Basic issues affecting the banking sector are digital disruption, rising competition, regulatory change and post-pandemic economic fluctuations, etc.. Tomorrow’s winners will take steps to not only mitigate or manage these issues—they will find creative, disruptive ways to address them proactively. The specific future of banking is impossible to predict. Still, many of the most potent forces shaping that future can be closely tracked. They include the influence of digital tools like machine learning and cryptocurrency, the role of industry outsiders in driving banking innovation, and the growing willingness of banks to challenge their own deepest assumptions.
Anticipating and making the right strategic choices to prepare for tomorrow can be difficult. There are different perceptions and beliefs about winning in today’s economy. Some prioritize more investment in buying new technology, some are taking steps to using AI, some admit they need to significantly improve their understanding of customers, and others say they need to improve their innovation processes and execution.
To be resilient, banks need to be comfortable in disrupting their business models. Over the past few years, many financial institutions have intended and/or invested in innovation programmess focused on enhancing their technological capabilities and trying to become more agile. The approaches they’ve taken to make these changes have varied based on their existing strengths, business strategies, and identified gaps. By analyzing relevant data, it can be said that traditional banks will invest heavily in updating their technology to remain competitive. These investments include upgrading credit systems in order to approve loans more swiftly, making systems compatible with application programming interface (API) and open banking regimes, or finding ways to integrate more robust data analytics. While good, these incremental changes are unlikely to give traditional institutions the competitive edge they need to stave off new competitors.
So far some banks, particularly traditional banks, purchase/obtain license of digital banks to make rapid changes. This trend will become much more pronounced in the coming days. Purchasing/licensing of digital bank may give the incumbent the flexibility to change or retain the brand name. Banks electing to migrate customers, however, run the risk of incurring significant expenses because of the need to write off aging legacy systems more quickly than they might have done otherwise. Though establishing a digital bank will provide the legacy banks with similar flexibility in regards to branding and building a customer base. The time and investment required to develop a new business model and build the brand can be challenging.
Significant resources will be needed to erect the five pillars of any digital bank: senior management, licensing, funding, technology, and customers.
The new, more competitive business model may provide for lower costs, greater agility and greater modularity. New technology stacks will put incumbents on a level playing field with upstarts and customers can be readily migrated over. Digital banks are also often referred to as “lifeboat” banks. Should the digital bank prove operationally resilient, traditional banks will consider migrating their legacy customer books to the new entity. This both helps replace legacy infrastructure with new, as well as solving the agility and customer experience issues that banks struggle with. To be successfully, banks face the challenges posed by new digital competitors and changing customer expectations, they need to think beyond technology. Whatever path of change a bank undertakes, whether organic or inorganic, it must be partnered with a willingness to entirely rethink their strategy and business processes in order for their transformation to be successful.
This means objectively considering the use of mobile apps, the cloud, customer accessibility, the use of big data and defining how any decisions will contribute to the organization’s overarching business strategy. To be successful long-term, a major cultural shift is required, one in which employees at all levels come to appreciate and even value a company’s transformation. While many financial institutions know they need to change, few recognize the magnitude of change required or the degree of internal resistance they might face to change. To manage this resistance, the change management needs to be an upfront, ongoing and persistent component of any bank transformation initiative. Additionally, any associated communications programmes should be aimed at attracting converts, even evangelists, to the effort right from the get-go.
There is no one path to success for financial institutions that want to increase their competitiveness and better respond to the needs of their stakeholders or the dynamic changes expected to continue to reshape the financial services industry in the years ahead. Companies need to determine their path based on a strong understanding of where they are today and what they want to become in the future.
Banks that recognize the profound shift required and act now to transform their organizations to keep pace will emerge more competitive and successful than ever. It may believe that makeshift upgrades may seem like enough to stem the tide in the short term, companies willing to make more radical changes will be better placed to lead the financial services industry in the years ahead. Those that adopt new business models and build and migrate to new technology stacks will be best prepared for digital competitors. Innovation works when you use technology to actually help customers. The real secret sauce in fintech is when to use technology, data and balance sheet capabilities to help customers empower themselves and meet their own needs. That is what innovation is all about. As customers start to understand and assess the value of their data, many banks will have little choice but to shift towards more open models.
Uncluttered banking goes universal: Over the coming few years, it is expected to see a rapid uptake of open banking approaches and models as people become more aware of the benefits it could bring consumers and small to medium enterprises (SMEs) the ability to quickly understand their financial position, explore alternatives and make better financial decisions. At the same time, we expect to see customer demand and shifting expectations drive increased adoption of open banking models, even where regulation doesn’t explicitly require it. Customers are looking for easier, more seamless and intuitive value-added banking experiences, and there are a growing number of fintech and ‘challenger banks’ seeking to capitalize on these developments. As these new offerings start to influence customer expectations — and as customers start to understand and assess the value of their data — many banks will have little choice but to shift towards more open models (if only to reduce the friction between ecosystem partners) as they strive to offer better customer experiences.
The new metrics coming in front that the survival of many financial institutions will not be defined by how they cut costs, but how they innovate and serve the customer with a ‘challenger mindset. Despite the benefits of large, existing customer bases, economies of scale, strong balance sheets and trusted legacy brands, traditional banks and credit unions can’t assume a successful future is guaranteed. Instead, all traditional financial institutions must embrace a ‘competitive mindset’ that can help to future-proof organizations from the nimble new players that are focusing on combining data and digital delivery to meet customer needs. No longer is cutting costs enough for success in an environment controlled by consumers and small businesses who want you to know them, understand them and provide a strong value transfer for their loyalty.
The statistic isn’t completely surprising, and in fact only recaps what banks and the world in general have known for a while now: The future is digital and banking is no exception to that. So, if the advent of Banking as a Service (BaaS), open banking, and the booming Fintech sector were not proof enough, we now have this roaring statistic that puts a number to the future of banking.
Equipped with real-time assistance, personalized services, highly customized offerings, way shorter turnaround times, and 24x7x365 availability and accessibility, digital banking may help to deliver an enhanced customer experience, in turn leading to an increased rate of adoption. Cyber security concerns, the banks will need to protect consumer data, the ability to integrate with digital payment platforms, and reducing the turnaround time for customer requests are some of the direct benefits banks can look to reap from digital transformation. Also, digital transformation can help banks sell their products and services via digital platforms, in turn increasing their customer base and helping them reach out to the newer and more tech-savvy generations and millennials.
A situation where digital transformation is the route that the banks want to take but individual executives and employees don’t agree is bound to do more harm than good. Before embarking on a journey to go digital, it is of essence that those in leadership roles speak to the employees and ensure them that new-age technologies are only being employed to help them and not replace them.
