Banking Transformation: Embracing Digital Innovation for a Reshaped Future

?“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. “ –?Mark Twain

Digital transformation has become a top priority for the banking industry, driven by the need to improve efficiency, enhance customer experiences, and stay competitive in a rapidly changing financial landscape. Over the past decade, the banking sector has experienced significant disruptions and innovations, reshaping traditional models and prompting financial institutions to embrace new strategies and technologies.

As we can read in the BCG publication, Banks generally understand what they need: a modular architecture, scalable data platforms to access data through standardized APIs for multiple purposes, and a shift toward “cloud native” systems to support more resilient, asset-light operating models.

Modernization costs at large incumbent banks over the next three to five years will typically represent up to 50% of their annual “change the bank” budget. The question is not so much what a bank’s technology landscape should look like but how to frame the journey without stalling business development for three years or more.[1]

Gen-Z and Millennials expect traditional financial organizations to act in a technology-driven way, like Google or Apple do. As a result, traditional players feel the urge to introduce innovative and competitive digital solutions to ensure long-term market survival.[2]

Millennials and Gen Z grew up in an era of technological advancements, and they expect banking services to be easily accessible and available through digital channels. They heavily rely on mobile devices and expect seamless experiences, including mobile banking apps, digital payments, and online account management. They expect Authentic Experiences: These generations value authentic experiences from brands. They seek banks that go beyond basic digital features and provide meaningful and personalized interactions. Financial institutions need to offer innovative solutions and value propositions that align with the values and expectations of millennials and Gen Z, such as simplified money management, financial literacy tools, and social responsibility. The technological revolution is changing the rules of market competition. Alvin Toffler said:

“The illiterate of the 21st Century are not those who cannot read and write but those who cannot learn, unlearn and relearn.”

We can easily relate this sentence to the technological revolution in the banking sector.

There are some fast-growing fintech players publicizing these unique solutions for younger consumers. Revolut and GoHenry are two prominent ones, but others that specialize in teenage and kid banking accounts include Copper, Greenlight, Jassby, Osper, RoosterMoney, Current, FamPay, Monzo, and Step.[3]

What are the elements of the banking experience that resonate with younger consumers?

Personalization: Younger consumers value personalized experiences tailored to their needs and preferences. They expect banks to understand their financial goals and offer customized services and recommendations based on their transaction history.

Flexibility in Communication: Younger consumers seek flexible communication options and expect banks to provide multiple channels for customer service. They prefer communication through messaging apps, social media platforms, and virtual assistants, avoiding long wait times or in-person visits to branches.

Omnichannel Experience: Millennials and Gen Z appreciate a consistent user experience across multiple channels. Banks should offer easy logins and seamless transitions between devices, allowing customers to access financial services anywhere and on various platforms.

Meeting the expectations of younger consumers requires banks to adapt and innovate their offerings, incorporating digital solutions, personalization, instant support, and educational resources into the banking experience.

Now we can do a lot with Open Banking. The movement has been driven by both regulatory initiatives and market forces. In Europe, the revised Payment Services Directive (PSD2) was implemented to promote online and mobile payments through open banking. It mandated large banks to open up their customer accounts and transaction data to third-party providers.

As mark twain said:

"It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so",

The long-term outlook for traditional banks has been disrupted by the emergence of new players in the market, players who want to change things for the better.

The traditional banking industry has faced several challenges and made mistakes that have impacted its competitiveness and customer satisfaction.

What were the biggest mistakes of traditional banking?

Lack of Customer-Centricity: Traditional banks have traditionally focused more on their own products and profitability rather than prioritizing customer needs. This approach has resulted in a lack of customer-centricity, leading to a disconnect between banks and their customers. In contrast, fintech companies have excelled in delivering tailored and customer-focused solutions, attracting customers away from traditional banks.

Overcharging and Misrepresenting Fees: Banks have been found guilty of overcharging customers and misrepresenting fees, particularly in areas like foreign exchange transactions, mortgages, credit fees, etc.

Inappropriate Advice and Lack of Disclosure: Banks have been known to provide inappropriate or misleading advice to customers and fail to disclose important information during the sales and advisory process. In some cases, this has led customers to make financial decisions based on incomplete or inaccurate information.

Failure to Resolve Complaints Promptly: Banks have sometimes been slow to resolve customer complaints, causing frustration and dissatisfaction. When customers raise concerns or dispute certain decisions or actions, banks should handle the complaints promptly and effectively. However, there have been instances where banks have failed to address customer grievances in a timely manner, leading to customer dissatisfaction and a loss of trust.

And now new players will prioritize transparency, ethical practices, and customer-centricity to avoid misleading their customers.

Open banking has transformed the banking landscape by promoting collaboration, innovation, and customer-centricity. It has opened up possibilities for new products, services, and partnerships, benefiting both consumers and financial institutions.

The benefits of open banking are multifold. For consumers, it offers improved user experiences, access to innovative products and services, and consolidated financial information in a single platform. It allows them to make better financial decisions and enables greater convenience in managing their money.

Financial institutions can leverage open banking to foster innovation, explore new revenue streams, and enhance customer engagement. By collaborating with third-party providers, banks can introduce services and products that they wouldn't be able to offer on their own. This opens up opportunities for partnerships and collaborations between traditional banks and non-banking entities. Open banking refers to a collaborative ecosystem between traditional banks and non-banking partners, allowing third-party providers to access consumers' financial information held by banks through application programming interfaces (APIs).

What are the financial products that have emerged or evolved in the banking sector after the implementation of open banking?

Enhanced Payment Solutions: Open banking facilitates the development of innovative payment solutions, such as peer-to-peer (P2P) payments and instant payment services. Customers can initiate payments directly from their bank accounts without the need for traditional payment methods, providing greater convenience and faster transactions.

Customized Lending Products: Open banking allows lenders to access customers' financial data, enabling them to offer customized lending products based on individual creditworthiness and financial history. This can lead to more competitive loan rates, faster loan approvals, and a streamlined application process. Products like BNPL (buy now pay later) that offer Klarna, PayPo, Youlend, Afterpay, Affirm, Shop pay, Sezzle, Paidly, etc.

Account Aggregation Services: Open banking enables customers to aggregate their accounts from multiple banks and view them in a single platform or application. This simplifies financial management and allows users to have a comprehensive view of their finances, including account balances, transactions, and investments, across various banks.

Open Insurance: Open banking can extend to the insurance sector, allowing customers to share their financial data with insurers to receive tailored insurance products and pricing based on their risk profiles and financial behavior. This enables more accurate risk assessment and personalized coverage options.

In conclusion, after the implementation of open banking, the banking sector has witnessed the emergence of personalized financial management tools, account aggregation services, enhanced payment solutions, customized lending products, investment platforms, robo-advisors, and open insurance offerings. These products aim to improve customer experiences, provide greater financial transparency, and enhance financial decision-making capabilities.

What are the general trends and possibilities for the open banking landscape in 2023?

1. Expanded Regulations: More countries may introduce open banking regulations or update existing frameworks to increase consumer protection, data privacy, and security standards. This could lead to the adoption of common standards across different jurisdictions.
2. Global Expansion: Open banking may continue to expand beyond its current strongholds, with more countries around the world adopting open banking frameworks. This could lead to a more interconnected global open banking ecosystem.
3. Increased Adoption: As consumers become more aware of the benefits of open banking, there may be an increase in the adoption of open banking services. This could result in a greater number of financial institutions and third-party providers offering open banking products and services.
4. Collaboration and Partnerships: Financial institutions may increasingly collaborate with fintech startups and other third-party providers to create innovative products and services. These collaborations could lead to improved customer experiences, personalized offerings, and new business models.
5. Technological Advancements: The open banking landscape could be shaped by technological advancements such as artificial intelligence (AI), machine learning, and blockchain. These technologies can enhance data analytics, fraud detection, and security measures, leading to more robust open banking systems.
6. New Use Cases: Open banking has the potential to extend beyond traditional banking services. In the future, we might see open banking APIs being utilized in sectors like insurance, wealth management, and healthcare, enabling the development of new innovative solutions.

In conclusion, this constant stream of new information grants the power to develop greater products and services that address the specific needs of individual customers and even whole markets.?Everyone wins, from the typical consumer to the businesses striving to get awesome products to the market, not forgetting traditional banks that can modernize procedures and present themselves as credible alternatives to FinTechs.[4]

[4] https://gocardless.com/guides/posts/what-are-the-benefits-of-open-banking/

[3] https://thefinancialbrand.com/news/gen-z-banking/how-neobanks-are-catering-to-the-youngest-generation-of-consumers-117293/?internal-link-blist

[2] https://www.forbes.com/sites/forbesbusinesscouncil/2021/12/29/digital-transformation-in-banking-how-to-make-the-change/

[1] https://www.bcg.com/publications/2021/modernizing-bank-technology