Historically, digital transformation in banking has lagged behind other industries, but even the banking sector is not immune to the increase in technology adoption. In fact, financial institutions have found that not only is increasing their digital transformation beneficial, but it’s also essential to their survival.
A recent survey found that 53% of banks and 69% of credit unions view technology companies like Apple and Google as their top competitors in 2020, and believe they will be going forward. These tech businesses are expanding their reach into the financial sector, developing payment and banking apps for their customers.
Digital transformation is the means by which banks can stay competitive against these tech companies, retain their customers, and find and pursue new leads. We’ll break down the reasons the financial sector needs to embrace new technology in order to survive, including everything from creating new revenue sources to adapting to changes in consumer demand.
One of the top drivers of digital transformation in banking is consumer preferences, as well as changes in what products and features consumers need. Increased health concerns and a desire to avoid physical contact because of COVID-19 have caused customers to gravitate toward digital payment options. A recent Mastercard poll found that touch-free payments grew twice as fast as traditional payment types between February and March of 2020.
The same poll revealed that 79% of respondents typically use contactless payment methods. In response, tech companies have started offering touchless payment apps, such as Apple Pay and Samsung Pay. However, banks have been slower to adopt this technology. Some, like JP Morgan Chase, have begun rolling out tap-to-pay options, but these options are not widely available, and many smaller banks don’t have them at all.
There are a few companies that have embraced this form of digital transformation in banking, and we can look to them for inspiration and ideas. For example, Bank of America recently rolled out digital wallets. The bank integrated payment options within its applications, so consumers can pay with their Bank of America card using their phones or their Fitbits. People can even use their phones to withdraw cash from ATMs, eliminating the need to physically insert cards.
Source: Bank of America
Banks need digital transformation in order to stay competitive and meet consumer demand. Adopting contactless payment methods is one way to do that. It encourages customers to use the bank’s proprietary apps and services instead of turning to tech companies for solutions.
Another reason banks should embrace new technology is that digital channels offer new outlets for following leads and increasing revenue. In fact, Boston Consulting Group estimates digital will make up at least 30% of revenue for corporate banks by 2023.
As customers increase their use of digital applications and online banking, it’s easier for banks to track their behavior patterns. They can see what resources customers look up frequently, and they can send pop-up surveys to find out more details about users’ financial needs and reasons for using the technology. Banks can then make personalized product recommendations based on the data.
One example of this is Yu’e Bao, a money-market fund under Ant Financial. It uses Alipay (a payment processing app) to identify and pursue potential leads based on consumer behavior. When users have a positive balance in their Alipay account, the company sends a message detailing the benefits of a money-market fund and asks the customer if they would like to open one.
Digital channels also help attract new customers, even when banks have to close physical branches or limit the number of people visiting brick-and-mortar locations. Banco Bradesco started expanding their digital offerings as a way to appeal to customers 18 to 35 years old. A year after beginning their banking digital transformation, the company had 300,000 active accounts and a churn rate of less than 2%.
The banking industry is not always known for being agile, but being able to quickly adapt to economic changes is more important than ever. Having a robust digital setup means a bank can rapidly respond to crises such as having to unexpectedly shut down branches, operate with fewer staff, or limit in-person services.
One strategy would be to operate under a “phygital” model. In this model, banks would prioritize and expand digital offerings. Physical branches would remain open, but because the focus is on mobile and online banking, brick-and-mortar locations would function with a leaner staff and could quickly shut down if necessary.
Digital transformation in banking also enables financial institutions to respond rapidly to changes in demand. Cloud technology makes it easier to scale offerings up and down. It also enables businesses to roll out new products and features quickly in response to customer requests or market changes.
For example, Capital One uses cloud technology to survey customers and roll out new features in weeks instead of months. Being cloud-based has also helped the institution partner with Amazon. Now, Capital One customers can use their Amazon Alexa to check account balances and perform other transactions using voice commands.
Not only does digital transformation better help banks respond to economic crises, but it also helps them react to industry changes and stay competitive.
The best way to stay competitive is to give customers what they want—and, right now, that is digital banking options. Mobile and online banking have been steadily on the rise, but in the spring of 2020, demand jumped even among demographics that previously preferred physical branches. According to Deloitte, “digital channels are used more frequently than branches and ATMs . . . across all generations, and in all countries.”
A recent study supports this spike in demand, finding that mobile registrations increased by 200% from March to April 2020. In the same time frame, mobile traffic increased by 85%. The same study revealed that 46% of baby boomers, a demographic historically resistant to adopting new technology, are also moving to digital channels for their banking.
Banks have the opportunity to draw in more customers and increase engagement with current customers by expanding online and mobile banking options. For example, many banks require that people go into a physical branch and fill out paperwork to apply for a loan. Yet nonbanking companies like Tala illustrate the feasibility of online loans. Not only does Tala allow people to fill out loan applications online, but they also use digital channels to alert applicants of their status and to distribute the funds.
Financial institutions could potentially capture more loan applicants by offering online loans. In addition, digital loans would enable banks to continue accepting and processing loans, even if customers were not physically allowed in branches.
Similarly, if banks allow customers to open accounts online, financial institutions can attract new customers regardless of whether physical branches are open. This is another way digital transformation strategies can help businesses attract and retain customers and increase revenue.
The necessity of digital transformation in banking is clear: It’s how banks can stay competitive, attract new customers and retain current ones, and stay agile in uncertain economic situations. Of course, the key to successful digital transformation is high rates of end-user adoption.
By implementing a digital adoption platform (DAP), banks can ensure that clients understand the different features of the business’s new app or online banking technology. Then, customers can clearly see the added value of the bank’s new tech offering, and they won’t need to turn to a tech-focused company like Apple or Google for their digital banking needs.