2021 has been a year marked by disruption, casting the last decade of banking industry trends in a whole new light. However, over the next five years, will these disruptions result in major changes or faster growth – especially in digital banking? Read on to find out what to expect!
The Shift Toward Digital Banking
As disruptive as 2021 was – or arguably because of it – 2022 could be the year for innovation. A compelling reason for banks to step up their digital banking efforts is COVID-19.
Even in areas where banks have reopened, many people are unsure of their safety due to the limited in-person interactions. Many community banks already offer online banking services. For these banks, their commitment to making digital banking more user-friendly and efficient is paying dividends. Therefore, this trend may continue to persist for the future as well.
It is likely that the future of banking will not only be characterized by higher levels of digital adoption, but also by changes in service offerings. The most successful banks will rely less on traditional services and income streams. Their success will depend more on their ability to see their customers’ financial needs from start to finish, and meet them in a connected, frictionless and seamless way.
Below are eight factors that will shape digital banking in the next 5 years:
- Physical decline: Brick-and-mortar banks will continue to fade, slowly but steadily, giving way to the ever-increasing use of digital services through mobile devices, computers and other devices. While physical banks are unlikely to disappear entirely in the decade to come, many of those still operating will have to repurpose themselves to meet niche needs as general financial services become increasingly accessible online.
- Thinner wallets: By retaining multiple payment options, including cashless payments, consumers stand to gain more. The digital financial ecosystem also offers significant advantages to businesses, governments, and economies in general. As a result, the real question is not whether companies and countries will go cashless, but rather who will lead the charge or oppose it.
- Cardless payments: A century ago, it would have been difficult to convince someone their entire liquid value would one day be visible and transactions would be completed with a small plastic card. You might also have difficulty convincing some people that cards will soon be obsolete today. More than half of all transactions are made using digital wallets. In order to drive this trend, payment-capable IoT devices and their accompanying services have grown dramatically.
- Competition with non-banks: In spite of ongoing debate between lawmakers, regulators, and executives, SaaS companies are not considered banks. However, they will increasingly serve customers’ financial needs in the same way traditional banks do today. Meanwhile, super-apps will continue to disrupt the financial sector.
- Credit relevance: While wages and spending needs are misaligned, consumers will continue to rely on credit. What is likely to change is how financial institutions make credit decisions, which will impact the relevance of credit scores. Credit issuers are turning to artificial intelligence to analyze the risks and rewards of consumer lending, as they did following the 2008 financial crisis. Consequently, banks will increasingly use the data available to them to improve the decision-making process as the amount of data available grows.
- Micro-personalization: The rise of big data and AI-driven analytics is bringing about a new paradigm in financial services. A paradigm in which every customer is the bank’s top priority. In contrast, financial institutions are poised to be the first to offer customer personalization in the form of instant loan approval, proactive product suggestions, detailed guidance on purchases, and budgetary recommendations based on factors such as location and spending patterns.
- Interoperability: In the financial landscape, there are many players, including traditional banks with online services, digital-only banks, fintech applications and service providers, merchants, and most importantly, consumers. While variety can be useful, it can also cause transaction friction, privacy and fraud concerns for all parties involved. As a result, groundbreaking innovations can only disrupt financial markets to the extent consumers are convinced they are safe and efficient. Solutions to these challenges will increasingly come from payment stacks and financial stacks that offer interoperability by design.
- Regulation: Regulators initially responded by adopting an ad hoc approach to digital financial services. Nonetheless, in light of new technologies coming into play and tech giants disrupting the financial industry to a greater extent, policymakers will be challenged to identify emerging threat vectors and manage risks more comprehensively. Compared to the majority of national systems in place today, what the world may need is a global approach to ensure the sector’s stability.
To Conclude
While the future of digital banking may appear promising, the unprecedented pace of innovation and shifts in consumer expectations require a new level of agility and forward-thinking. Even as financial institutions compete to differentiate themselves, co-innovation will be a critical element of success. Therefore, smaller banks will need to leverage their nimble capabilities to take advantage of digital banking trends during the next five years.
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