By Ángeles Nuñez-Letamendia, Expert in Digital Transformation and Innovation in Banking, and Laura Nuñez-Letamendia, PhD,Professor of Finance, IE University
We live in an increasingly digitalized world in which citizens have all the information and services they need just one click away. At any time of the day or night, they can access the day’s news, go shopping, organize a trip or pay a bill by direct debit from their smartphones. As if that was not enough, COVID-19 created a huge impetus toward further digital transformation. Even elderly people during the pandemic lost their fear of using technological devices, such as smartphones, tablets and computers, to carry out tasks that facilitated their daily lives. Online banking was no exception, with an increasing number of people performing financial transactions or accessing financial services through applications, tablets and computers.
For example, in Spain, a country with a high level of banking penetration, according to the National Statistics Institute (INE for Instituto Nacional de Estadística), between the end of 2019 (pre-pandemic) and the end of 2020, digital-banking users grew by 10 percent, meaning that approximately 67 percent of internet users—accounting for 93 percent of the total population—frequently accessed electronic banking. This increase was much more prominent in the 65-74 age segment, with a growth of almost 28 percent. Underpinning this evolution has been the investment in digitalization made by financial institutions. According to Deloitte’s study “Digital Banking Maturity”, the Spanish banking sector is considered one of the most digitized in the world, given the wide range of functionalities and high quality of the experiences offered to users.
The digitalization process in many countries—combined with the need to reduce costs in the context of low interest rates, aggravated by the growth in default ratios due to the pandemic—has necessarily entailed reductions in bank office networks and changes in their roles. The branch must evolve to focus on providing high-quality, professional service to the customer when more complete, in-depth, specialized or personalized advice is required, enhanced by the proximity provided by human contact.
The threats from big tech (Google, Amazon, Apple and so on) and fintech (Digit, Flywire—financial technology firms) require online banking to provide not only basic banking services (queries, transfers, direct debits, etc.) but also value-added services that allow for customer engagement in the medium term.
Financial well-being is one of the key areas in which value can be built for the users of banking services. Helping customers improve their finances and abilities to control their expenses while generating sufficient savings to cover unforeseen events and meet their vital objectives is essential to retaining them and making them profitable as customers. In this regard, the European Union’s (EU’s) PSD2 (Payment Services Directive 2) allows users in affected countries to have all their banking data in a single application (not necessarily from a bank), even if the information comes from different financial institutions, enabling them to have comprehensive views of all their financial data. Entities that can generate more confidence in their clients will be able to offer them this integrated and aggregated vision of their finances. They will have a valuable 360-degree vision of their clients that is necessary to provide quality advice and offer them the most appropriate products and services (financial or otherwise), resulting in substantial revenues.
Today, consumers trust their banks to share their financial data—a competitive advantage over the big tech and fintech firms entering the financial-services market. According to a study by Accenture, “2020 Global Banking Consumer Study”, 37 percent of consumers trust their banks “a lot” to look after their data, while less than 10 percent trust big techs or neobanks to do so. However, this trend can change quickly if a reputable technology company provides this service with a personalized and quality user experience.
Digital banking also allows full traceability of everything customers do, so analyzing the data generated becomes key to precisely improving and personalizing the experiences and services provided. Banks must use all their customer data (captured from every channel) to get to know them better and provide more customized experiences with a human touch, allowing them to establish emotional connections. Detecting a customer’s emotional state when interacting with the bank through voice- or text-analysis technologies is necessary to humanize the experience and connect with the customer, but it is undoubtedly challenging.
If banks can monetize and make their knowledge of their customers profitable, as large technology companies do, their businesses will benefit. Google “knows” what we want to do, but what we actually do (what we buy, where and when) is data currently residing in the banking sector. Therefore, seeking new sources of revenue through the use of data is key in an environment with increasingly narrow intermediation margins and in which the alternative of commissions is not sufficient and is unpopular with consumers, who are used to receiving services that appear to be free but have real costs, such as the values of the transfers of their data. Banking must balance guaranteeing the protection and confidentiality of the data provided by the customer with extracting value from that data. Therefore, data analytics and artificial intelligence (AI) technologies will be crucial to properly exploiting and using this information while providing differentiated and personalized value to customers at affordable costs.
The rapid development of e-commerce and the digital transformation of society make it necessary for banks to provide their services through other companies and third parties, such as car dealers, real-estate agencies or online stores, to meet customers’ financial needs. Meeting these needs when and where they arise is critical. If the customer is making a large purchase, that is when it makes sense to offer financing. Moreover, nonfinancial institutions already include financial services in the digital customer experience. For example, in China, the WeChat app makes it possible to send messages, book a cab, order food, send money or access a personal loan.
Open banking, banking as a service (BaaS) and strategic alliances with other businesses (open collaboration) are emerging trends that will be key in the coming years. This is technically supported by using APIs (application programming interfaces) open to third parties that allow communication between two systems (the financial institution’s and the other institution’s). The information shared in these transactions is crucial to knowing the customer. However, providing financial services through third parties also has risks, so the financial sector must invest heavily in security to avoid vulnerabilities and fraud.
Sustainability is another key area that can generate significant revenues for the banking sector. In a world marked by global warming and climate change, with efficiency essential to ensuring companies’ profitability, substantial investments are required to improve production processes by minimizing the use of energy resources as much as possible, thus reducing environmental footprints and production costs. The banking sector will be key in providing the necessary financing for this transformation. The risks of continuing to finance fossil-fuel-based activities will become increasingly evident, and accordingly, financing costs will need to be higher for companies operating in these sectors. Such a cost differential will incentivize transforming these sectors toward more environmentally sustainable activities.
So, the banking sector’s future will depend on its ability to innovate. But this innovation must go beyond developing the next generation of hardware or software; it must involve new ways of thinking through open-mindedness and collaboration with other players. The banking sector of the future must achieve an emotional bond with its customers that will allow it to be their trusted partner in the financial management of their lives, giving it an infinite space of opportunities if it knows how to take advantage of them.