Digital banking has been steadily gaining market share over the past decade. However, in 2020, the adoption of digital banking grew exponentially. The pandemic caused banks to limit branch hours. Not only that, many people were hesitant to use cash in transactions for fear of infection. This caused a major shift in banking habits. People began to rely on digital tools to complete banking transactions and started using mobile pay options at retail and grocery stores. The shift to digital banking is expected to continue even post-pandemic. Let’s dive into the question of “what is digital banking?”
Table of Contents:
- What Is Digital Banking?
- Digital Transformation in Banking
- Digital Banking Trends
- How Have Consultants Been Involved in This Shift?
What Is Digital Banking?
Digital banking is the digitization of every function performed by a bank. Digital banking is often referred to as “online banking.” However, there is more to the story - the digital transformation in banking goes beyond online banking.
What is the Difference Between Digital Banking vs Online Banking?
Is there really a difference in online banking vs digital banking? Yes. Online banking has been commonplace for years. Online banking lets customers perform core banking functions, such as checking a balance, transferring money, or depositing checks remotely. They can use a computer or, more recently, a mobile phone. Ultimately, online banking is a subset of digital banking. On the other hand, digital banking lets consumers perform every banking function remotely. Through digital banking you can not only check a balance or transfer money, but also apply for a loan, shop through a website, or resolve a dispute. Digital banking eliminates the need for a consumer to ever enter a bank physically.
Digital Transformation in Banking
Digital transformation in banking is happening faster than anyone in the industry expected. In the years ahead, digital banking will continue to become more popular with consumers. 80% of participants in a new Chase survey admitted they prefer to manage their finances digitally. Consumers will start to place less value on having a physical branch nearby. Because of this, they will have a multitude of options when it comes to who to bank with. To remain competitive, banks will need to be aggressive in adding additional features to improve the user experience of digital banking.
How do banks hope to accomplish this digital transformation? There are 4 concepts that banks need to keep in mind when creating new digital banking tools for customers.
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Reinvent the Consumer Journey
Banks need to determine what matters most to customers at every step of their personalized banking journey. This means banks need to create tools that give customers valuable insights and resources while streamlining the entire banking process.
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Leverage the Power of Data
To leverage the massive amount of data collected, banks need to use data mining and other AI-based tools to do everything from cross-selling to identifying customers who are looking to switch banks. Banks should use the data to create solutions that help retain customers and increase revenue.
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Redefine the Operating Model
Customers want a bank that combines human interaction with digital and self-service functionality. This can be accomplished in a fully remote way using the right digital tools. According to BCG, banks that achieve this can expect a 15% increase in revenue, up to a 35% reduction in branch costs, and up to 15% increases in customer satisfaction.
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Build a Digital Driven Organization
Digital banking tools create a large amount of value for customers. However, each digital tool that is rolled out needs to be part of a larger digital strategy for a bank. This strategy needs to have a clear implementation plan. Many banking systems run on legacy systems that are difficult to connect to modern technologies. To ensure that tools are rolled out quickly, it is essential to prioritize projects. It is better to roll out smaller, high impact features or tools rather than wait to roll out an entire new banking system at once. This not only allows customers time to slowly adapt, but it leads to less frustration for development teams.
Digital Banking Trends
What trends can we expect to see in 2021 and beyond? Taking into account the 4 pillars above, we can expect to see a variety of high-impact changes continue to roll out this year. Some of the digital banking trends to look for are below:
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Personalization
Banks can leverage artificial intelligence and machine learning to create a fully customized experience for customers. These methods use a customer’s banking history to derive insights about the customer. These insights can then be used by the customer to make better decisions about their finances.
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Chatbots
Most banks offer a chatbot feature to help customers find answers to common questions. However, chatbots often lead to frustration where the customer has to call or go into the bank. One of the goals of digital banking is to have customers complete all functions online and chatbots can be used to help customers along this path. For example, machine learning can be used to get customers more personalized chatbot answers. However, if the chatbot is unable to understand the question or “realizes” it does not have the needed information, the chatbot seamlessly sends the customer to a real customer service representative.
Chatbots can also guide users on opening new accounts or applying for different programs. At Chase, half of mortgages in Q3 of 2020 were completed digitally. This was double that of Q1. AI-powered chatbots that lead users through these experiences can greatly improve satisfaction levels and increase the number of digital transactions.
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Real-time Transactions
2021 will see a focus on helping customers feel comfortable using digital tools to complete real-time transactions. One example of this is Zelle. Zelle lets a user pay in real-time or instantly split a bill. Banks will continue to roll out similar tools that let customers make online purchases through the bank’s website.
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Increased security
There was a significant increase in the number of digital banking transactions in 2020. This growth, combined with the nature of the data being transferred, makes digital banking a prime target for hackers. Banks will continue to invest heavily in increased security for online banking.
Banks will implement security systems that use AI to ensure data security. In addition, banks may move towards using an application programming interface (API) approach to implement security or multi-factor authentication process. Both of these solutions would add extra security to digital banking without being disruptive to users.
How Have Consultants Been Involved in This Shift?
Consultants will be a strong guiding force behind the digital transformation that we are seeing in the banking industry. Firms like McKinsey, BCG, Bain, and others have the expertise to conduct research on what consumers want and also give guidance on implementing these changes. Consultants also have the experience to understand the challenges that regulations in this industry can cause and the high level of security needed in each application. McKinsey formulated its thoughts on how retail banks needed to reinvent themselves for the new normal.
Conclusion
Digital transformation has already had a tremendous impact on the banking industry and will continue to do so. For banks that implement a strong digital banking strategy, everyone wins – the customers and the banks. We are excited for what the future holds for the banking industry.
Additional Reading:
- BCG Study Says Banks Must Adapt To Digital-First Model
- Investment Banking Financial Models vs. Consulting Financial Models
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