Can Banking Shape Up in a Digital World?

Published on 24 Aug, 2016

Banking Business Research

While we’re still trying to figure out the “Internet of Things” and how it could possibly change anything, you’ve probably missed a silent revolution that’s already well underway.

Digitization has slowly but surely touched our lives, spawning seamless features and services that we’re pretty much taking for granted. It’s been gaining traction across several key sectors, not the least of which is banking. 

Digital banking has grown steadily over the years, in part due to better global Internet penetration, which grew from 6.5% to 43% between 2000 and 2015. It’s also a key driver for an increase in non-cash transaction volumes.

Global non-cash payment volumes touched USD389.7 Bn in 2014, a growth of 8.3% y-o-y, with card instruments (debit cards) contributing the lion’s share. While electronic and mobile payments are usually made using a debit card, this could change in the future due to disruptive payment gateways.

Online payment providers like PayPal have revolutionized how we handle financial (non-cash) transactions, and they’re one of the biggest threats that traditional retail banks have ever faced. It’s pushing banks to come up with ‘out of box’ measures in order to appease a more demanding digital-age customer.

Retail banks have begun adopting a digital approach to offset this, coming up with various initiatives to provide customers with efficient and effective transaction channels, while building cost-effective technologies that are agile enough to evolve with changing needs. This digitization isn’t happening uniformly however, differing from region to region depending on factors like Internet penetration, demographics, and the digital divide.

The banks of tomorrow will be hard-pressed to develop digital strategies that can keep up with changing customer demands as well as fast-paced technological advancements, all while creating an ecosystem that provides value to investors, stakeholders, and customers alike.

Fintech Challenges the Banking Sector

Banks today face stiff competition from fintech companies, with private label banks, alternative payment methods and credit providers among their biggest threats.

Competition is tough simply because banks have a lot of catching up to do in terms of technology adoption; there’s a pretty big digital delivery gap between fintech companies and banks. Fintech companies have a strong focus on digital innovation and adopting newer technologies, while banks are slower to evolve and aren’t readily embracing technological developments.

While banks may be wary of issues with security and theft prevention, the banking sector as a whole needs to seriously overhaul legacy processes if they’ve got any hope of closing the digital delivery gap.

Digital Delivery Gaps in Banking Right NowSource:

What Can Banks Do to Cope With Digitization?

The conventional “cautious outlook” is a huge hurdle that traditional banks need to overcome.

Banks that are still trying to gauge the viability of digital banking versus their tried-and-tested methods need to adopt a more dynamic outlook, realigning strategies to cope with the realities of the digital age.

Millennials — the denizens of digital banking — are keen to engage with banks that offer a wide array of products and services.

While a traditional bank may not be able to offer everything that tech-savvy new customers expect outright, banks can meet them in the short term by broadening their ecosystem through partnerships, collaborative ventures, and associations with fintech companies.

Quite a few major banks such as Bank of America, JPMorgan Chase, Goldman Sachs, Wells Fargo, Morgan Stanley, and Citigroup have already taken the initiative, fueling several promising startups and incubation programs. Such collaborations will not only be mutually beneficial in the long run, but could also support some of the bank’s more immediate needs.

Come to think of it, why try to beat them when you could just join them?

Joint ventures between banks and competing fintech startups wouldn’t just be mutually beneficial; they’d be the perfect way to mitigate each other’s shortcomings.

Take something like customer data for instance.

Traditional banks that have been around for a long time are sitting on a veritable treasure trove of actionable insights. All they lack is a means to tap it.

With data in abundance at legacy banks, analytics could be easily applied to develop strategies for the future, based on trends from the past. By tying up with fintech startups like Betterment, Visible Alpha, and Square to deploy tech that can do this, banks could dabble in an area they’ve never explored – Big Data Analytics.

Teaming up with fintech companies could allow banks to create value for customers, not only through the introduction of new products and services, but also by revamping current offerings.

It’ll certainly allow banks to survive better in an increasingly digital global ecosystem.

The future of banking is definitely digitization.