How COVID-19 has Accelerated the Digitalization of the Banking Sector

As the world continues to battle with new challenges every day, most evidently seen in our efforts to tackle COVID-19, many industries, including the banking sector have been hit hard. While the banking sector used to be the early birds in embracing technology, the pandemic has pushed them far behind. 

The pandemic has created new financial needs, where customers have been forced to adapt their ways of life, both at home and in the office. For that reason, a digital banking experience available 24/7 can provide them with greater flexibility and agility. 

It is evident that a change in customer behavior means a need for more liquidity. Online purchasing, digital payments, and digital bank transfers are increasing as more and more individuals are slowly opting for mobile banking and other online banking solutions.

A survey report published by McKinsey collected data from 200,000 Europeans and revealed that in May of 2020, the number of people who adopted digital platforms increased from 81% to 95%. Under normal conditions, this transformation would have taken nearly 2-3 years, but it is clear that the pandemic has sped up the digitalization of the banking sector. 

However, many banks are in the early stages of this digitalization and have just started shifting to distributed ledgers, AI, and cloud-computing services. Even with the obvious need for technology adoption in the pre-pandemic world and nearly every industry booming with technology and offering competitive products, the banking sector lacked cloud-based platforms and infra-structures to revolutionize the banking experience for the customers and come up with modern and cost-effective technology systems. 

In fact, the need for digitalization really only arose when FinTech companies slowly started capturing the market. FinTech’s have demonstrated that the world needs digitalization, and consequently, banks must also have a digital plan to thrive. In Europe alone, the use of FinTech apps has increased 72% since the early lockdowns began in 2020, according to Forbes. 

As a result, it is clear that digitalization is the new way to go, and even with the end of the pandemic, there is no turning back. The convenience of handling finances from the comfort of one's home has turned hundreds of thousands of remote working employees into raving fans of digital banking. 

Why is this Digital Revolution Everlasting?

In June 2019, Mastercard published its second comprehensive Digital Banking Study, which revealed that 84% of Europeans regularly engaged in digital banking. In particular, 1 out of every 5 people who engaged in digital banking used digital-only banks, like Klarna, while 63% used mobile banking apps from their traditional bank. The study also revealed that this percentage will only increase in the future.

This obvious change was inevitable due to changing customer demand and the desire for benefits, flexibility, and swiftness. However, while digital banking is becoming a norm, individuals above 55 are reluctant to accept this change. Despite this setback, it is expected that soon this demographic will also adopt the change. 

It is only a matter of time before market shifts make the survival of already vulnerable traditional banks impossible. Even the banks currently transforming themselves in the digital age are at risk of being left behind because their transformation is too slow in an incredibly fast-paced digital world. 

How Fast can Traditional Banks Adopt the Technology? 

Traditional banks already feel the pressure to explore and adopt new technology. For banks to keep up with the digital shift, time frame and speed are the key essential elements. Banks are already monitoring the situation where customers are constantly getting frustrated with the traditional processes that are both slow, lack innovation, and are not half as effective. The teams deployed for digitalization will need to be agile to ensure real-time engagement for their customers. 

To dramatically change the digital banking user experience, there must be an improvement of web channels, targeted online banking communication, and self-selected navigation. Furthermore, it is essential for customers to have FAQ sections, content, and features that help users solve problems on their own without the need of heading to a physical branch or communicating with call staff. 

Banks might have to divest from non-crucial projects so that they can instead fund the digital ventures that are needed. 

Ultimately, the goal is not only to set up a digital banking platform, but also to design a unified digital experience with a myriad of functions, a customer-friendly interface, and a way to stand out from its competitors. 

The User Demand Differs Geographically

Customer demand differs across Europe. As we move from one country to the other, we notice a change in trends, meaning that creating a common digital platform may not solve the problem. 

Evidently, this is one of the biggest challenges for well-established digital-only banks, especially since creating an app from scratch for every demographic is also not a viable idea. Experts suggest that banks should go for a ‘platform approach’ where apps from every demographic share the same platform, but the features, languages, and options differ from country to country based on the user preferences. 

Managing Huge Stacks of Data and Customer Queries

For first-time users, the online banking experience can be over-complicated, slow, and lack user-friendly interfaces. As a result, individuals struggled using apps when banks were closed during the lockdown and banking had become a nightmare for those who were not used to the digital apps.

These issues came about because the apps were not designed with the customer’s needs in mind. People of every age, with various levels of education and income, use these apps. And they should adapt to everyone.

Aside from the previous problems, the biggest challenge was probably the handling of data that digital channels were receiving. Because of huge demand and fewer online resources during lockdowns when the physical branches were unavailable, the surge in customer queries had multiplied. 

Unfortunately, this also created a shortfall of customer care assistance. Troubled customers were constantly trying to get in touch with customer care but because the call centers manually provided help and assistance to each query, some queries were delayed. 

This also shows how badly the system needs AI-powered chatbots to assist customers. Having chatbots and branch staff can boost the performance of the customer care team by many folds. In fact, a 2023 survey had revealed that the banking sector will globally save $7.3 billion in operational costs if they switch to chatbots. 

How the Traditional Banks Can Achieve Digital Success 

Within the next 12 months, banks are expected to divest from the corporate sector and instead increase investment in digital technologies such as analytics, remote servers, AI, Robo-advisors, and blockchain. Many banks are already on their way to building these digital components so they can establish seamless digital banking platforms before their competitors do. 

Here are the key components that every traditional bank needs to consider to transform itself and keep pace with the digital age. 

Redefine the Customer Experience

Redefining the customer experience will mean putting the customer’s needs and demands in the center of strategies when banking services become digitalized. The shift will create a need for new roles and require an agile workforce with new capabilities. The existing team will be merged with the upcoming additions to motivate the team to create expert solutions. 

The combination of human talent and AI usage can positively impact the way things are done and the effective changes will retransform the user experience. Co-creating digital online banking with customers also means that your customer always feels understood and served, which results in brand loyalty.  

Expansion

With the seemingly everlasting transition from traditional banking to digitalization, customers in the future will require most of their needs to be served digitally. This puts pressure on the banks as their margins will be cut short. Furthermore, customers will be selecting their financial products with great research after comparing each product side by side. So, traditional banks would then have to tap into pools that yield greater value to the customer and are also competitive. 

When this huge network serving millions will be created, banks will move towards centralizing data. Some important questions that would arise include: What kind of data are we dealing with? Is it the data needed by our customers or us? 

Technology Platforms 

Choosing the right technology platform is essential in the digital age for regulating data and non-risk compliance.

AI is taking the world by storm for its precision, effectiveness, and speed in financial institutions. It is essential to eliminating the risk of fraud, accurately calculating credit scores, automating complex manual data management tasks, and handling work round the clock.

AI is applicable in online banking and can even improve personalized interactions with clients. It can create customized messages for the customers, create credit risk analysis, provide excellent financial products, and compare them based on the use and needs of each customer that it records. 

AI offers real-time services and personalized solutions that clients expect from banking channels and it is the future of online banking. 

Cater to Changing Preferences

The banking preferences of customers are constantly evolving across Europe and globally. A world bank survey revealed that 15 to 20% of individuals who are currently using online banking apps during the pandemic will continue to use it or increase their use in the future as well. It is also vital to note that customers as old as 65 years of age or older are using these banking channels for everyday transactions and that the percentage of users is about 60-85% in the Western European countries. 

Fast Track Digital Adoption

With the shutdown of the traditional banking system and the rise of investment spending, banks' revenue growth will be disturbed, meaning that they would have to rethink their revenue drivers. Utilizing advanced analytics can help banks identify areas where significant growth can be made as well as recognize unfilled market gaps.  

Traditional banks have large caps, infrastructure, and potential for inorganic growth and if used correctly, this can translate into cut-throat competition with fintech companies. The fintech companies have two important common components that make them so popular: high speed and superior customer experience that gives individuals complete freedom to manage their finances with minimal effort. 

The technology upgrades will take time but what banks can achieve within a 6 to 9 months period is the status of a digital financial institution that can offer its customer everything they need, from knowledge of financial products to adequate security. 

Just like how Nokia was too late with introducing new handsets while Apple and Samsung had already taken over the market, traditional banks will also be left in the dust by fintech companies that are constantly evolving with changing market trends. However, innovative leadership, agility, and a healthy growth rate will enable the banks to cater to present customer needs and contemplate future demand. 

To succeed in this changing digital environment, the speed at which banks transform is crucial in determining how the business industry will thrive on profits that are constantly getting eroded by margins getting thinner. The banking institutions responding to the digital banking crisis will emerge as pioneers of technology.