7 digitalization trends transforming the banking industry

Digitalization has been defined as “the use of digital technologies to transform a business model” - but when it comes to it's impact on banking’s business model, transformation does not seem a strong enough word. Seemingly in the blink of an eye, people have gone from being amazed that they can access cash from an ATM (“you don’t even have to enter the branch”) to barely batting an eyelid at being able to use a smartphone to trade cryptocurrency while sitting on a bus. Terms that had barely been heard of a few years ago - think blockchain, digital wallets and FinTech - now dominate the banking and finance conversation.

7 digitalization trends transforming the banking industry

The big question is what happens next and, given the nature of technology, one certainty is more change. Just as time waits for no man, the digitalization wave cannot be stopped and many traditional big banks have finally realized it is a case of get onboard or risk being left behind. While FinTech and neobank entrepreneurs have a short but proud history of pushing the digital edge, some legacy players have been slower out of the blocks and are now rushing to meet the needs of tech-savvy consumers who consider online banking not just one option but all they know and want.

Of course, no analysis of the digitalization of banking can be conducted without reflecting on the impact of the COVID-19 pandemic. Few factors have accelerated wider society’s adoption of digital banking than the prolonged lockdowns of 2020-21, with once-hesitant consumers quickly switching to – and, more importantly, staying with – digital banking options.

This was highlighted by financial giant JP Morgan Chase & Co, which found the number of consumers using its digital solutions rose 6% year on year in the third quarter of 2020 and those using its mobile app soared 10%. Additional research reinforces that a new generation of digital banking consumers is emerging in the post-COVID era, with about a third of retail banking customers intending to increase their use of online and mobile services post-pandemic and only 46% planning to return to ‘banking as usual’.

With so much transformation happening across the financial landscape, it is easy to lose sight of the key digital banking trends likely to impact the sector in the coming year. For that reason, we have compiled this definitive list about all things banking digitalization, online innovation and AI.

  1. Digital-only banking is here

    It was once the stuff of fantasy – a bank that only exists in the virtual world. Make global payments and transfers, receive a contactless MasterCard with free transactions and buy and exchange Bitcoin and other cryptocurrencies without leaving home - too good to be true? Of course not. In fact, it is increasingly the norm with the likes of Revolut, Monese, FirstDirect and the appropriately named Digibank among the digital-only banks on the rise. While some old-timers maintain they will never bank online, the fact bank branch visits are set to drop 36% from 2017-22 highlights the rise and rise of digital-only alternatives.

  2. Silicon Valley influx

    Behemoths such as Bank of America, Wells Fargo and Chase enjoyed a golden run when they dominated the banking landscape but digitalization has opened a window for tech giants to grab a seat at the fiscal table. The likes of Google, Amazon and Uber are all aiming to stake a claim in the financial sector and given their clear superiority in digital innovation, it will be no surprise if it is the traditional organizations that raise possible partnerships as a way to work with their new rivals rather than against them.

  3. Blockchain revolution

    For a sign of how blockchain is set to change the face of global financial transactions, consider this statistic from the team at Statista – at the end of 2016 there were almost 11 million blockchain wallets available across various providers. In 2019, that number had soared to more than 40 million and has continued to rise during the pandemic. Fast, truly global and with low processing fees, blockchain has already proven popular within the banking sector, which had a huge dominance as the industry that had the highest distribution of blockchain market value in 2020 (29.7% compared to second-placed process manufacturing with 11.4%). A PwC analysis has also predicted that 2025 will be the tipping point when blockchain technologies will be adopted at scale across economies worldwide.

  4. The AI effect

    With artificial intelligence projected to reduce bank operating costs by 22% in 2030, it is little wonder executives are fine-tuning their AI strategies. The cutting-edge technology has already reinvented customer experience via chatbots and other smart systems and financial institutions are now embracing it as a means to provide faster transactions and overhaul backend processes to provide customers with the convenience they demand. AI is also improving user safety within digital platforms via its ability to monitor and learn customer behavior and better recognize and alert them when their accounts may have been accessed by hackers. However, an immediate challenge for banks may well be one faced by various industries – a worrying global shortage of professionals skilled in the field of AI.

  5. Digital crime watch

    It’s obvious really – the more the banking industry embraces digitalization, the greater the threat of criminals wanting to exploit it. Where there is money, illegal activity tends to follow and banks are stepping up their cybersecurity to prevent attacks from hackers. Nothing erodes customer trust like their finances or personal information ending up in corrupt hands and the rise of digital crime is set to be matched by the commitment of the banking industry to beat it.

  6. Regulation revamp

    The banking sector is already one of the world’s most heavily regulated industries and the rise of fintech and blockchain will draw further interest of governments and industry authorities alike. As much as there will be those who bemoan such ‘interference’, there is little doubt the increasing digitalization of banking poses many issues for regulators including data ownership and the potential for financial breaches. Expect plenty of high-level discussion aimed at reassuring businesses, consumers and financial institutions themselves that appropriate safeguards are in place.

  7. Back-end overhaul

    As financial organizations battle to stay ahead of their competitors, many are putting the digitalization of back-end processes at the forefront of their thinking – and with good reason. Almost 90% of finance executives do not believe their current core systems can keep pace with customer-facing initiatives, while one study showed 60% of customer dissatisfaction originated from back-end issues. The role of technology such as Document Management Systems (DMS), digital signature solutions and Business Process Management (BPM) software will continue to rise and, in turn, increase efficiencies, reduce costs and boost customer satisfaction. Just ask Lloyds Banking Group, which invested in a digital back-end technology that reduced the time it took to do certain processes by 90%.

The outsourcing solution

Just as financial institutions are embracing digitalization to enhance their prospects of attracting and retaining customers, an increasing number are turning to external providers to assist with that goal. Outsourcing is a resourcing strategy that sees an organization’s tasks completed by third-party team members in another location. Between core banking activities, back-end processes and IT functions, the banking industry has many of the repetitive and time-consuming tasks that best lend themselves to outsourcing.

That much is obvious from the fact almost 80% of retail banks already outsource at least one part of their business operations, with the pressure to reduce costs and drive efficiencies a key driver in their decision. Valued at $85 billion in 2020, the global BFSI (Banking, Financial Services and Insurance) outsourcing market is projected to reach almost $175 billion by 2028 as more businesses take advantage of the numerous benefits of outsourcing in the banking industry, including:

  • Cost savings: labor costs are a huge drain on any business but outsourcing to nations such as the Philippines is easing that pressure in the banking sector. Along with saving vital funds on associated infrastructure such as office space, furniture and computer equipment, the lower cost of living means businesses can pay up to 70% less for highly qualified talent than they would onshore.
  • Increased productivity: do not underestimate how partnering with offshore banking and IT teams enables in-house staff to focus on higher value tasks. Outsourcing providers pride themselves on handling high volumes of repetitive, time-consuming work, which means their onshore colleagues can dedicate more time to strategic priorities such as developing and deploying digital innovations, delivering better customer experiences or preparing for the next wave of online competitors.
  • Talent: the banking and IT industries are facing increasing pressure to attract quality staff due to local talent shortages, all the more so as COVID-19 plays a disruptive role for both existing personnel and training programs and institutions. No wonder many banks and financial institutions are grateful that outsourcing hotspots have nurtured a large and self-generating crop of skilled and committed workers. The Philippines workforce, in particular, is renowned for its digital competency and attention to detail, operating in a fiscal system almost identical to the West and being supported by dynamic financial tracking and reporting tools.

The days of people solely associating outsourcing with call center agents and data entry specialists are long gone. Befitting a dynamic, growth industry, there are numerous outsourcing job roles that would enhance a bank’s digitalization goals including:

  • Back office support: process is a fact of life in the banking sector and that brings immense pressure for the executives and staff responsible for managing the huge volume of related labor-intensive jobs. Outsourcing providers can source staff and entire teams to manage back-office functions such as HR, workforce management, personal assistance, payroll and data analysis, which allows in-house managers to focus on high-value projects that help deliver long-term goals.
  • IT/Digital: few areas of business evolve faster than IT and that adds an extra layer of complexity to the search for the team members needed to manage change and maintain quality across financial institutions. The likes of the Philippines boast a huge array of IT specialists who can enhance the process of banking digitalization and, best of all, their wages are up to 70% less than what is needed to employ one of the limited number of recruits on home soil.
  • Operations: many banks and financial institutions are so enamored by the success of their forays into outsourcing that they are choosing to recruit entire operations teams in hubs such as the Philippines. The highly specialized ops teams can streamline processes, identify opportunities, respond to specific business needs and can proactively adapt and evolve to meet the needs of the changing landscape, be it in financial or technology arenas.

Finding the balance between managing costs, supporting growth and keeping staff morale high can be a challenge in the financial sector. Discover how a Canadian payment provider used offshoring in the Philippines to almost quadruple its full-time workforce in a cost-effective manner, all while maintaining high levels of staff morale and retention.