Digital banking is clearly disrupting traditional banking in more ways than one. It forced established banks first to offer rudimentary online banking and later even digital.
Most traditional banks have jumped on the bandwagon and have started offering, with more or less success, a digital banking experience. This has brought them the luxury to stay in business and not be left behind. To their clients, it brought ease of access and added functionalities.
Although it was, and still is, an uphill battle for some, it clearly brings more benefits than drawbacks for both sides. Let’s briefly cover what’s the importance of digital banking and each of the main benefits for banks and clients.
Importance of digital banking
Online banking has been around for a long time. It rose as the internet started to emerge in the 1980s. In the 1990s, as the internet was becoming prevalent, online banking was beginning to become a norm, and in 1999, the Bank of Internet USA was established as the first digital bank.
Although all banks today offer some form of online banking, from rudimentary and bare-bones to more advanced, few of them provide a complete digital banking experience.
Digital banking offers more features and benefits and isn’t just an extension of the service provided in physical branches. Every traditional bank was forced to offer some form of online banking.
Some have gone through this process fairly seamlessly, while others struggled with the architecture of their old systems and had to spend hundreds of millions of dollars and many years.
Once they finally succeeded in implementing online banking, the world wanted more than a bare-bones service. People wanted to have all the features on the palms of their hands. That’s where challenger banks came in and swooped millions of people from traditional banks that didn’t adapt quickly.
Digital banks have no branches, meaning less overhead because they don’t need them. All the features and capabilities can be accessed seamlessly through the app.
63% of people preferred mobile banking as their main type of banking. That was almost 10 years ago, in 2012. This number has to be much higher now. Probably high 80s or low 90s.
With all the lockdowns happening around the world, people weren’t too eager to visit their local bank branch and basically had no choice but to apply for or perform financial services online.
As millennials and Gen Z are slowly taking over from boomers, there’s really no future for bank clerks as branches will be closing at an increasing rate.
What digital banking means for banks
Institutions have different expectations from digital banking than those of customers. There are, of course, many benefits that digital banking brings to the table. Here are the main ones.
Our mobile phones collect incredible amounts of data about us, our habits, what we’re browsing, shopping for, etc. Mobile apps, banking apps included, are no different. They might not know everything about us, but they do know how much we’re earning and where, how much money we have in the bank, what we’re spending it on and where, and much more.
This treasure trove of information is valuable to banks as they can offer tailored financial products and services at the right time. For instance, if a client has started to earn more money lately, they might be interested in a savings or investment product. AI and bank employees can make an informed decision on what auxiliary products their client might be interested in next.
All the big data that banks have gathered is also vital for risk assessment and fraud prevention. AI can recognize patterns and act if something is strangely uncommon. It could potentially save a customer a lot of money if the AI recognizes that a scammer or hacker might be after it.
Agility and big banks don’t go exactly hand in hand. Yet, agility is a necessity in today’s world. Digital platforms are much more agile than analog ones, and digital systems and AI can make decisions on the fly.
Mobile apps are perfect for testing out new products and services on a reasonable number of people. You can easily do A/B testing to see what offer is the most appealing to a certain type of client and which one is more profitable. Or both.
Automation and digitalization are also crucially important for risk assessment. Not only can you draw conclusions about your customer, but the risk management software can detect the changes happening in the market and respond to them with greater accuracy.
They can do this more quickly than even the best risk management pros.
This brings us to speed. If coupled with accuracy, it saves time and money to the bank. By letting systems take over from people, a bank can process more requests in less time and make decisions based on existing precedents.
The speed goes both ways as it also helps customers make transactions and payments, for example, in less time and with fewer mistakes as there are multiple system checks along the way.
I think we can all agree that staying competitive is very important, not only to stay relevant but also to thrive. Customers will go where other customers are also going as word of mouth of new and amazing features will spread like wildfire.
Although the older demographic tends to stay with traditional banks no matter what, the new generations that are used to the digital world from birth will prevail, and they do not care about traditions one bit.
Legacy banks need to look at challenger banks and what they are doing to attract the young demographic. Trying to copy their look is not what I had in mind. But they should look at the features that they bring to the table and how people are adopting them.
The greatest wealth transfer in history has started happening, and trillions of dollars are on the line. Some estimates say that as much as $68 trillion will transfer between generations inside 25 years.
That’s a lot of money that will pass hands from older to younger generations. Legacy banks have to be careful not to let this money slip from their hands and into someone else’s. There are many takers that would be more than happy to take care of it.
Increasing digitalization that allows for all the channels your customers want to bank and transact will go a lasting way in retaining and drawing in customers, particularly the next, succeeding generations.
One way to accomplish this is to partner with fintech companies to provide clients with a more digitized banking solution that will place your bank in a mightier position as well.
Digitalization helps to streamline back-end processes and reduce mistakes, thus saving valuable time and money. There’s also less need for HR infrastructure or even IT as there will be fewer moving parts and “meddling” people.
Operating costs can make or break a bank, and digitalizing the front and back-end of one’s bank can reduce them drastically. There’s a reason why challenger banks only employ a fraction of people that traditional banks do, not just branch staff, but corporate as well.
There’s just no need for different specialists as the AI and the algorithm take care of their jobs. Traditional bank processing is costly, sluggish, and inclined to human error.
Banking as a service is often called white-label banking because an existing bank is providing the back-end and another company, usually fintech, is the face of the bank or the brand.
Digitalization and BaaS are one of the main reasons why there are so many challenger banks all around the world. The current regulation in the US mandates that fintech companies have to partner with established banks to be able to provide banking services.
That’s a big opportunity for banks to earn considerable amounts of money by doing what they’re doing already. Once they establish a viable BaaS platform, there are not many costs involved as the frontend and marketing are done by the company that bought the BaaS platform.
Platform banking is arguably the opposite of banking as a service. It involves traditional banks partnering with fintech companies to enhance their existing service.
This can be an offensive approach to attracting new customers by offering a comparable service to neobanks. But it can also be a defensive approach focused on not losing existing customers by offering them new features from third-party financial companies such as robo-advisors, for instance.
Platform banking is easier to implement, but the lion’s share of the revenue could go to the third-party company. It’s more of a temporary service until a product can be developed in-house and offered through the app.
What digital banking means for customers
Now that we’ve seen what benefits digital banking can have for legacy banks, let’s briefly go over the benefits for customers. This will help us understand why millions of people are switching sides.
Ease of signing up
One of the biggest reasons why people go to digital banks is how easy it is to get an account. There are more often than not, no credit history checks, and sometimes not even identity verifications until a certain limit for money transfers is hit.
While most traditional banks don’t have the luxury to do this, they can still make it as easy as possible to open an account without visiting the local branch. There are specialized companies that offer seamless customer verifications so the process doesn’t have to be completely in-house.
The algorithm can also decide on big data analytics if a customer is an okay candidate for an account or a credit card.
Transferring money abroad, opening a savings account, applying for a loan or credit card, and even getting a mortgage or investing into crypto from the app itself. These are all the things that challenger banks’ customers are accustomed to, making it impossible to put the cat back in the bag.
Big banks can either adapt or start bleeding customers to other, more agile banks and digital challengers.
Here’s an example of a feature that I love. It makes saving easy and on autopilot. It rounds up your spare change in every transaction you make with your card and puts the change in your savings or even crypto account. Such a simple solution that makes people happy and that is extremely handy and convenient.
Budgeting and analytics
The big bank that I’ve been using for ages still doesn’t have budgeting or even analytics capabilities. I find this shocking but the reality of the situation is that I need this particular account and can’t close it for the time being. Otherwise, I’d be out of there in no time.
How can you properly budget if you can’t see, black on white, what categories you’re spending money on the most? No wonder there are countless budgeting apps out there since our bank accounts still can’t show us in a graph or a pie chart what’s what.
Faster money transfers
It’s easy to see why the biggest banks in America (Wells Fargo, JPMorgan Chase, Bank of America, BB&T, Capital One, PNC Bank, and U.S. Bank) decided to launch Zelle – a faster digital payments network.
I’m sure that most people don’t even remember a time before Zelle was available. The transfers would take from a couple of days to up to two weeks, not counting weekends and holidays. It’s like we were sending money with a horse and carriage and not moving a few digits on the screen.
This benefit isn’t mentioned often but rural, immigrant, and minority areas have perhaps benefited the most from the onset of digital banking. And, there’s still a lot of room for improvement.
As physical branches were hard to reach, so were financial services. You’d have to travel long distances to get to the first branch, any branch, to open an account or do your banking.
Now, everyone, even the poorest and disenfranchised people have a cheap smartphone that can do the job. Brazil is a great example where unbanked and underbanked helped create the largest digital bank in the world by the number of customers – Nubank.
Nubank has more than 40 million users and has started out by offering free credit cards to regular folks. That was before it got its banking license. Now, it’s offering a variety of services, expanding abroad, and preparing to go public.
No credit checks
We already touched upon this a bit. But credit checks can be a deterrent to many people and challenger banks are often not performing it at all. This can, and has, led to account closures for many people, with a justified reason, or without.
Still, everyone deserves a second chance and that’s why many challenger banks also offer a credit builder program that, of course, entices people to use their credit card or make a monthly membership payment. Either way, the bank is making money while trying to do a good thing.
Is digital banking is the future?
Both startups and legacy banks agree that digital banking is the future. You’ll be hard-pressed to discover a bank that hasn’t launched an online banking app yet and continued to shut down branches and, of course, lay off bank staff and managers.
But institutions are only one side of the coin. People have already decided that they prefer banking from an app and are continuing to choose digital-only banks en masse.
There haven’t been many industries that have seen such a rapid disruption during the last five years that banks have seen. Fintech companies really did a number on the big banks.
There’s still time for traditional banks to keep their existing customers and attract new ones. All they need is well-rounded and modern banking apps and accounts with all the bells and whistles that people have come to expect. Easier said than done.
The bottom line
The cat’s out of the bag, and it’s make it or break it time. Luckily, it seems that banks have realized that fact and have thrown hundreds of millions of dollars into transforming their online banking apps into complete digital banking products.
This hard work will pay off more for some than others, and we will see a continued rise of challenger banks because it is much easier to open one now than ever before.
With the impending fintech charters, Walmart, Apple, Google, and other tech giants are standing ready at the starting line, waiting for the gun to go off. It will be interesting to see how the big banks are going to adapt to this new dawn of banking in America.
May you live in interesting times is all that we can say. As these are some of the most interesting times in history, I wonder, who did we make angry to deserve this.