How Digital Revolution Changed the Banking Sector As We Knew It

The financial crisis, which hit in 2007, crippled banking institutions across the world and led to a recession whose effects we are feeling to this day. A growing number of digitally savvy customers have begun clamoring for greater accountability and transparency from their financial institutions. At the same time, retail banks are operating within an ecosystem of new fintech startups and non-banking digital entities, which have begun eating into their market share.

Both combined have affected financial institutions in developed and emerging economies. In 2016, North American banks saw a 4.1% drop in ROE, while in China the figure was 6.7%. In order to change their fortunes, retail banks are digitally transforming their operations.

Today, banks are more focused on ‘the best way to transform’ rather than ‘whether or not to transform’. Advancements in analytics, artificial intelligence, and fintech are quickly changing the way banks operate. In 2018, the strategic focus will be on automating core business processes and recruitment of the right talent.

Determining the Key Factors Spearheading Transformation

With new market entrants and rapidly evolving customer expectations, the reliance on technology is at its peak. Customers are demanding better usability, and expecting personalized digital experiences that are intuitive and effortless. Improved use of data and advanced analytics along with refinements in multichannel delivery also feature prominently in DX strategies.

Changing Dynamics

Advanced analytics can be leveraged along with machine learning and contextual engagement to offer personalized experiences. Modern customers want flexibility in terms of banking channels and timings and that makes it essential for banks to make provisions to accommodate that workability. Advisory and sales activities should be more reactive than proactive while relationship management should increasingly entail end-to-end engagement, throughout the customer journey. The task, therefore, would be to strike the right balance between digital and physical channels.

Channels of Choice

According to the J.D. Power 2017 U.S. Retail Banking Satisfaction Study^SM, overall retail bank satisfaction was significantly higher among customers who had visited a branch as opposed to those who have only used digital channels. Within the closely watched Millennial age group (those born between 1982 and 1994), satisfaction was highest when bank customers used a mix of branch and digital banking channels.

Mobile banking has been adopted widely but despite that, a large percentage of the millennials visited bank branches for an average 11 times in the past year. To stay connected with and retain the new generation of customers, banks must focus on and improve digital problem resolution. Customer satisfaction will, in the long run, be the primary differentiator because very few customers would return to a bank if their issues are not resolved satisfactorily.

Data and Advanced Analytics

Data is the key to personalizing experiences for a bank’s customer

Financial institutions have to rely on advanced analytics to increase automation, improve personalization and customer experience, reduce costs and enhance compliance. Advanced analytics is constantly evolving, improving with each iteration, and performance measurement results. With enhanced accuracy of predictive models, organizations can refine data sources and leverage data to make use of newer technologies such as machine learning and automation.

Advancement of machine learning applications will prompt vendors to provide domain specific solutions. By 2020, about 1.7 megabytes a second of new information will be created for every human being on the planet. The way forward will comprise fully integrated, end-to-end data management platforms to leverage large volumes of data from different streams, and Deep Learning applications to derive actionable insights from data. Experts also foresee accelerated use of AI and Deep Learning applications in voice recognition and video analytics.

Artificial Intelligence (AI)

With increasing adoption and maturity of FinTech solutions, and widespread acceptance of digital payments, the banking industry is expected to open up. API built architectures, blockchain, AI and RPA solutions will change the face of financial services, and the movement will be led by global tech giants. Enterprise Data Architecture will gain importance as banks have recognized that customer data spread across multiple platforms, built to align systems to products, cannot use AI efficiently. The architecture will be crucial to rationalizing and cleansing fragmented data stores.

Blockchain

Although a new technology, blockchain bears the promise of becoming an effective agent to help combat fraudulent activities. Between 2016 and 2017, fraudulent activities and economic crime rates increased significantly. Although the percentage increase could be attributed to an increased awareness and improved understanding of what constitutes economic fraud, close to half of the respondents said that their organizations have and will continue to boost expenditure to combat economic crimes.

Presently, a centralized database forms the core of most banking systems the world over. That exposes a system to cyber-attacks, making it vulnerable. Hackers can compromise the entire system with a single breach. The answer to that is blockchain. Essentially a distributed ledger wherein each block has a timestamp, and holds batches of individual transactions linked to the previous block, blockchain can eliminate many financial crimes.

Looking at Tomorrow

Data security and privacy in today’s connected digital age is a must to ensure loyalty

Fintechs are becoming increasingly popular and to stay in the race, banks have to engage and adopt digital transformation. Globally, VC funding in FinTech has increased exponentially and that has given entrepreneurs a platform to disrupt traditional providers. They have effectively set new UX standards and thereby raised customer expectations. According to the Basel Committee of Banking Supervision, cooperation between fintechs and banks will pave the way forward for financial services.

According to the World FinTech Report 2017, 50.2% customers globally say that they use financial services from at least one non-traditional firm for banking, insurance, payments or investment management. If banks are to collaborate with FinTechs, they have to gradually move towards a bank-as-a-platform model of operation. They would have to equip themselves to make a part of the IT system (payment process, account management, cash management services, etc.) accessible to and usable by in-house or external developers within a secure and efficient environment.

Security and privacy will always top the concerns chart. Cyber security will be of paramount importance as a cyber-attack will cost a bank its customers. Smart security policies, initiatives in cognitive compliance and automated security will help banks keep their customers assured. Banks should therefore consider new governance models, adopt and support a culture of enhanced agility, and most importantly, promote innovation.