportunities or service opportunities.

Jan Bellens (31:23):

And I think getting more agile and being able to respond faster in a safe and secure way with good governance all the way from the board to the frontline, I think is really going to be a key challenge. Easier said than done but I do see some good examples of institutions around the world that can actually do that.

Jan Bellens (31:51):

And I think as we also, see what I still ... and that's again, easier said than done. It doesn't mean that the banks don't need to be prepared to various scenarios where one of the things that we like to do with our clients is pretty advanced scenario exercises. What if this happens? What if that happens? I think it's quite common in the cyberspace.

Jan Bellens (32:16):

But I think a lot of the institutions have expanded that more broadly. And I think certainly a lot of the digital natives and the FinTechs also, are good at that because they sometimes have to pivot very, very quickly to events that happen in their world. Be it regulation that pops up or something that happens in the market.

Jim Marous (32:45):

That's very interesting, Jan, because we usually talk about, we need to do some concrete things, you need to do this, this, this. And you're right, I think the past four years — alright, five years now, are a great example. The best capability you can have is the ability to be able to be ready for whatever may come down the path.

Jim Marous (33:07):

I look back five years ago at the beginning of COVID and say, we thought that was the worst thing that could ever happen and that nothing would ever disrupt the marketplace more. Only to find out that the economic uncertainty that approached the marketplace two years after that was even a bigger impact as far as how it changed the way we did things.

Jim Marous (33:28):

You look back and you go, COVID was just a matter of saying, how do you do things without fiscal facilities? That's simplifying it quite a bit.

Jim Marous (33:37):

But that's a whole lot easier than learning about what do you do if all of a sudden, interest rates double or if they go down zero again, or there's all the things we discussed in this conversation.

Jim Marous (33:51):

And as we looked to 2025, I think a good takeaway is the fact that we really honestly don't know what the future's going to bring, but we have to use the past as a lesson to say, we have to be ready for what we believe will happen and the alternative, because it's likely the other way.

Jim Marous (34:11):

So, Jan, thank you very much. It's the first time we've met, but I really appreciate you being on the show and appreciate what EY is doing to work with their clients in all industries to actually make banking and making business better at a time of massive amounts of change. So, thank you very much.

Jan Bellens (34:29):

Oh, thank you, Jim. It's an honor to be here. I've been following you for a very, very long time, so it's a real honor for me and I love what you're doing in this space. So, absolutely.

[Music Playing]

Jim Marous (34:39):

Thanks for listening to Banking Transformed, the top podcast in retail banking and the winner of three international awards for podcast excellence. We appreciate your support.

Jim Marous (34:49):

If you enjoy what we're doing, please take some time to show some love in the form of a review. Also, be sure to read my recent articles on The Financial Brand and the research we're doing for the Digital Banking Report.

Jim Marous (35:01):

This has been a production of Evergreen Podcasts. A special thank you to our senior producer, Leah Haslage; audio engineer, Chris Fafalios; and video producer, Will Pritts.

Jim Marous (35:13):

I'm your host, Jim Marous. Until next time, remember, to remain competitive and relevant, every bank must embrace disruption and strategically build a better ecosystem, not a bigger bank.

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