Among the great structural challenges that currently affect the financial sector, digital transformation in its broadest sense is undoubtedly one of the most important for the future of banking.
The digital transformation derives, first of all, from the very evolution of bank customers. In variable percentages, but already clearly around 50%, it has decisively entered the digital world and most of the bank transactions are already carried out through non-contact channels. These percentages are growing rapidly and, if we compare it with what is happening in other markets such as the Scandinavian countries, it is not difficult to assume that the numbers will soon be in quotas close to 80%. This requires banks to be prepared to efficiently serve these new demands and correspond to them all or most of the new products and services.
They must do it efficiently so that, when designing their new processes, they can provide their customers with a pleasant experience, comparable to that offered by other service providers, competitors, or not traditional banks. Banks are no longer the only channel through which many clients receive financial services and, besides, many non-financial service providers are educating the client about what constitutes an efficient way of working. Every day, the Big Techs and the fintech interrelate with bank customers, showing them new ways of doing things.
If this is relevant for all bank customers, it will be especially so for the younger ones. Their expectations about how a client should be treated will be forged by the new standard.
Secondly, the digital transformation is also bound by the need to improve the efficiency and profitability of banking entities and does not exhaust its limits at all (in making non-contact channels available for carrying out different banking operations and transactions).
Although banks have moved quickly in the transformation of their front office to offer their customers access to their services through these new channels, the true transformation will take place (or not) in the back office, in the operating structure of the entities.
The new challenges
The problem for banks is that for this transformation to be real and effective, they will have to make a great effort and a greater investment in updating their systems and processes.
Banks compete with new entities and firms created from the beginning to efficiently capture information about their clients, store it, and manage it appropriately to develop new business models. On the other hand, in banks, customer data is often fragmented, stored in very diverse systems and databases, which often makes it difficult to reach it.
Keys and routes for the digital transformation of banking
Banks face a dilemma: the advisability of launching a new bank, totally digital, with systems independent of those of the original bank that replicates its offer of products and services or that of making the bank evolve as a whole, undertaking the difficult task of its complete transformation.
It is not easy to determine which is the best way and, depending on the circumstances, in some cases it will possibly be the one way and in others, it will be another. Depending on the circumstances of the sector, the characteristics, and the business model of the bank or the situation of its technological infrastructures, the strategy that will be adequate (and successful) for one bank, will not necessarily be good for another. For this reason, we see examples of entities that have chosen to evolve with the model of a new bank (neobank, in the jargon of the sector) and others that have decidedly bet on its complete transformation, despite its difficulties.
Finally, digital transformation is also imperative in the current context of low-interest rates and limited profitability. Banks have to increase their efficiency by lowering their costs and, for this, the commitment to process automation and digitization can be an effective ally.
Every light has its shadow
Digitization has great advantages, some of which we have already discussed. However, there are also risks, some of them related to new forms of fraud or crime (cybercrime).
Cybersecurity is a critical aspect of this new stage. Banks must be prepared to receive unprecedented attacks that will not only seek to obtain their financial resources and those of their clients but also and increasingly more information about the latter. It is an economic threat, no doubt, but also a reputational one.
Supervisors are already paying great attention to this matter, aware of its enormous destabilizing potential for the sector as a whole and individual entities. Without a doubt, an issue that has come to stay among future investment priorities.
A new ecosystem. Interconnections and the “open banking” phenomenon
The new Payment Services Directive (PSD2), still pending transposition to the law, has opted for the development of some new payment service providers that, predictably, will belong to a large extent (although not exclusively) to the fintech world.
For some of these new providers, a true right of access to bank customers' accounts has been set up, which, although subject to some relevant conditions (explicit consent, compliance with some security standards, etc.), does not cease to suppose a relevant change in the conditions for the different players in the market.
There is no doubt that this supposes an asymmetric approximation of the regulator to the reality of access to information from customer data so that banks will be obliged to allow this access not only to fintech operators who meet the established conditions.
Although the PSD2 regulation is, in this sense, a very relevant step, it must be seen as the beginning of a path which we see as the process that is developing in the United Kingdom at the hands of the “open banking” initiative.
The “open banking” model, imposed on the banking sector by the regulator, implies that banks must build APIs (interfaces that allow the exchange of information under secure conditions) subjected to a rigorous standardization process so that, whether they want it or not, they will end up being part of an ecosystem of service providers for bank customers.
Banks are not obliged to position themselves "defensively" in this new world and some of them are already evolving so that they will be able to take advantage of the new regulation to be able to build alliances, better positioning themselves in the new ecosystem.
Banks have to realistically analyze which is the position of each bank in this new ecosystem, what are the products and services that they are going to offer, what are the products and services that they’re going to commercialize, with which other entities are they going to partner, how are they going to face the competition from their peers and also from the new entrants (especially the dreaded "Big Techs").
Open banking is a new world in which yesterday's competitors can be allies and new competitors will appear where they least expect them. Big techs and fintech are already here, but so are the big telecommunications companies. All of them will end up providing financial services, directly or indirectly, by themselves or through alliances.
The ecosystem of the future
Given this, not all entities are in the same position. Those whose investment capacity or strategic vision has allowed them to anticipate change are among the most advanced in the world in this area. Others, however, are further behind, sometimes due to their own (and legitimate) doubts about whether they should rush to make large investments in technologies that have not been sufficiently tested. But in all cases, they are fully in the process of digital transformation.
As things evolve, the alternative will be between arriving on time to the challenge of digital transformation and facing the risks and challenges that pioneers always face.
Even though despite all the awaiting challenges, the customers never wait for you to decide if you want to hop on the train of the digital transformation or will prudently watch it from the corner. They will choose the bank provider who has the digital services they need.
The digital transformation of financial institutions is already a fact as it is in society. The phenomenon transcends the traditional financial sector and is projected onto many new operators that compete with banks and insurance entities. It is a fast process, with clearly disruptive effects, and one that will have very positive effects for clients and users of financial services.
The magnitude of the coming change is hardly imaginable. As customers, we are faced with an increasingly broad range of products and services, of higher quality, more personalized, and from increasingly diversified sources.
Innovation is positive, wherever it comes from, and should be universally encouraged for the benefit of bank customers and society as a whole.