There have been many factors that have accelerated digital transformation in the financial services industry recently. While financial companies have typically been product-centric and relied heavily on legacy technologies, they're quickly moving towards being consumer-centric and delivering seamless, personalised solutions.
It's crucial to note that digital transformation in this industry goes deeper than just digitalisation. In order to survive, companies need to constantly adapt to changing customer preferences in order to deliver frictionless digital experiences.
What Does Digital Transformation Mean for Financial Services?
To remain competitive, companies need to keep up with today's pace of innovation. The digital transformation process generally focuses heavily on employee needs, processes and tools, but it's important to consider customer needs as well.
Digitalisation is required on both the front and back ends of businesses. The way that employees in financial services companies manage activities and transactions has drastically shifted but customer expectations for how to receive these has also changed.
1. Start-ups, Disruption, and the Need for Forward Thinking
In the early days of digital banking, it took Bank of America nearly a decade to gain 1 million new online customers. These days, they hit that same number for their banking app, Erica, within 3 months of rollout.
Business size or financial clout is no longer mandatory to gain traction in the financial services market. SoFi was started by four business school students at Stanford in 2011 – it is now a multi-billion dollar firm specialising in student loans and wealth management.
It took Ant Financial, China’s fintech giant, only 15 years to reach a peak valuation of $300 billion. Established banks and financial institutions can no longer take their position in the hierarchy for granted. If they remain stagnant, they will lose customers to smaller, more innovative start-ups.
Disruption is the name of the game in fintech. For example, the traditional KYC/due diligence processes in banks can delay loan approval by days, or even weeks. Start-ups leveraging big data and AI can make loan decisions in a mere 10 minutes. Which company would a customer prefer in this scenario?
Established financial companies have two options in this scenario – either try to buy out these disruptors for a king's ransom or embrace and nurture a disruptive ethos within their firms. A recent example would be VISA acquiring Plaid, a fintech star-tup specialising in data transfer, for a whopping $5.3 billion.
2. Customer (Experience) is King
There was a time when “customer experience” was synonymous with customer support / troubleshooting in the financial sector. It was just a question of how polite and attentive the staff were towards customers.
With services migrating to apps and web interfaces, the standards have changed and evolved drastically. Customer support is still a key aspect of the overall customer experience, but there are other priorities as well.
Two big factors make or break the user experience in modern fintech – ease of access and ease of use. In the digital marketplace, there are multiple channels where financial firms can reach their customers – mobile apps, websites, email, social media – the wider a firm's presence on these platforms, the easier it is for users to access them.
3. COVID has Added Fuel to the Fire
The pandemic may have dampened most aspects of the global economy. But in the realm of digital transformation, it has had an opposite effect. Even before 2020, the number of bank branches had been in steady decline. In the UK alone, it halved between 1986 and 2014.
Several factors contributed to this. The newer generation of customers is more comfortable with digital banking. As profits declined, branch closures, combined with digital transformation, presented an easy way out.
And now, even those customers who preferred physical banking have been forced to head online. As for the banks and financial firms themselves, stints with work from home / remote working have presented a possible roadmap for the future.
4. No Time for Rest and Recuperation
Firms that succeed in delivering a smooth user experience across multiple channels will outperform their competitors by a significant margin. But they will not get any time to rest on their laurels, because digital transformation is an ongoing process.
With instant online surveys and rating systems, getting feedback from customers has become easier than ever before. Companies have unprecedented access to information they need to improve their services. And if the ones ahead do not iterate and improve, they will get overtaken by the chasing pack.
The most popular apps in Android and iOS stores undergo constant updates. Some are security patches to counter recently discovered flaws or vulnerabilities. Others are minor tweaks to the user interface, for UX improvements. Banking / fintech apps cannot ignore this reality.
5. From Cutting Costs to Improving Productivity
Banks and financial service firms had a very compelling reason to digitise – automation of processes resulted in significant cost savings. The banking sector in particular has historically suffered from weak profitability. Reducing costs by using new technologies was a popular strategy in the financial sector in the 1990s and 2000s.
While that remains relevant to this day, another aspect of increased automation is coming to the fore now. IT has taken over many of the labour-intensive tasks involved in financial services – credit scoring, risk analysis, fraud prevention – these are just a few areas where the superior number-crunching abilities of artificial intelligence have come in handy.
This allows human resources to be utilised more efficiently on critical projects. The data-driven approach has drastically improved the operational efficiency of modern financial services. For instance, the use of AI has resulted in up to a 20% increase in the efficiency of fraud detection teams in banks, according to some studies.
6. AI as the Game-Changer in CX
The modern customer prizes a “frictionless digital experience” above all else. With traditional phone support, callers are often left waiting for minutes. Using AI chatbots allows firms to remove this waiting period altogether. The automated systems can identify and handle low-level queries, leaving the human agents free to focus on more complicated issues.
And it is not just customer support – going digital has radically altered customer expectations in other areas as well. Opening an account in a traditional bank can take anywhere from several days to weeks, depending on the KYC process. In a digital bank, opening an account takes 5 minutes.
With automation and AI, self-service has become the norm in banking and finance. Using AI data analysis, firms can now predict customer needs and present options proactively.
This kind of enhanced digital experience (DX) is the future of the financial industry as well. Firms can offer everything from insurance policies to investment, loans, and other financial products to their customers, using segmentation and enhanced targeting.
7. No Compromise Allowed on Privacy / Security
From a customer perspective, the significance of all other features pales when compared to their security and privacy. Facebook has steadily lost users in recent years due to rampant privacy and data safety concerns. The same is also applicable to banks and financial institutions, and perhaps to a higher degree.
The financial sector has been at the forefront of cybersecurity from the early days of the internet. Apart from governments and defence establishments, they were perhaps the biggest customers of security software and products. But concerns regarding data privacy is a relatively new issue.
Digital transformation grants companies access to a treasure trove of user data. But there are concerns regarding how this data is being used, and who else is gaining access to this data. Governments across the world are starting to act on this – the GDPR and PSD2 in Europe are examples.
In Australia, an initiative called Open Banking gives customers of major banks greater control over their banking / financial data. The customer gets to decide which entities can access this data – be it other banks, fintech apps, or financial service firms.
Such an approach is beneficial for consumers in switching banks, seeking better financial products / services, and above all, in having greater control over their privacy. At the same time, this is also a warning signal for banks and service providers – be prepared to cede control over things that they took for granted (like customer data).
Where is the Financial Services Industry Headed to Next?
The entire financial services industry is at a critical juncture in 2021. According to the IMF, the banking sector, in particular, will struggle to reach profitability until 2025 at the very least. As a result, the coming decade will see massive shifts in how business is carried out. Firms who embrace the change will have a better future ahead.