First things first

We’re outlining 3 banking trends to watch in Banking viewed through the lens of our Trendtracker SaaS. It's important to outline that throughout this article, we're sometimes mentioning TSI.

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TSI: Trend Strength Index represents a trend's current 12-month average strength on a scale from 0 (minimum value) to 10 (maximum value). We applied TSI for the banking Industry, meaning the TSI might differ for other industries. We developed this to help companies make data-driven strategy decisions.

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1. Emerging trend: virtual economy

What is a virtual economy?

A virtual economy, also referred to as a synthetic economy, is an economy that exists in a virtual world. It involves the exchange of virtual goods, predominantly in the context of online games, particularly in massively multiplayer online games (MMOs).

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What's the trend showing?

According to Trendtracker, the trend index (TSI) for virtual economies in banking is currently at a low 3.2 (out of 10). This is typical for a trend that has not yet reached full maturity or may never do so. However, there are signs of potential growth as the trend velocity is rapidly increasing.

What strategies should banks and financial institutions follow?

Firstly, virtual economies allow banks to reach the unbanked population. By establishing a brand presence and relationship with primarily Generation Z, banks can access a customer base that is traditionally difficult to reach through traditional banking services. With proper understanding and execution, this can lead to a significant increase in business leads.

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Secondly, virtual economies allow banks to offer services within the virtual economy. A virtual economy, like cryptocurrency, can create new business models, such as secure storage and exchange platforms, for banks. Institutions experienced in regulation can address challenges in emerging areas like cryptocurrencies and virtual economies.

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2. Established trend: Open banking

What is Open banking?

Open Banking is a system that enables the sharing of customer financial data across different financial institutions and products. This is accomplished using Application Programming Interfaces (APIs) and other technology solutions. The main objective of Open Banking is to create a more competitive market by allowing third-party providers to access customer data and offer financial products and services.

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What is the trend showing?

Trendtracker’s TSI is 9.2 and has been taking off since 2016. TSI is determined by applying AI and NLP to millions of documents, patents, and articles, … and applying it to a specific industry.

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The chart shows open banking is nothing new under the sun, but if we apply velocity to this trend, we notice a clear take-off.

One of the major outcomes of Open Banking has been the development of "super apps" within the banking industry. A super app is a comprehensive platform beyond traditional banking services, offering a range of products and services in a single, integrated platform. This trend is driven by consumer demand for a more convenient and streamlined experience and banks' efforts to stay competitive in a rapidly evolving market.

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What strategies should banks and financial institutions follow?

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Open Banking has opened up new opportunities for fintech companies and tech firms to enter the banking sector. Companies like Revolut have followed an alternative banking trajectory. They eventually applied for a banking license, disrupting the traditional banking landscape.

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Banks are taking on a larger role as ecosystem facilitators in the coming years as Embedded Finance becomes increasingly important for businesses. Embedded finance refers to integrating financial services into non-financial products and services. For example, banks can facilitate the provision of subscription services by car manufacturers or allow telecom companies' customers to charge the cost of movie rentals and other content to their phone bills. This trend highlights the increasing importance of banks as enablers of financial services beyond their traditional role.

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3. Scaling trend: Decentralized Finance

Decentralized finance (DeFi) has been rolling over the tongues and is, in short, referred to as a financial system built on blockchain technology.

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What is the trend showing?

Trendtracker’s TSI for DeFi is 7.1 and has been taking off since 2017. TSI is determined by applying AI and NLP to millions of documents, patents, and articles, … and applying it to a specific industry.

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The chart shows that DeFi is getting a strong tailwind, similar to the popularity of Cryptocurrencies.

What does this mean for banks?

As DeFi is built on blockchain technologies, it implies that decentralized networks and protocols replace traditional finance institutions such as banks. As a potential disruptor, banks are closely exploring what this means to their business model and future role.

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Whilst the above wording might make it look like chess mate for Defi vs. banks, the truth is that banks have a potential upper hand.

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DeFi in its current form has shortcomings where banks have already built entire processes for

1. In DeFi, the user is responsible for his funds, including safeguarding it, making it more prone to be hacked or scammed.
2. Complexity. Over the past years, consumer apps and services have improved in UI and user-friendliness. It’s needless to say that in its current state, managing your finances through DeFi isn’t exactly a walk in the park.

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What are banks doing with this knowledge?

It’s not like banks are unaware of all this. The main learning is that banks can take a page out of Defi’s book and steal their thunder whilst there’s a lack of DeFi regulation.

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First off, it’s clear that there’s demand for banks to hold custody and create yields of crypto holdings, if not from consumers, then for institutional investors. By looking at DeFi, banks are learning what threats will come into the financial system.

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Secondly, cross-border transactions are where banks are looking into allowing a smoother and better process through all-day trading with a single type of currency.

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Thirdly, as CBDC (Central Bank Digital Currencies) are on their way, there’s an increasing demand to facilitate similar user experiences as DeFi. There is a need to increase interoperability and accessibility of CBDC outside of the traditional ways.

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Even so, traditional and decentralized finance can coexist in the future and will eventually impact each other to reduce their risks and flaws.