As we usher in 2012, a year that will be challenging for many financial institutions / banks but at the same time presents a chance for growth and innovation. Here are some trends, predictions and focus that we might potentially see in the realm of retail and online banking throughout the year.

1) Consolidation. As Banks try to hold on and hope for brighter days, there are bound to be consolidation in such an uncertain market. Developing markets for which some are still closed markets and some pseudo-supported by the Government will soon realise they need to merge to compete with international players. They can’t stay hidden under a coconut shell forever.

In the event of a merger or consolidation, people get caught up changing the brand name, consolidating their staff, looking at what IT equipments can be salvaged, doing a massive re-organisation and guess what, they will forget that they need to innovate, not just merely growing in size. And then they realise they are not doing any better before they merge, so let’s do a re-org, hire and fire again.

2) Creating the Innovation division. We are noticing some major banks are starting to do so and hiring top talents with world class qualifications to run it. Kudos to them for taking the initiative.  Just having an IT/ product team with a CIO (Chief Information/IT Officer) is no longer sufficient these days because the existing team are (and will continue to be) busy “fire fighting” in day to day operations. The innovation division should act as an incubator, to build and try out new products quickly before it hit mainstream. For it to be effective, there is a need to have an innovation team that is separated and managed by the CEO directly. Otherwise it will just be caught in office politics and whatever innovation that was created would not see sunlight, or at least not within the year.

On the other hand, the IT division people would start fighting for their survival before they get retrench and would want to get involved in an IT and R&D work possible. So they will lobby hard to the management to stop out-sourcing to other divisions or external parties. We already seen some banks wielding to these demands and have decided to in-source some of the work. But Banks need to realise they need fresh blood, a faster team, faster decision making process and have managed services by specialized companies to do selected part of the business. Technology is not going to slow down. Customers are going to get more demanding. An IT team who has been running a dinosaur IT system is no way going to innovate the Bank out. But if they goal is to maintain being a Bank that is traditional, by all means take that path.

3) Revamp in online and mobile banking. Some existing online banking interfaces are horrendous because the idea is to pack all the products in to one space because each division wants their product to be represented. Banks need to realise they need to start looking into user experience and online customer journey.

With phones being a necessity, I am sure it is in many KPIs of Banks to have a mobile and iPad version if they haven’t have one already. Unfortunately, what they do is just do an exact verbatim of their online banking into the app, weighing it down with tons of options and none of them particularly attractive. There are millions of exciting apps out there. What makes the Bank think consumers will download their app compared to Angry Birds.

Revamp will also include the back-end architecture. A question for Banks to answer will be their position on the Cloud computing. To adopt or not?

4) Data mining. Banks are sitting on a gold mine of data but perhaps have not been using it well enough. Time to get cranking and make sense of the data you got. It’s the age of analytics. Please start sending me business or personal loans proposals when you know I am starting so many companies. Perhaps they don’t, and that’s the problem/ opportunity. Real time data will also equip their outlet relationship manager with better information to upsell or cross-sell relevant products to their customers.

If Banks are clueless where to start, just add to the scope of engagement with your top management consulting firms such as McKinsey, BCG, etc that Banks constantly hire.

We will also see some work on optimising the database, increasing speed, structure and ability to pull data in real time while minimizing the load to the system.

5) The adoption of PFM (Personal Finance Management) solutions. An obvious answer to increase engagement with consumers and to refresh the Bank’s online banking capabilities. PFM creates a win-win for both the Bank and the consumer as Banks gets consumer to linger in their online space and consumers get to have a better view of their finances instead of the list of mindless debit and credit entries you see once you have logged on to your internet banking. This is also in line with data mining as pointed out in the previous point above. PFM allows Banks to merge their existing data with data provided by consumers and also via automated account aggregation.

Some banks in Europe initially tried PFM out 2 to 3 years back and claim it did not work, but I believe they were either too early and also there is more to it than just throwing some PFM capability or selected tools. Foresee that banks in US will give a second push to their existing PFM tool now that we have a “stronger” more technologically advance solutions. Due to adoption in the West, pressure will be put to some Banks in Asia but unfortunately some put this as low priority as it’s not money generating, but that is just pure short-sightedness. Contact Perfectsen and allow them to show you their solution. You will immediately want to use it from a consumer point of view, and that is what is needed when a Bank thinks about a solution, not coming out from a banking point of view which they have done so for many years.

Expect some banks to use the personal finance feature to drive their mobile banking strategy.

6) Lifestyle focus.  Banks will see the need to start positioning themselves, increasing their brand relevance and creating adverts that are not filled with words and terms and conditions but instead advertisements that strike a chord with their customers. With information overload and bank lacking the cool factor, they will need to start doing something to increase their top of mind recall and brand strength. We should be seeing more spending on online marketing although offline marketing will still take up a huge chunk of the budget.  Do not be surprise to see Bank’s start pulling out some FMCG type or IKEA style advertisements soon.

7) Increase in Partnerships. In line with lifestyle focus, Banks will increase partnerships to maintain its relevance to consumers. An example in 2011 was Maybank, the top Bank in Malaysia with subsidiaries in South East Asia signing a partnership with Groupon Malaysia, an online daily discounted deal provider, where Maybank customers will have the privilege to obtain higher discounts and special deals.  We expect more of this type of deals to happen due to both, a push and pull factor. Banks want to be closer to consumers and companies need to differentiate themselves to competitors, so what better way than to tie-up with banks having an existing large customer base.

8 ) Online and mobile payment. This space is definitely heating up. Huge increase in e-commerce is fueling this growth.  New payment methods are also popping up. Square ( definitely got in to the radar in 2011 with and backings from top VCs such as Kleiner Perkins Caufield and also established personalities such as Richard Brandson, Shawn Fanning and Marissa Mayer putting money into it. Intuit got excited about the same idea and came up with GoPayment whilst Verifone launched Payware. It is basically a card reader that is an add-on to plug into a phone that allows any retailer to accept credit card payments. This allows any mom and pop shops, street stalls  and start-ups to receive credit card payments.

Relating a personal story, when I opened a spa in Asia I was desperate to have a credit card terminal but the major Banks rejected my request because I was not big enough and they did not think my business was worthy of it. It’s been 4 years since but I know Banks are still doing so to many small companies. Banks cannot afford to be such a snob anymore because people like me who initially have to start somewhere will not go to you if I have a choice in the beginning when we are desperate.

Don’t forget Google Wallet is coming. Mobile phone operators and manufacturers are also gearing up for NFC (Near Field Communication) devices. What are the Banks going to do in this space is anyone’s guess. Giving out more VISA or Mastercard credit cards? Start pushing their own payments APIs? Watch this space, it’s going to get really interesting.

9) The rise of virtual banking. The telecom operators have experience it with MVNO (Mobile Virtual Network Operators), basically operators without an actual network. Their purpose is to serve a certain  segment, unmet needs or dissatisfied customers of the traditional telcos. Having a telco background, I always thought a similar concept is bound to happen in the banking field.

The Banks have long held total control and have taken their customers for granted. Users are not churning not because they are happy with the service, but there is lack of other alternatives. So it’s about time someone came up with an online bank and we are now seeing BankSimple doing exactly that. It is still early to know how they will do but if their business model works in 2012, we will potentially see copycats in other parts of the world.

10) Segmentation of customers. The rich are getting richer, so why not cater more for them. On the other end of the spectrum, there is a huge market to develop relevant products for the poor or better known as the bottom of the pyramid segment. We expect to see more targeted products catered to specific segments of the market. We may also see introduction of sub-brands to increase flexibility in pricing and promotions.

So that was the top 10 on my list. Banks need to realise they have to act fast. The telecom operators has seen the entire data products revenue taken away thanks to the app market, retail outlets are seeing the behemoth Amazon trying to take share away from them. It will be just a matter of time before someone takes away something from the banking and it’s highly likely in one of the above areas. With innovation cycle speeding up, huge competitors can come in a matter of months, not years.

Article contributed by ST Chua,  co-Founder of Perfectsen. He is a serial entrepreneur and management consultant.