With new technologies and savvy new entrants flooding the financial services space, traditional banking sometimes appears to be on its last legs. But incumbents still have a strong advantage over challengers because they enjoy a high degree of consumer trust, according to academics, bankers and other market observers.
And in the modern world, a reputation for safeguarding personal data could be an important differentiator for big banks — but only if they keep up with trends.
"Banks should not worry about being loved, they need to worry about ... being trusted," according to Peter Hahn, dean of the London Institute of Banking and Finance, or LIBF, and former senior adviser at the Bank of England.
The role of banks in society is often underestimated because the concepts of trust and appreciation are mixed up, he said in an essay in the LIBF's book Banking On Change, which looks at the future of financial services.
Banks are not highly respected but they are of high social utility, and that is likely to remain the case in the future as banks adapt their business models amid disruptive market forces, he said.
PricewaterhouseCoopers has warned that the banking landscape is set to be fundamentally altered under the combined pressure of customer expectations, regulatory requirements, technology, demographics, new competitors and shifting economics.
But the concept of the traditional bank as "a trusted institution acting as a store of value, a source of finance and as a facilitator of transactions" is not about to change, the professional services company said in its retail banking 2020 outlook.
While financial technology firms and digital-only banks are attracting customers with easier-to-use applications, lower-cost services and new products, incumbents largely remain the primary provider of banking services, Hahn said in an interview.
That said, they also need to ensure payments integrity and data protection in a time when a large part of their customers' financial lives happen in the digital space, according to Hahn.
Meanwhile the notion of trust has expanded, he said. People used to simply rely on banks to keep their money safe, but now they expect them to keep financial data secure and protect their privacy.
A survey by encryption hardware company nCipher Security conducted in April showed U.S. consumers trust banks more than any other organizations to protect their personal data.
But the findings also suggest banks should not be complacent. Nearly half of respondents said they would lose trust in their bank if it did not seem in control of data security, and more than half said they would lose trust in a bank that did not inform them about a hack within 24 hours.
As digital offerings evolve rapidly, banks need to keep up and change their privacy policies to address not only the protection of personal financial data but also other types of privacy concerns, "from location, to thoughts and feelings, to biometric information," accounting firm Deloitte said in a May report.
Privacy can be "a competitive differentiator" for banks, but only if they adjust their policies to reflect the complex new world and its technological advances, according to the analysts.
Raman Bhatia, head of digital for the U.K. and Europe at British lender HSBC Holdings PLC, told CNBC in an interview earlier this year that banks would have to work "harder than ever" to retain customer trust. Those that have it will win in the long term, he said.
Banks can play an integral role in privacy and data protection in the future.
Some banks have already made steps in providing ID verification services online, David Birch, director at technology consultancy Consult Hyperion, said in an essay in LIBF's book.
U.K.-based Barclays PLC, for example, is one of the providers of such services for the British government, he said. Customers wishing to use government services online can create an online identity and ask the bank to verify their data.
If this is expanded to non-governmental services, it could become part of the bank's fundamental consumer proposition and could stop the disintermediation which threatens banks' bread and butter business, Birch said.
Using an online ID is a good proposition for bank customers' personal data protection because it does not really contain the data itself, according to Birch. A digital ID shows a third-party provider where the customer is coming from, i.e. logged in with their Google or Facebook profiles, but not who they are.
To verify their identity, the third-party provider needs to go back to the bank. Therefore, in case a third-party website is hacked, criminals will not be able to get the personal data of any digital ID user, Birch said.