Digital Transformation in Banking

A Look at the Journey So Far: Major Innovations

According to Britannica, in the early stage of banking, which was around 2000 BC, written receipts were used to transfer ownership of valuable commodities (grains, for example) that were kept in temples and royal palaces. The aforesaid places served as their “banks,” as we call them today. 

Apart from the safe storage of valuables in sacred places, there were different forms of buying and selling of assets, as well as lending and borrowing during ancient banking that can be compared to what we know and do today. For example, traders used to go to the temples of Babylon to get loans (grain loans). The transactions were documented on clay tablets, and they were required to repay the loans with some fractions of extra grains as interest.

But as better technologies for doing business and managing finance started to emerge, consumers began to see transformative and innovative solutions directing the course of the banking industry. Thus, thousands of years later, banks have moved away from ancient temples and palaces to contemporary brick and mortar structures (traditional banks).

However, when we thought that banks had arrived at their permanent places and had nowhere else to go, they moved to our smartphones and personal computers in the form of banking apps and e-wallets. Thus, we now have neobanks that operate without physical branches and FinTech companies that individually and collectively render banking products and services in ways we have not seen before. Cashless payments and paperless operations are now trending throughout the global banking industry. What is more, digital currencies such as cryptocurrencies are now threatening to replace banknotes, and banks are becoming friendly toward them. 

Challenges of Digital Transformation in Banking

No business can continue to be successful without consistent efforts to meet the changing preferences of its customers. In the banking industry, as customers continue to prefer digital services, they force all kinds of banks to design and implement digital transformation strategies to compete with their rivals. But there are some challenges inhibiting their successes. We will highlight the major ones in the following paragraphs. 

Firstly, the rise of online-only banks is creating a tough competition for patronage. Many customers are switching from conventional banks to challenger banks. The reasons they find neobanks attractive include the fact that they offer 24/7 online services as well as personalised products and services. For example, there are neobanks for digital nomads, and fans of anonymous payment solutions. Hence, millions of people nowadays, especially Millennials (young customers), find using digital services highly comfortable.

Secondly, how to improve the digital customer experience is a common challenge for traditional banks. Why? There are now many options for customers to pay for their purchases and wire money without using their cheques or swiping their bank cards. As long as they continue to find this experience more convenient, they will continue to want more of it. Moreover, many business establishments, including freelance exchanges and online casinos, are relying on digital wallets and alternative methods for their payment solutions today.  Traditional banks are struggling to provide this kind of experience. 

Thirdly, going digital demands maintaining strong cybersecurity. This is needed to protect the high amount of data to be collected from the customers and stored in the online platforms, databases, or any other systems. Neobanks, especially, create serious online data security risks by operating only online. Customers are more loyal to financial services providers that can protect their data from third parties. Hence, at a significant cost to them, digital banks spend a lot of money on strengthening cybersecurity to protect their systems against data breaches, malware attacks, and cybercriminals. 

Fourthly, outdated and rigid regulations are making it difficult for traditional banks and neobanks to go as far as they would want with transforming digitally. Based on the high speed of introduction of innovative products and services in the banking industry today, there is a need for regulatory bodies to keep pace with them and adapt their regulations to the transformation. But unfortunately, it takes a long (bureaucratic) process and time for existing (old) regulations to be updated or changed to allow banks and financial institutions to embrace digital transformation quickly.

Tips for Overcoming Digital Transformation Challenges

We suggest that the challenges facing digital transformation in the banking industry can be overcome in the following ways:

• Create a flexible corporate culture – this can help prepare any bank for inevitable digital transformation by giving it speed and agility for adaptation.
• Invest in new technologies – banks need to do away with legacy (traditional and inept) bank management systems so that they can acquire modern software for banking management and smarter (automated) payment processing.
• Set up a competent technology management team – the team of technology experts should be responsible for driving innovation and managing the digital transformation process.
• Transform for your customers – try to know what your customers want and use the knowledge to create digital transformation and niche marketing strategies that focus on providing the products they often interact with, thus, meeting their needs.

Advantages of Digital Transformation in Banking

There are many benefits that banks can derive from going digital. They include the following:

• Increased flexibility – it makes it easier to cope with the changes in the industry and add new strategic products and services.
• Cost reduction – although the initial cost of transforming digitally might be high, it definitely pays off in the long term by significantly reducing overhead costs and increasing process efficiency.  
• Customer loyalty – embracing digital transformation helps you to achieve better customer retention due to an improved banking experience.
• Better synchronisation – keeping various departments and teams coordinated is easier when you use advanced banking technology.
• Smarter decision making – with smarter talents (tech-savvy workers), big data, machine learning, artificial intelligence, blockchain and other cutting-edge resources and technologies at your disposal, you will find it easy to make faster and better decisions.
• Better connections and partnerships – going digital makes it easier for you to form profitable partnerships and create strong connections with other banks, FinTech companies, and payment solutions providers in the industry.

Neobanks and the Current Banking Industry Trends in Major Markets

The global banking industry is experiencing a massive transformation in digital payments and neobanking – especially in major markets like Europe, the United Kingdom, and the United States.  For instance, digital wallets are reshaping payments across Europe.

Furthermore, there are new digital platforms and neobanks that target ultra-niche market segments. Today, we can name several crypto-friendly banks, digital wallets for businesses, apps for kids and teens, neobanks for long-term investors, and the list goes on. If you are interested in reading detailed material on the latest trends in the banking industry, see our previous post. 

Meanwhile, there are ongoing regulatory changes towards establishing favourable environments for neobanks to operate. We will now look into some examples of them.

Regulatory Changes for Digital Transformation

In the United States, there are changing FinTech Laws and Regulations to accommodate neobanks and the pace of digital transformation of banking at both State and Federal levels. FinTech companies in the US are receiving legal power (licences) and recognition as providers of any of the following services: money transmission (that is, money transfer); alternatives to traditional lending; buy now, pay later (BNPL); and/or cryptocurrency. The key regulations and regulatory approaches of the Government are FinTech charters, open banking rules, anti-money laundering reforms, State credit and money transmitter laws, and the regulatory framework for cryptocurrency. 

In the United Kingdom, the main regulatory body is the Financial Conduct Authority (FCA). In the last quarter of 2021, the FCA began to allow neobanks to send their applications for regulation all year round. Also, the UK Government is currently looking into minting its non-fungible token (NFT) to introduce more regulations on digital assets and cryptocurrencies. 

In the European Union, the first regulation for digital transformation in banking was the Payment Services Directive (PSD), which was implemented in 2007. The PSD helps to standardise fees and the time it takes to execute transactions. It also creates transparent requirements for neobanks and electronic money institutions (EMIs) to obtain licences. In 2015, PSD was updated to allow banks to open up their systems for third parties to have access to their platforms. The update also enforced the use of two-factor authentication for higher security of customers’ accounts. Today, owing about 40% of the global neobank market share, the EU is the largest market for neobanks. In mid-year 2021, the EU announced plans to introduce digital wallets for every citizen.  

Neobanks Leading the Digital Transformation of the Banking Industry

Globally, there are many neobanks driving the pace of the digital transformation we see in the banking industry today. They can do it through multiple partnerships with traditional banks, fellow challenger banks, financial institutions, and FinTech companies. These industry leaders are delivering overwhelmingly impressive digital banking, financing, and investing solutions.

Without further ado, we would like to present the industry leaders to you. We have purposively selected these neobanks, not just because they are among the best and most secure digital banks, but also because they have many partners, and their customers can enjoy their digital services from many countries:

Revolut

Revolut is a leader amongst neobanks and an all-rounder in digital banking. The company has its headquarters in London, the United Kingdom. Nevertheless, its services are available to millions of people in over 30 countries, including the UK, USA, Japan, Singapore, Australia, and Switzerland. This online-only bank offers a wide range of services and features that include personal IBANs, multicurrency accounts, SEPA and SWIFT transfers, cryptocurrency trading, bank cards, insurance, and a lot more.

The digital products and services of Revolut are delivered through its many partners. For instance, in the United States, all Revolut prepaid debit cards are issued by Metropolitan Commercial Bank, while its cryptocurrency services and Savings Vault are provided by Paxos Trust Company and Sutton Bank, respectively. You can find out how Revolut works and its pros and cons on our website.

N26

Whenever you think of a German neobank, remember N26. It calls itself “The Mobile Bank”. This digital-only bank operates in over 20 European countries. You can read about its range of services on our website. Due to its multiple partnerships, when you create an account with N26, you gain access to some special services. For example, its account holders can use mobile point-of-sale devices from SumUp at a reduced price.  What is SumUp? It is a registered digital payment systems facilitator of a USA-based bank called Fifth Third Bank.

Monzo

Anywhere that accepts Mastercard accepts Monzo. Therefore, you can access the services of this UK-based neobank from many countries and use its Mastercard debit card free of charge. It also allows you to transfer money and manage frequent payments. In addition, it has tools for personal budgeting and automatic savings. Now, it might interest you to know that, through a partnership with an investment platform known as Freetrade, Monzo lets its customers claim free shares on Freetrade under easier terms and conditions.

Starling Bank

Starling Bank is a UK-headquartered neobank that has customers in more than 30 countries across Africa, America, Asia, Europe, and other parts of the world. It offers cheap and fast international money transfers, Mastercard contactless debit cards, multicurrency accounts, and personal IBANs. Recently, to empower UK savers to promote environmental sustainability and fight against climate change, Standard Chartered Bank and Starling Bank entered into a new partnership to create Shoal – a new digital investment platform for green and sustainable projects. Starling Bank’s business-as-a-service (BaaS) platform and world-class digital capabilities power the technical operations of this platform.

Chime

Through partnerships with The Bancorp Bank and Stride Bank, Chime (a US-based neobank) can offer innovative banking services to millions of people. Chime account holders are allowed to use their Chime Visa cards wherever Visa is accepted. It offers three types of accounts: Checking, Credit Builder, and Savings. Users of this digital-only bank enjoy a wide range of benefits that include zero monthly fees, fee-free overdraft, high-yield savings accounts, and fee-free access to over 60,000 ATMs.

Monese

Monese offers its users a great app for personal budgeting, insurance, and money transfers. This neobank is based in the UK yet supports its over 2 million customers in more than 30 countries. It lets its users open bank accounts in GBP, EUR, and RON currencies and supports international money transfers in more than 10 currencies. It offers contactless Mastercard debit cards through its partnership with PrePay Technologies Limited – the issuer of the cards. It also partners with Investec Bank to boost its BaaS platform for private client transactions.

Varo Bank

Varo is the first mobile-only bank to be granted a national bank charter in the United States. Hence, Varo can operate without depending on any partnerships with traditional banks and other FinTech companies. It offers a range of banking products and services that include a savings account and bank cards with no credit check, no minimum balance, no overdraft fees, and no monthly fees. The Varo Bank app can be used in many countries. Its Visa debit cards, which are issued by the bank through a licence from Visa USA can be used anywhere, as long as Visa debit cards are accepted there.

Digital Transformation and the Future of Banking

The impact of digital transformation in banking cannot be overestimated. The banking industry has come a long way – from the era of “temple banks” and grain loans to today’s neobanks and BNPL. What can we say about banking in the next decade? Challenger banks will definitely transform into something way better than what we have now. But what exactly they will be is difficult to describe accurately at the moment. However, artificial intelligence, robotic automation, and multi-channel data-driven customer experience should be expected to dominate the changes.

Conclusion 

Neobanks are growing stronger through partnerships with other players in the banking industry. They offer cheap fees and rates, develop innovative banking products and services, manage sustainable operations, and create remote jobs in better ways than traditional banks.Also, with the pace at which they are leading the transformation of the banking industry, we can rest assured that they will not disappoint us in years to come. Besides, Governments are already making friendly regulatory reforms targeted at neobanks, FinTech companies, and online payment solutions providers. Hence, the future of the industry does not project a world dominated by brick-and-mortar banks but digital-only banks!