By Alexander Jones, International Banker
The world has witnessed the digital-banking landscape expand and evolve significantly over the last few years. But it was not until the outbreak of the COVID-19 pandemic in early 2020 that the demand—and, indeed, the necessity—for digital solutions in banking jumped into overdrive.
“The pandemic has demonstrated that digital banking is essential for consumers of all ages to confidently manage their finances,” said Allison Beer, head of digital at Chase, upon the release of the bank’s survey of 1,500 consumers in December 2020, which revealed that the pandemic had greatly accelerated digital-banking adoption across all age groups. Fifty-four percent of consumers agreed that they used digital tools when banking more due to the pandemic; thus, greater future adoption of digital solutions was expected.
And, indeed, 2021 saw this prediction come to fruition as several COVID variants kept the pandemic in the headlines throughout the year. And with the virus still seemingly far from being confined to the past, 2022 has become a crucial year for the digitisation of banking, as customers continue to migrate in huge numbers onto mobile and digital platforms to meet essential banking needs.
As such, it is important to ascertain which trends in digital banking will likely feature prominently this year.
More control for consumers and small businesses
At the top of Chase’s list of digital-banking trends for 2022 is the proliferation of digital technologies giving banking customers and small-business owners more control. Consumers increasingly want to perform such tasks as depositing checks, sending money and investing via their phones. The demand for such convenient digital functionality is thus driving innovation from fintech (financial technology) start-ups and banks alike, with further growth guaranteed this year.
“Consumers and small business owners expect their banks to go beyond traditional account offerings and provide reliable tools and resources to help them understand and improve their financial health. This includes giving them a lightning-fast overview of where their money is and how it’s being used, available at their fingertips,” Chase’s chief product officer, Rohan Amin, recently wrote. Consumers and small-business owners will demand more personalization, he added, which will lead to “hyper-personalized features that deliver tailored experiences based on real-time dynamic signals” about customers’ individual needs and profiles. “Key to those efforts will be clear segmentation.”
Banks’ digital-transformation strategies continuing to accelerate
Again, the pandemic is chiefly responsible for inducing permanent changes in the behaviours and goals of financial institutions regarding digital transformation. In practice, this means that digital transformations are accelerating more rapidly than before, with the pandemic underpinning the need for banks to increase digitisation investments to remain competitive.
Indeed, COVID-19 has challenged the status quo in unprecedented ways, according to BDO’s “2021 Financial Services Digital Transformation Survey” published in July 2021, which polled 100 C-suite executives at middle-market banks, credit unions and other lending institutions. According to the survey, most organizations have developed digital-transformation strategies, and nearly half are accelerating existing plans.
“From economic instability to new regulatory pressures to increased cyber threats, 2020 upended operations and amplified uncertainty,” the study noted. “Using technology solutions to increase agility and resilience has become more important than ever before, and financial institutions aren’t taking a wait-and-see approach—61% are adding new digital projects, and 51% are revising their long-term strategic vision.”
More “digital-only” banks
The last few years have seen the unstoppable rise of challenger banks and neobanks—those digital-only banks that operate without a single physical branch and offer their services wholly via mobile apps. Invariably offering preferable rates and lower fees compared with their traditional-banking peers, it is easy to see why they have gained so much popularity recently. With fewer overhead costs for which to account, such digital-only banks are carving out a distinct niche among banking consumers wanting to keep their fees as low as possible as well as those who can realistically complete the bulk of their banking requirements over the internet or through their smartphones.
And, of course, the growing migration by banking customers towards the online realm, spurred by the pandemic, has only helped such digital-only banks to thrive. With the pandemic far from over throughout much of the world, moreover, digital-only banks are set to continue seizing market share from their brick-and-mortar rivals.
Indeed, according to its “2021 State of Consumer Banking and Money” survey, fintech firm Galileo Financial Technologies found that the majority of consumers (62 percent) were “somewhat” or “highly likely” to switch to a digital-only bank, with Millennials (77 percent), Gen Z (72 percent) and Gen X (55 percent) expressing the greatest likelihood of making such a switch. One main reason was customer satisfaction—of the 65 percent of the survey’s respondents who used traditional banks as their primary providers, only 66 percent were satisfied; whereas, of those who chose digital-only banks (21 percent) and stand-alone digital accounts (7 percent) as their primary providers, 79 percent and 81 percent were satisfied, respectively.
Continued growth of embedded finance and banking-as-a-service (BaaS)
Much of the banking industry’s ongoing evolution is thanks to the rise of financial services being offered by nonbanking firms. In essence, a multitude of companies—including retailers, tech giants and logistics firms—are now becoming fintechs by embedding a range of banking and financial services within their slates of product offerings.
And on the demand side, it seems clear that customers are more willing than ever to use services offered by nonbank companies. “To meet the rising demand for embedded finance, financial institutions are increasingly offering banking as a service (BaaS)—bundled offerings, often white-labelled or cobranded services, that nonbanks can use to serve their customers,” Zac Townsend, McKinsey & Company associate partner, wrote in March 2021.
The London-based fintech company Finastra’s “Financial Services: State of the Nation Survey 2021”, published in June 2021, revealed that both BaaS and embedded banking services were set to experience notable growth, with 85 percent of respondents at global financial institutions expecting them to have significant impacts on the industry in the 12 months to June 2022.
“The benefits of BaaS are clearly recognized by financial institutions with three quarters or more of global respondents agreeing with 5 out of the 6 statements outlined in the chart,” the survey noted. “As seen previously, there are differences on a market level, with the UAE and Asian markets (Hong Kong and Singapore) broadly being more likely to identify and agree with the benefits of BaaS. The UK and Germany generally ranked benefits lower, relative to all the other markets, suggesting these markets might be taking a slightly more cautious approach to adopting BaaS and recognizing the benefits it can provide.”
But making it work will require new technologies and capabilities, McKinsey’s Townsend also noted, as BaaS is usually distributed to clients via APIs (application programming interfaces) and thus requires “strong risk and compliance management of the embedded finance partner”.
The human touch still much in demand
Do the aforementioned trends necessarily usher in an era of banking self-service? Not according to at least some of the research. While the convenience of sorting out one’s financial affairs with just a few touches of a smartphone or a few clicks of a mouse certainly sounds appealing, there remains a hefty chunk of consumers who still desire interactions with human employees able to discuss various banking matters with them.
In its “2021 Consumer Banking Report”, which surveyed 21,000 banking customers across seven countries—Canada, Germany, Hong Kong, Netherlands, Singapore, the United Kingdom and the United States—EPAM Continuum found that 34 percent of banking consumers want more personal interaction with their banks and credit unions via actual interactions with another person.
“In a post-pandemic world, where the digital experience will be a primary area of differentiation and competition for financial institutions, banks will need to move away from purely transactional digital apps by offering digital experiences that connect with the consumer on an emotional level. Thus, a deeper customer intimacy and engagement will become the new normal of digital banking,” financial enterprise-software firm Temenos stated in March 2021. “The benefits could be significant. Emotionally connected customers exhibit less price sensitivity, purchase more products, and recommend a given brand more compared to customers who are only highly satisfied.”