3 Drivers of Digital Banking’s Unstoppable Rise

by | Oct 6, 2021

After the Global Financial Crisis of 2007-8, large banks around the world were deemed by governments to be “too big to fail”. Fast-forward to just 13 years later and traditional financial institutions operate in a much different environment: the digital banking era.

The idea of a bank for customers is increasingly an app on their mobile phone rather than a brick-and-mortar building. High street banks face far greater competition due to the rapid rise of technology and changes to regulation that promote greater competition, such as PSD2. For banks that struggle to digitize and meet market demand in the next five years, they are at serious risk of losing significant market share, both to other more tech-savvy banks and agile fintechs.

The path to predominantly digitized banking is irreversible and there are three key drivers of this development, although there is also one crucial challenge for banking entities to solve.

1. The pandemic forced banks to level up

With banks unable to open their doors throughout the pandemic and restrictions continuing to ease and tighten around the world, digital banking growth accelerated in an unprecedented manner. Banks were left with no choice but to create new digital banking processes for their customers, with automation and artificial intelligence taking care of many types of customer queries and needs. 1.9 billion people worldwide used online banking services in 2020 and this number is expected to increase to 2.5 billion by 2024. During the pandemic, many customers have used banking services digitally for the first time, including applying for a loan, making transfers.

Although, according to Deloitte, 52% of customers value bank branches as important, including young people, indicating that there could still be a strong future for the bank branch too. For some customers, especially older generations, the branch may remain as the primary means of banking, while younger generations are more likely to combine digital and in-branch banking. 31% of people say that they do not plan on using bank branches again in the future.

Banks continue to face increasing cost pressures. Tech-led capabilities like robotic process automation (RPA) and machine learning can enable banks to massively reduce operational costs. With this in mind, the shift to these digital methods, including for client-facing banking, is only set to increase in frequency. For instance, this is already apparent with the increasing sophistication of AI chatbots to deal with many kinds of customer queries.

2. Cashless society is almost here

Cash transactions dropped in the UK by 35% in 2020, with about a mere one in six transactions paid for with cash. Again, this rapid shift was powered by the pandemic. However, it was a sign of what is coming. It is now increasingly common to see merchants that only accept card payments.

According to a European Central Bank survey, 45% of respondents cite greater digital payment convenience as the main reason for the move to a cashless society. Other main reasons include the risk of Covid-19 infection from touching banknotes, merchant preference to use card payments, and businesses that now only accept card payments. Wider economy-related reasons are also important factors, such as the rise of e-commerce and digital apps like Uber and Deliveroo, which operate only through electronic payment.

Banks must proactively take action to remain competitive in this new cashless society with data-led processes and digital products that help their customers.

3. Artificial intelligence and data technologies are advancing further

Relatively nascent technologies like RPA, process mining, blockchain, AI, and quantum computing are advancing at an incredible speed. Indeed, many of the digital processes that a completely digitalized organization today use will likely be obsolete within as few as five to ten years.

What this fast rate of technological advancement means for banks is that they have to change their traditionally cautious, slow-to-react nature to become proactive, visionary, and strategic. The risk of failing to do so is that technology-led enterprises, be they other financial institutions or fintech challengers, could render them uncompetitive.

An urgent digital banking challenge: Sourcing the right talent

It is all well and good talking about what banks have to do in order to become digitized but there is also a huge problem that they currently face: finding professionals that are knowledgeable and capable in data science, analytics, and data-led strategy.  They can integrate the requisite technologies to drive digitalization but without the workforce knowledge of how to operate them and harness them to their full potential, banks won’t get very far.

The reality is that technology is advancing too fast for the global talent pool to keep up with. There is a worldwide dearth of suitably educated and trained professionals in these key digitalization areas. To address this issue, banks can focus resources on upskilling and training their own workforces. They can also seek collaboration with specialized fintech organizations, especially those with expertise in data science and analytics.

The pandemic showed how banks can develop when they really want to. Very quickly, banks across the world set up digital communication and banking services for their customers as in-branch banking was no longer possible. With the same type of approach to digitalization in “normal times”, financial institutions can continue this pandemic-fuelled burst of meaningful digitalization. However, to truly move on from legacy systems and correctly integrate and take full advantage of the power of advanced digital technologies, banks require talented people with specialist skills and training in the data space, both in-house and externally via third-party partners.

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