Digitalisation is a broad term used to indicate the use of digital modes such as mobile devices or computers through which bank customers access banking products and services, without human intervention. The evolution of online banking started in the 1980s when the definition of internet banking was far different than what exists today. The increasing digitalization level has led to a paradigm shift in customer engagement while offering benefits to the customers in terms of ease of use, higher speed and multiple means of access. The extent of digitalization adopted by banks across the globe varies depending on geography and size/scale of the bank.
Technology at the forefront
Rising customer demand for digital banking services has led to the emergence of technological innovations such as the use of Artificial Intelligence (AI). AI is employed by banks to automate back-end operations such as administrative tasks and data processing, in turn reducing the pressure on employees. Bricks-and-mortar branches are being replaced by chatbots programmed by natural language processing based on AI. The rise of banking-as-a-service (BaaS) also accounts for an increase in digital services, as more legacy banks are opening up their application programming interfaces (APIs) for fintech and third-party app development. Traditional banks are increasingly allowing third-party providers and fintech firms to leverage their infrastructure and consumer data to develop new digital services.
Technology companies to challenge traditional banks
Banks face challenges on multiple fronts such as lower interest rates and stricter regulatory controls. Traditional banks have also seen increased competition from non-banking players such as Tech giants such as Google and Apple, and small fintech start-ups. These market participants have created a niche for themselves by catering to tech-savvy customers through seamless online banking, instant information and top-notch services at much lower costs. The technology companies also benefit from their large customer base and strong capabilities in the digital space and could disrupt a market previously dominated by traditional banks. The entry of these technology companies could encourage traditional financial institutions to improve their financial products. Consumers are increasingly moving towards fintech firms over traditional banks and credit unions; however, there is also a hesitancy to give in fully to emerging tech firms. The digital-first strategy characteristic to many fintech companies makes them more agile and enables them to offer swift customer service.
A paradigm shift in banks’ business models
As digitalization is here to stay, banks cannot afford to remain stuck with old-world ways of doing business and will be quickly overshadowed by competition unless they adopt digitalization in a big way. Previously, banks have always followed a reactive approach to technology adoption. Today, as the banking landscape turns more and more digital, banks cannot afford to be slow, as stronger and nimble competitors will take away market share which will then be difficult to recapture. Banks need to be more proactive and take measures to remain relevant to the changing technological developments. Banks need to transform their business models to facilitate early-stage strategic investments in emerging technologies in collaboration with technology companies. Partnerships with technology firms operating in the banking sector may be one way to educate the bank management and staff about digital products and help them prepare for the change ahead. Banks will also increase the usage of analytics to enable them to devise products suited to their customers’ requirements.
Digital services also present unique opportunities for banks to refine their operations in innumerable ways. One example of the fact that digital technologies lend themselves to automation is the use of e-wallet. E-wallets facilitate the storage of customer data on the client or server-side and in turn improves customer experience. Another notable technology is Blockchain which is expected to revolutionize digital transactions. One more reason why banks should embrace digitalization is significant cost savings, especially in geographies with a dense branch network. This will be also dependent on factors such as labour laws, population density and level of digitalization in the society.
While the benefits of going digital for banks are all too obvious, the path to total digitalization is fraught with some roadblocks. One major headwind which all financial institutions especially banks continue to face is increasingly stricter regulations and compliance measures enforced by the regulatory stakeholders. It would not be prudent to include fintech players that partner with banks within the realm of banking regulations. These companies compete at only a few nodes in the entire banking value chain and do not directly extend any financial services. What is instead more practical would be to adopt a monitoring mechanism to make quick supervisory adjustments in case of any material changes in the way these players operate. An oversight regime that strikes a balance between rapidly changing customer choices, disruptive technological innovations and the scope of banking regulation and supervision is the need of the hour.
Cybercrime is another key risk, given the new level of interconnectedness achieved by the “sliced and diced” banking value chain supported by various players including banks and fintech companies. This creates a complex network where any breach may have an impact on the entire value chain and could spark a systemic crisis.
What lies ahead?
Digitalization has led to the emergence of disruptive ways to access banking services forcing banks to radically alter their perspectives and priorities on the conduct of business. Banks’ digital transformation will also drive profitability gains, provided it is accompanied by structural changes and balance sheet adjustments that create an environment conducive to digitalisation. This change is needed to cope with the rapid pace of technological innovation in financial services, increasing competition from big tech and fintech companies as well as the need to strengthen their resilience to cyber threats. The future of the bank is digital and perhaps digital-only and banks committed to technology will likely survive the competition and serve into the distant future. In the future, banks will likely have close partnerships with technology companies to help them mirror the underlying technologies in their outlook, plans and operations.
Author : Prasanth R Krishnan
Prasanth works as an Associate Director with Avalon Global Research and is primarily responsible for project delivery, client management and business development. He has over 14 years of experience across research, consulting and financial services industries. At Avalon, his focus industries are Automotive and Industrials along with ICT. Outside of work, he is an avid Automotive enthusiast and likes to keep track of all the latest developments in the Automotive world.