Over the years, there’s been a lot of investment funneled into the digital transformation of the banking and financial services industries. We take a look at how this digitization in banking is helping to improve the overall financial services landscape and what digital priorities will look like this year and beyond.

What is digital transformation in banking and finance?

Banks and financial institutions are accelerating their digital transformation efforts, pouring more money and resources into their initiatives—including artificial intelligence (AI), data and analytics, and enhanced mobile offerings—in an effort to not only hyper-personalize the consumer banking and wealth management experiences, but also to make gains in an arena that is increasingly appealing to Big Tech competitors.

Big Tech companies are looking to join a multitude of fintechs, insurtechs, wealthtechs, and other financial services start-ups, to offer customers more seamless experiences and steal market share away from established financial institutions (FIs). Since the pandemic pushed many consumers toward digital experiences, including digital banking and contactless payments, fintech companies and traditional FIs alike are eyeing innovation across all aspects of the digital banking arena. To have any chance at competing in this new landscape, incumbent banks must either partner with their new tech-savvy competitors or modernize their own legacy systems.

Digital banking transformation demand due to COVID-19

During the pandemic, there’s been a digital shift within the banking industry. With businesses closed and consumers forced to transact and access funds at home, there is an increased desire to make these digital interactions as personalized and seamless as possible.

This shift in behavior has presented many banks and FIs with alternative ways to reach customers—whether that’s through a mobile app, a chatbot interaction, or by leveraging Big Tech partnerships and big data to better understand consumer needs.

Benefits of digital transformation in banking

For banks and FIs, being more digitally-forward comes with many benefits, including reaching a wider breadth of consumers and creating more seamless experiences overall. 

When it comes to priorities and use cases, it’s not a one-size-fits-all approach, and what may work for one company may not necessarily work for another. For example, digitizing the supply chain may take precedence for a particular financial institution, while another places priority on introducing new payment models to consumers.

Overall, digitizing banking and personal finance in this post-pandemic world will likely lead to customer retention, which is something all companies aspire for.

How Big Tech is making moves in banking and finance

Big Techs’ “on-ramp” to financial services is embedded finance—the inclusion of financial products and services in the customer journeys of nonfinancial companies. Tech giants like Google and Apple have large and engaged audiences from whom they could generate more revenues with features such as banking, payments, or wealth management.

Payments is the most mature area of embedded finance. Big Tech’s competitors should take note if embedded payments is any indication of what may be on the horizon for other financial services subverticals. More than a decade ago, telecoms and retailers teamed up to target the burgeoning mobile in-store payments space, but it proved too costly. In the US, Apple Pay and Google Pay reign supreme in the nearly $247 billion proximity mobile payments space, accounting for 43.4% and 25.0% of the market’s users, respectively. 

For the banking industry, partnering with Big Tech could open the door to millions of customers, but this puts incumbents in a bind: Big Tech firms are unlikely to want the regulation or operational complexity that comes with a license—making partnerships a must. But sacrificing customer relationships could cut banks’ margins and relegate them to becoming commodities. While Google’s foray into banking ended quickly, expect more pushes like Plex in years to come.

How mobile banking is driving digital transformation

One-size-fits-all financial services exclude too many customers. By delivering highly targeted experiences in banking and wealth management, providers can benefit from higher customer satisfaction, growth, and loyalty. We’re especially watching for providers to target the 1.7 billion unbanked adults worldwide. This diverse group is composed of immigrants, small-business owners, and freelancers, among others—all of whom could benefit from tailor-made solutions.

While many customized experiences are delivered by chatbots, such as Bank of America’s Erica or Chase’s Digital Assistant, we’re watching for providers to extend their AI capabilities to create bespoke banking experiences. Providers will find new ways to deliver financial insights in app—including highlighting double-charges or offering budget advice—such as Wells Fargo’s “Personetics.” 

As new players—such as fintechs, neobanks, and Big Tech—enter the arena, they will focus on building these hyper-personalized experiences to help consumers take control of their finances. They will give consumers more control with AI and real-time data to automate financial journeys, increasing financial and social equity. 

How the US banking industry can respond to the super apps prolific in the east

Around a third of US consumers feel overwhelmed by the number of devices and subscriptions they need to manage, per Deloitte. Chinese super apps—a digital ecosystem of products and services housed under a single app and user experience—evolved to fix a dearth of options. Western super apps will need to address the opposite problem: choice overload. 

Titans of commerce, finance, and transportation are all angling to become consumers’ one-stop shop, but China’s example suggests that winners will need to offer high engagement services such as payments or neobanks. In the US banking industry, long-standing FIs and fintechs alike are looking to fill this need, but they will face healthy competition from Big Tech.

PayPal and Revolut could launch the first super app to break through in 2022, though early versions will be more akin to a tasting menu of the possibilities of a super app. These companies have already made strides, but they will need to add an array of offerings beyond payments and banking to hit the mark—and they will do precisely that.

Trends & the future of digital banking & finance

By and large, it’s going to be critical for banks and FIs to invest heavily in digital transformation, whether that’s by leveraging AI to boost customer personalization, or by joining forces with Big Tech to provide seamless, one-stop-shop experiences. 

Regardless, improving customer acquisition and retention will be key for the banking industry as consumers continue to favor digital interactions.