Future of Banking: Why Innovation Needs a Dedicated Budget

In a world dominated by digital-first competitors, the question isn’t whether banks should innovate - it’s whether they can afford not to. With customers increasingly expecting intuitive, tech-driven solutions, banks that prioritise innovation are redefining the industry, and reaping the rewards.

The numbers speak for themselves-

Banks that invested in digital innovation saw 22% higher customer retention (Source: Deloitte)
They measured a 15% increase in cross-sell opportunities within three years (Source: Deloitte)
Banks failing to invest in innovation risk losing up to 35% of their net profits by 2030 (Source: McKinsey)

With customer expectations evolving faster than ever, even the most established banks risk falling behind without a strategic commitment to transformation. By allocating an annual budget for innovation, you empower your institution to stay ahead of trends, create meaningful customer experiences, and drive sustainable growth.

Leading banks that leveraged Innovation Budgets to stay ahead

Leading banks have invested in innovation, setting trends that competitors scramble to replicate. These innovations aren’t just incremental improvements, they are setting new standards in banking. They’re building deeper trust and loyalty with customers at every touchpoint.‍

1. DBS Bank integrated a housing ecosystem simplifying the homebuying process for its customers. The platform combines home loans, property listings, insurance, and related products. This integrated approach simplified property transactions and reduced the complexity for customers to choose, manage and finance home buying.

2. Sohar Bank launched a first-of-its-kind beyond banking financial and non-financial services through its mobile banking app in Oman, making it the recipient of the ‘Most Innovative Digital Bank’ this year. This ecosystem, categorized into 'My Life' and 'My Goals,' perfectly complements customers' lifestyles, offering services such as air travel ticket booking, hotel reservations, and purchasing gift vouchers.

3. Standard Chartered developed Nexus, a white-label marketplace platform that enables e-commerce platforms and fintech companies to offer banking services directly to their customers. This innovation has driven partnerships in emerging markets like Indonesia and Vietnam, helping the bank capture untapped revenue streams and drive customer engagement.

4. HDFC Bank launched Business Banking Ecosystem, a one-stop digital platform offering 100+ business software solutions, tailored to its SME and Business customers. By providing discounts on these subscriptions via its commercial card, the bank achieved a 30% increase in acquisition and a 60% decrease in CAC.

5. BBVA has made significant strides in AI, including neural networks and natural language processing (NLP), to personalize customer interactions. In 2023, BBVA's AI tools facilitated 391 million interactions—a 49% increase year-over-year, creating seamless customer experience at every touchpoint.

6. First Abu Dhabi Bank (FAB) launched the UAE Trade Connect, a blockchain-powered platform that connects key players in the trade ecosystem. This innovative investment has not only minimized fraud but also streamlined cross-border transactions, setting a new benchmark for efficiency and security in the industry.‍

Where should Banks Allocate Innovation Budgets?

If you’re still deciding on areas to allocate your Innovation Budget this year, here are a few areas that are disrupting the banking space that you should definitely consider.

1) Building Ecosystems/Marketplaces

Banks are moving from offering isolated services to creating purpose-driven ecosystems that deliver value at various stages of a customer’s life. This integrated approach not only deepens customer engagement and trust but also opens new revenue streams. By strategically partnering with lifestyle service providers, banks can cross-sell a diverse array of products, enhancing their value proposition while increasing the adoption of their products and generating additional revenue. According to a BCG report, 27% of leading banks have already made ecosystems a core part of their strategy, with more than half actively exploring this shift.

2) Fraud Detection and Prevention Technologies

Banks are increasingly investing in advanced technologies to prevent fraud and enhance security. Innovations like geo-fencing, which limits transactions to trusted locations, and trusted contacts, where a third party confirms large payments, are becoming standard. Additionally, personalized security features such as secret QR codes add another layer of protection by requiring a second device for transaction approval.

Research highlights that most financial institutions are already using advanced technologies such as AI, and blockchain for financial crime detection (74%) and fraud detection (73%). These investments are helping banks stay ahead of fraudsters, ensuring more secure and trusted banking experiences for customers.

3) Cloud-based as-a-service Banking Platforms

The rise of "as-a-service" models like Banking-as-a-Service (BaaS) and Platform-as-a-Service (PaaS) is reshaping how banks deliver their services. These models are powered by cloud computing, allowing banks to access cutting-edge software and infrastructure without heavy upfront investments. This means banks can quickly develop and launch products that meet market demands, all while keeping costs low and resources optimized.

Take the example of Crassula’s cloud platform (BaaS) that enables companies to build and launch financial products, such as payment systems and online banking services, without needing their own infrastructure.

4) Open Banking for Collaborative Financial Ecosystems

Open banking is shifting the focus of financial services from a single-bank model to a collaborative approach. What makes open banking so important is the speed at which it’s fostering innovation. Instead of banks trying to do everything in-house, open banking creates an ecosystem where fintechs, startups, and even other banks can collaborate to offer better, more efficient services. And the potential is massive.

According to Accenture, open banking could generate an additional $43 billion in revenue by 2026, as more banks partner with fintechs to deliver tailored solutions. Not to mention, cross-border payments are projected to hit $250 billion by 2027, and as customers demand faster, smoother, and more interoperable services, open banking will be the key to meeting that demand.

BBVA leverages Open Banking APIs (Image Source: Payments Cards & Mobile)

5) AI and Data-Driven Personalization

AI is enabling banks to offer tailored services like investment advice, anticipate loan requirements, and deliver dynamic fraud prevention in real-time. For instance, global banks leveraging generative AI have reported up to 20% increases in customer satisfaction by deploying chatbots that handle over 80% of queries.

The real breakthrough lies in AI's ability to predict customer behaviour and automate proactive services. Banks are increasingly leveraging machine learning algorithms to analyze vast amounts of customer data, enabling them to anticipate needs before customers even express them.

Moreover, by analyzing transaction data, AI detects fraudulent activities with remarkable precision, reducing the likelihood of security breaches. According to Accenture, AI in fraud prevention is expected to save the banking industry $12 billion annually by 2025.

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Conclusion

As a banking leader, it's important to ask: Are you investing in the future of your organization? Innovation isn’t about taking risks; it’s about ensuring your bank is positioned to stay relevant. With customer expectations evolving faster than ever, even the most established banks risk falling behind without a commitment to transformation.