The Economist: 5 Megatrends That Will Shape Banking in The Next Decade

The Economist: 5 Megatrends That Will Shape Banking in The Next Decade

by July 20, 2023

The future of banking will be shaped by several forces and megatrends, including the accelerating digital revolution, new consumer expectations and efforts by governments to combat persistent economic and social inequities.

To stay relevant, banks will need to adapt and center their strategy around purpose and profitability, a report by Economist Impact, sponsored by SAS, says.

The report, titled Banking in 2035: Three possible futures, presents three potential scenarios to the future of the banking sector and explores the major forces set to revamp the industry through 2035.

The first trend presented in the report is the digital revolution, which is rapidly progressing and creating digital economies centered around data production, collection and protection. This growth presents new opportunities and markets, particularly in banking, but also intensifies regulatory and cybersecurity risks and competition, the report says.

The second trend is economic fragmentation, which is growing due to rising populism, nationalism and protectionism and posing a threat to globalization. Governments are increasingly using economic policies and financial instruments for geopolitical purposes, forcing companies to take sides and fueling uncertainty in global supply chains and international governance.

The third trend is the multiplication of shared global challenges, including climate change, pandemics, humanitarian crises and conflicts involving non-state actors and anti-immigration sentiment. Around the world, governmental efforts to address these global crises are gaining stream. At the same time, private-sector actors are stepping up to play greater roles in addressing these challenges.

The fourth trend is that despite efforts to combat persistent economic and social inequalities, headwinds will persist and vulnerable populations will continue to be left behind. Climate change is disproportionately affecting less developed countries and regions; digital transformation is widening gaps within countries as well as between generations; and urbanization is projected to steadily rise in the coming decades, exacerbating inequalities, the report says.

Finally, the last megatrend that will impact the future of banking is the rise to prominence of ethical practices. As consumers become more vocal about environmental and social issues, they will expect companies to play an increasing role in solving these issues. This trend will further accelerate as impact investing moves towards mainstream adoption and as regulatory efforts to decarbonize economies continue to multiply.

Three potential scenarios for the future of banking

According to the report, these five megatrends will serve as the foundation for the future of banking, to which three potential scenarios are envisioned.

In the first scenario, banks have managed to transform themselves to regain the trust of the public, becoming more transparent, ethical and customer-centric, and focusing on providing value to their customers and society at large. In this scenario, banks have clear and actionable disclosure requirements, giving customers more control over their money and data.

In the years leading to this, banks pursued partnerships with non-banking institutions, while mergers and acquisitions (M&As) accelerated the sector’s digital transformation. Regulations also evolved to ensure consumer and investor protection.

In the second scenario, there has been a significant shift in the way banks operate due to the urgency of climate action. Incumbents are now key players in the fight against climate change, investing heavily in green technologies and sustainable practices.

Key catalysts of this paradigm shift include accelerated environmental, social and governance (ESG) investing, consumer and investor pressure, technological breakthroughs and the introduction of a carbon tax by the planet’s major polluters.

Finally, in the third scenario, the world has become increasingly fragmented due to economic and political factors, forcing banks to adapt to a more localized way of operating and having to deal with different regulations and customer expectations in different regions.

In the years leading up to 2035, global fragmentation continued to accelerate as bilateral and regional agreements supplant the World Trade Organization and as BRIC+ countries see their economic and political power rise, ultimately leading to reduced reliance of the global economy on the US dollar.


Featured image credit: Edited from Freepik