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.
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%1 year on year in the third quarter of 2020 and those using its mobile app soared 10%. Additional research reinforces2 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.
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%3 from 2017-22 highlights the rise and rise of digital-only alternatives.
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.
For a sign of how blockchain is set to change the face of global financial transactions, consider this statistic4 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 value5 in 2020 (29.7% compared to second-placed process manufacturing with 11.4%). A PwC analysis has also predicted6 that 2025 will be the tipping point when blockchain technologies will be adopted at scale across economies worldwide.
With artificial intelligence projected7 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.
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.
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.
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 executives8 do not believe their current core systems can keep pace with customer-facing initiatives, while one study showed 60% of customer dissatisfaction9 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 technology10 that reduced the time it took to do certain processes by 90%.
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 banks11 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 12 as more businesses take advantage of the numerous benefits of outsourcing in the banking industry, including:
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:
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 Philippines13 to almost quadruple its full-time workforce in a cost-effective manner, all while maintaining high levels of staff morale and retention.
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