We are in the process of the fourth industrial revolution, which will unite machines and people, break up traditional value chains and create new business models. The development steps of the fourth revolution are exponential and no longer linear. Mobile devices accelerate the process because they have a network or multiplier effect. Any information or services become available within a very short time, anywhere and for everyone. The big technology companies (Google, Apple, Facebook, Amazon) make their platforms open to the reach of millions of users.
Digitalization has disruptive potential for the business world and can be beneficial in numerous areas, especially the banking industry, be it a corporate banking, investment banking or commercial banking.
While technologies such as RPA (Robotic Process Automation) are already in use today, developing technologies such as blockchain, AI or Big Data still need some time to be fully adapted. In the long term, however, these technologies will lead to the fundamental changes of the entire banking industry.
Digital Transformation Trends in Banking
It is difficult to deny that banking is currently changing as much as it has not been in decades. New technologies keep coming onto the market and influence financial and business models. With them, customers, expectations and competitive behavior change. It is possible to single out a few most important trends in the digital transformation of banking.
Growth of cooperation among banks
The rapid pace of change will make it unlikely that even larger institutes will run alone. Instead, it will be increasingly important to form all kinds of partnerships. Such collaboration can have many advantages: acquiring new markets; gaining new customers; creation of new brands; creation of new application areas; positive image making.
It should be stressed, that cooperation will not be limited to credit institutions – fintech technology and software companies can also be involved, in order to achieve optimum synergies.
Evolution of payment methods
We can already see an unprecedented change in payment methods. The use of cash is falling while card payments are increasing. However, the share of online payments is also increasing significantly. Online casinos are an example of this. Time and again, new payment service providers are added, especially those active in this industry.
Improved use of data
The world is going digital: digitalization and the new ways of collecting and evaluating data give the previously unseen possibility to proactively estimate customers’ needs.
Instead of simple demographic data and a risk profile, completely different data will be used, relating to lifestyle, psychographic characteristics, previously used financial products, buying behavior, social media activity.
The new possibility of combining data and evaluating it in a targeted manner will not only result in changed marketing, but also better communication with customers.
Over a long period of time, financial institutions have created a real legacy of capital, infrastructure and customers. But the flip side of that coin is often a lack of speed, innovation, and real focus on the user. In addition to the payment service providers already mentioned, this is also the reason for the success of new fintech companies. They offer their services without organizational obstacles and structures, which enables them to act faster and cheaper.
The future lies in simple, fast, and intuitive design that allows customers to get things done with just a few clicks. This is precisely the crux for classic credit institutions.
New marketing strategies
There is hardly an industry that can do without marketing. Marketing is particularly important when people change providers, even in banking. In addition to the above-mentioned improved possibilities for data acquisition, new digital analysis methods are also emerging to evaluate the data. From this, in turn, new marketing strategies are being born.
Banks will be interested in not only these new opportunities, but also in effectiveness of the individual channels and in shortening the path from advertising to actual business success.
Examples of Digital Transformation in Banking
The examples of digital transformation in banking are numerous. Some use cases for new technologies in the banking sector are listed below:
Robotic Process Automation (RPA)
Banks’ operating activities are primarily characterized by a large number of standardized processes. Software robots can be used to ensure optimal processing of the extensive data. Numerous processes are already being automated through the use of Robotic Process Automation (RPA). The advantages are low error rates and cost reductions. Furthermore, the human workload drops dramatically, so that the freed-up capacities can be used for new and strategically relevant tasks. The processing costs can be reduced by up to 70% through the use of PRA. For example, RPA can be used in customer service to deal with customer concerns within a very short time. Standard inquiries can be processed quickly and efficiently. But the compliance rules can also be adhered to by using this technology. With the help of RPA, efficiency can be increased and correct processes ensured. Fraud prevention is an increasingly important issue, which can be optimized through digital processing of business transactions. New technologies encourage fraud so that an RPA can identify potential fraud within a tight timeframe.
Another great advantage is that the technology can be implemented quickly. It is not necessary to intervene in the complex and often old existing systems, which enables efficient processing due to introduction of new IT-systems.
Data is the gold of the 21st century, and it is precisely this data that can be collected and evaluated with the help of Big Data. Financial institutions in particular have access to a large amount of data that is currently simply not used. The amount of data will also grow exponentially over the coming years, so that there are many advantages to using the data correctly.
Correlations can be identified, time series – analyzed and trends – recognized through simple customer contacts. Above all, companies can benefit from the information gained about their own customers. An optimized customer experience can also generate new business opportunities. A greater knowledge of one's own customers also enables the development of suitable services. Overall, the financial institutions can get a comprehensive picture of customer requirements, which will be taken into account in further strategy development. But in addition to the customer experience, internal processes can also be optimized using Big Data. Analyzes of profitable or unprofitable ATMs, as well as the analysis of inefficiencies are among the advantages of the technology. The identified features can be put into strategies and taken into account in planning budgets.
More and more banks are outsourcing services to cloud providers. Instead of maintaining their own and, above all, costly data centers, the banks rely on external data centers. Clouds are a predestined platforms for cooperation with fintechs in particular.
IT-experts expect cloud computing to become increasingly relevant over the next few years. The technology is already in high demand and essential among industry experts. In the banking industry, the technology is mainly used in mobile banking and payment services. Other areas such as CRM (customer relationship management), trading and evaluation processes are also possible use cases.
In the past few years, cryptocurrencies like Bitcoin and Ethereum have made headlines again and again. These digital currencies came into focus due to rapid price increases and speculation. In this context, the distributed ledger technology is often mentioned, which represents the central principle of the blockchain: the grouping of data records in arrays that refer to their respective predecessors and are distributed to all participants in the network. This technology thus holds great promise for the business world and can be beneficial for numerous areas, especially the banking industry.
Compared to other technologies, the use of blockchain is justified by:
Data integrity: cryptographic encryption using hash functions allows transactions to be stored in a block. All blocks of the blockchain have a unique value that is distributed over the entire network and therefore cannot be manipulated.
Speed: a blockchain interacts almost in real time and saves changes immediately. With this approach, large amounts of information can be exchanged within a short period of time.
Transparency: the unchangeable and traceable transactions within the blockchain network ensure a high level of transparency within the entire network.
Reliability: a blockchain is a distributed network that does not completely fail due to the failure of a node. This approach protects the network from external attacks. In the event of an attack, each node also has a copy of all data.
There are numerous use cases for this technology in the banking sector. Blockchains enable inexpensive, instant and cross-boundary payments. Peer-to-peer transactions, such as PayPal, can also be executed using the technology. Numerous experts see a further advantage in transparency, because blockchain technology can prevent money laundering.
Smart-contracts as an important function of blockchains also have significant potential. Insurance claims processing can be automated and managed by the network.
The banks have been in the rough seas for a long time. Negative interest rates, new and foreign competitors, changed customer behavior, increased transparency and increasing regulation are the major challenges. Accelerating digital transformation in banking is an indispensable condition of industry’s survival and growth.