How is modern banking affected by digital innovation?

As a business owner, the primary factor that plays a pivotal role in successful digital transformation is knowing which component of your business process needs to be transformed. The first reason for keeping this vital point in mind is that every organization needs to base its digital transformation strategy according to its business objectives.

In today’s article, we will delve into how traditional banking service providers and the fintech sector require disruption to provide better customer service and stay afloat in the market with a competitive edge.

Source: Statista

Modern-age fintech startups are already combining digitalization, digital innovation, and the convenience of human interaction to chip away at the market share that the traditional banks capture.

The modern upstart digital banking challengers are disrupting the way traditional banks provide services like

• Making online payments
• Lending cash
• Money transfer
• Managing investments

Here are a few examples of how the new market occupants are seizing opportunities:

• Credit card/online payments have now been replaced by digital solutions from Apple, Amazon, Google
• Digital wallets are rapidly replacing cash/cards
• Real-time payment platforms and systems are removing the need to use cheques
• Peer-to-peer (P2P) lending platforms are replacing conventional lending systems

The main takeaway here is that the disruptions have occurred because the new age banking service organizations took up a “start from the end” approach. The focus is on the customer experience and habits, and the services are built backward to meet the customer requirements.

Traditional banking channels are slowly realizing the need to design the products based on their consumers’ needs. Conventional banks’ general approach is to develop products and services for the customers depending on their strategic interests and existing capabilities. This is the pain point that traditional banks and financial institutions need to resolve to keep their financial market share.

What is Digital Innovation?

Digital innovation is the use of digital technology and applications for improving

• existing business processes
• workforce efficiency
• enhance customer experience
• launch new products or business models

Of late, the finance industry has been heavily influenced by technological advancement. When I use the term influenced, I mean it in a very productive and positive manner. Let’s delve a bit deeper.

The graph by ATOS depicts how the ten technologies have been disrupting the banking and financial sector. We are covering some of the relevant technologies here.

Artificial Intelligence

The prediction of future outcomes and trends is essential, and AI allows businesses to analyze past behaviors. AI can be a successful tool for banks for deriving critical insights related to customers by crunching the data pool. Apart from predicting the future outcomes and various trends, AI enables banks to

• identify fraud
• detect anti-money laundering pattern
• make customer recommendations
• personalizing offers and services
• enhance the overall customer journey

Vital financial services backed by AI

A study by WEF shows a wide array of sector-specific opportunities financial institutions can derive after implementing AI. The economic system can be divided into six sectors, which encompass the entirety of financial services

• Deposits and lending
• Insurance
• Payments
• Investment management
• Capital markets
• Market infrastructure

The major component of the diagram above is the graph that depicts movement and opportunities.

While moving from the center of the diagram to the periphery, the five strategy types range from conservative improvements to bold steps for finding better capabilities. AI can enable banks to shift their focus from the scale of assets to the scale of data and use the same data for tailoring customer experiences.

API Platforms

Previously banks were using a monolithic system where they controlled everything, keeping the records to track customer interaction. That time has passed away, thanks to new regulations and customer needs.

Modern banks are more focused on building banking stacks, enabling them to connect customer and third-party service providers to deliver a flexible and personalized experience to their end-users. This is where APIs (application programming interface) come into play. The API Banking Platform is designed to be placed between backend execution and frontend experience.

APIs enable banks to experiment with modern technologies such as blockchain at a lower cost and adopt entirely new business models.

Blockchain

You can say that blockchain technology is distributed database that doesn’t require a database administrator. Multiple users can simultaneously access the data while ensuring the integrity and flexibility of the records entered in the database.

Blockchain is best suited for clearance and settlement departments of the banking sector. Investment banks can save $10 billion with blockchain technology with improved clearance and settlement systems.

One more area that can benefit from blockchain is KYC (know your customer). With blockchain’s help, Forbes has predicted that banks can turn KYC from a cost center into a profit center.

Quantum Computing

Quantum computing implies the implementation of quantum mechanics for deriving complex data operations. General computers are using 1 or 0. Quantum computing uses quantum bits that can compute using 1 or 0 or both with the right algorithm. Even though commercial implementations are still a far-fetched reality, banking giants like JPMorgan Chase and Barclays have already invested in quantum computing research.

Augmented Reality

This disruptive technology has been influencing customer experience across industries. So, how can it be used in banking? Well, for starters, immersive technologies such as augmented, virtual, and mixed reality can provide complete self-sufficiency to customers in actions and transactions, even from their homes.

Australia’s commonwealth bank has already implemented AR by implementing it in their application where customers look to buy or sell the property. The application them sections like

• Current listings
• Recent sales
• Price tendencies

All these factors enable their customers to make swift, data-driven decisions.

Instant Payments

In recent years, customers’ expectations related to payments have seen a dramatic change. Be it businesses or customers; both have higher expectations of faster payments and a hassle-free banking experience.

Banks can do so with the help of instant payments. To replace cash transactions with online ones, a fast, secure, and seamless experience is the need of the hour. Banks worldwide are now searching for methods that can keep their customers happy with their services and enable instant payments. Peer-to-peer payment is heavily suggested for the same.

Robotic Process Automation

Deloitte’s 2017 State of Cognitive survey found that 88% of financial service professionals believe that such technologies are a strategic priority.

The rise of digital everything has also touched off on banking. A large volume of unstructured data is created due to the digital economy, including transactional and behavioral data. This data can be used for renovating the customer experience.

Banking institutions need technologies that mimic human activities and judgment faster with proper scale and quality. So they need robotic and cognitive technologies to make their processes smoother and more prosperous for their users.

Hybrid Cloud

89% of banks reported operating with or planning to operate with hybrid cloud strategies. — IDC’s CloudPath Survey

Quick response! This is the greatest challenge the connected world has brought to the banking sector. High-performing banks know that the cost-effective way to promptly provide resources across the enterprise is by implementing an enterprise-wide hybrid cloud.

This also enables them to address issues like

• Data security
• Data governance
• Data compliance

The hybrid cloud also enables banks to move extensive resources in a matter of minutes. The bonus point in favor of hybrid cloud is that it also allows banks to bring an innovative offering to the table for their users.

Why is Digital Innovation Important for banks?

I will talk with insight towards 2021. So here it is. Even though stay-at-home orders and the lockdown will be replaced with the “back-to-the-routine” fundamental, the world has learned a big lesson; having a plan B. Digital innovation was the highlight for the year 2020, and the trend will continue to dominate business strategy.

The reason digital innovation is essential for banks and the financial sector as a whole is simple; you need to provide a better digital experience to the consumers.

More than eight out of 10 people are worried about their financial position, and 25% believe it may take years before returning to a state of stability. — EY Future Consumer Index

These statistics highlight the needs of the consumers, and banks need to pay heed to this. The better innovation they bring into their service mix, the more satisfied the consumers will be.

Banks must ensure that they plan and provide business owners and customers smoother access to critical loans and funding. It is necessary because banks will become more accessible to the consumers and businesses trying to get on their feet post-pandemic.

The pandemic exposed back-office system weakness, and that has pushed banking institutions to rethink their processes. With the onset of the pandemic, small and mid-sized businesses were the worst hit. In turn, this forced the banks to implement new lending capabilities and handle the influx of loan applications using legacy systems, which were not that capable or flexible.

89% of banks in North America and 83% of EMEA banks are still focused on business continuity, cost optimization, and building resilience into their operations. Conversely, 77% of banks in the APAC region — where the virus’s impact was felt earlier on — are already accelerating longer-term transformational projects and returning to a focus on innovation. — IDC’s COVID-19 impact on IT Spending Survey

On the other hand, banks that had invested in digital transformation could accelerate their recovery rate post-covid insurgence. I want to share a quote here, “Necessity is the mother of innovation.”

This pandemic has forced businesses to take the high road of digital transformation. IDC predicts that the global banking industry will accelerate IT spending over the next five years, growing at 5.9% annually.

Examples of digital innovation in the banking sector

This graph depicts how each company has fared in this technology-driven era. The percentages showcased here are from the research conducted by LinkHumans that indicate what themes played the most critical parts in the scoring for each company.

Total digital banking users will exceed 3.6 billion by 2024, up from 2.4 billion in 2020, driven by the rise of digital-only banks and digital transformation projects. — Juniper Research

Digital transformation in banking mostly requires the shift to offering online and digital services. It involves massive backend changes to support this transformation. Digital transformation in banks must always be a top-down approach. Banks need to integrate digital systems, customer experience platforms, apps, and infrastructure for enhancing their reach in the market.

Examples of digital transformation in banking

• The advent of blockchain technology
• The inclusion of artificial intelligence (AI), machine learning (ML), and big data analytics
• Faster, broader, and smoother customer data collection, management & analysis

Concluding thoughts: Traditional banks need to mix digital innovation with technology to face the fintech challengers

The graph in the previous point depicts that banks need to move away from their legacy systems.

They have to stop relying on manual functions and embrace digital innovations to counter fintech startups’ rise.

They need to smartly decide which segment of their entire process is in dire need of transformation and start by developing the same digital transformation strategy.

We have already written an in-depth guide to help businesses with their digital transformation strategy. Rapidops has been the digital product consultant to various firms and has also developed a system to counter the menace of illegal money and money laundering with data visualization and big data analytics.

If you want to turn your budding idea into a booming, working example, then let’s get down to business over a chat. I am sure our team of experts will guide you with your digital innovation strategy, and you will surely benefit in terms of ROI and other returns.