Banking is undergoing a technological churn right now in the US due to rising competition from fin-tech startups and increasing concern for cyber-security.
For long, banks have been reluctant to update their systems – and for good reason. The current systems that they use are the product of years of continued innovation to meet immediate customer requirements.
But this has resulted in siloed systems being used for the transaction, savings, investment and loan accounts. This is not suited for the digital age when the competition for banks is coming from technology-based FinTech startups.
Banks and other traditional financial service provider have had to respond with an array of digitization and innovation initiatives.
These initiatives employ cutting-edge technologies to ensure a customer-centric perspective rather than the traditional focus on products, real-time intelligent data integration rather than slow analysis being performed after-the-fact and open platform foundation.
This article will focus on some of the innovations that have been experienced by the banking system in the United States and the financial world in general.
- What is Innovation in Banking?
- What is Digital Banking Transformation?
- What is the Recent Development in the Banking Industry?
- Why is Innovation Important in Banking?
- What are the Four Pillars of Digital Transformation?
- Is Banking a Service Industry?
- Which Technology is Used in Banking?
What is Innovation in Banking?
Innovation means something new or something which had not been done before. The same goes for banking section as well. There are many sections in banks which are going through or have gone through innovation in recent past.
Read Also: The Negative Effects of Financial Regulation on the Banking System in the United States
They are no longer restricted to age-old (traditional) methods. Thus, to increase the business avenues and capture the new market banks are resorting to innovation. This term innovative banking is being in use a lot nowadays.
There are many types of banking facilities that the banks have started in recent years. These are the following types of innovative banking used by the banks these days:
Mobile Banking
Mobile banking has been a revolution in the past few years. It has completely changed the way banking systems are working. Thus, it is a system that allows customers to perform many types of financial related services through a smartphone.
These include services like ATM locations, bill payment alert, inter or intrabank payments, bill payments, and many more. So, services are available at the fingertips of every person.
Internet Banking
Internet coverage in the last few years has increased drastically. This service is online banking, web banking, or virtual banking.
Thus, this banking service allows its users to execute and perform any financial transaction or service with the help of the Internet. The banking facilities are provided traditionally at a local bank outlet.
This includes bill payments, a deposit of money, borrowing of money, and other services are all available at one place. This service happens with the use of the Internet facility. In India, ICICI Bank was the first bank to avail it’s customers the facility of Internet banking.
Retail and Wholesale Banking
Like other businesses, the banking sector to has evolved into retail and wholesale banking and it is also one of the parts of innovative banking.
Here, retail banking refers to the banking in which the transactions which are done daily by the banks are executed with consumers.
Thus, this is done instead of transactions with other banks or other corporates. The services under this are:
- Personal loans
- Savings accounts
- Checking accounts
- Debit card
- Credit card
Wholesale banking is completely the opposite of retail banking. It refers to the business being conducted with the business and industrial entities.
Thus, in wholesale banking, trading houses, domestic companies, and multinational companies are included. So, there are many services which are included in the wholesale banking and these services are:
- Value-added services
- Fund based services
- Non-fund related services
- Internet banking
- Multinational and offshore banking
Multinational banking is the banks that are present in more than one country. The main services are available in more than one country in these services. Thus, these banks are also called international banks.
The first bank to offer its services outside India was Indian bank in 1946. Currently, Bank of Baroda has the maximum number of the overseas franchise in India.
While under offshore banking, the banking activities are performed in the currencies that are different than the currency of the country in which the bank account is opened. The banking services in these banks remain the same though.
Narrow and Universal Banking
Narrow banking includes keeping together the higher part of deposits in risk-free assets like government securities. In India, this is basically in performance to reduce the size of the NPAs.
While commercial, investment, insurance, and many other financial activities combine to form universal banking. Thus, in this practice every product is available.
What is Digital Banking Transformation?
Digital transformation in banking largely entails the shift to offering online and digital services, as well as the massive number of backend changes required to support this transformation.
Many banks make mistakes by taking on a series of separate digital initiatives, which struggle to succeed because they don’t have the support or coordination to compete with digital-native solutions. Instead, digital transformation in banks must entail a top-down approach, integrating digital systems, customer experience platforms, apps, and infrastructure.
Examples of Digital Transformation in Banking:
- Blockchain Technology
- Utilizing Artificial Intelligence (AI)
- Customer Data Collection, Management & Analysis
While digital transformation in banking can and does mean many things, the following tenets will get you on the right track to strategizing your own bank’s digital transformation journey.
Digital Transformation in Banking Evolves the Customer Journey
All banks have a website, most have some form of a digital app, and likely online services and features to go with it. These digital features encompass most of what people think of as “digital services” but don’t at all encompass digital transformation in banking.
However, they do allow you to take a major step towards a bank’s digital transformation, which is digitizing the customer journey. How? And what does it entail?
Traditional customer journey or sales pipeline often starts with marketing building leads, transferring those leads over to sales, and then transferring those sales over to customer service.
An individual must go through several departments before they ever receive a product or service, resulting in a disjointed and disconnected or often impersonal result.
Digital transformation in banking allows you to create a more cohesive and personal digital customer journey.
Creating a digital customer journey means taking steps to integrate everything into a single online platform so that the customer is handled through the same tooling, sometimes by the same people, and with the same information throughout the process.
Here, practices like changing how teams are organized, integrating technical people into sales teams, and possibly merging marketing and retail into the same team can help a great deal.
The most important aspect of digitizing the customer journey is that the customers are moved seamlessly from marketing to sales as part of an online application for financing through in-app billing, all the way to customer support, directly in the app.
Achieving this means mapping the customer journey and building tools and applications around it, with a focus on specific critical points.
For example, a digitized customer journey allows a customer to click on an ad, sign up for an account online, receive tutorials and on-boarding information through their app, receive automated loan decisions, and pay bills or send funds online.
This sort of digital transformation in banking means understanding customer wants and needs and investing in those wants and needs. However, it will save you money in the long-term as it improves customer satisfaction, frees up staff for value-added activities such as relationship building, and eventually saves time by automating processes.
Digitalization and Big Data in Banking Digital Transformation
Modern banks have more data than ever before. The more digital services you offer, the more data you automatically collect. This data allows you to take huge steps in terms of updating and managing your operational model, your customer service, and even your business strategy.
Data allows you to understand customers in new ways, using that information to identify opportunities, optimize products and services, and automate solutions.
Data mining and big data in banking play into every part of the organization, but sales and marketing are among the most obvious departments that benefit from the data provided by a bank’s digital transformation strategy. Here, big data allows you to use customer information to create targeted marketing campaigns.
This same data usage works with reducing churn by creating offers and solutions to prevent customers from leaving. Analytics can predict when customers want or need loans when loans default when customers are preparing to leave, or even when a cross or up-sell will likely be useful.
This data, in turn, allows banks to offer highly personalized offers and solutions, either through a representative or as an automated offer or solution inside an app or online portal.
Automating and using digitally-driven solutions like chatbots and AI are also part of bank digital transformation strategy. J.P. Morgan Chase takes this to an extreme level, integrating COIN to handle and process loan agreements. The same AI integrates into customer service, offering assistance, account creation, and much more.
Here, solutions like self-service, chatbots, and 24/7 service offer business advantages while improving customer experience.
A Focus on Change with Bank Digital Transformation
While there are many aspects of digital transformation in the banking industry, one of the most important is readiness and ability to adapt to change. Banks are often held back by security, legislation, and strict frameworks intended to protect customer data and privacy.
At the same time, new digital-native banking solutions and money apps are outpacing traditional banking in terms of growth and customer acquisition. Adapting policies to meet changing consumer demand, to quickly adapt to new technologies, and to respond as the market changes is essential to digital transformation in banking.
This can mean that true digital transformation in banking requires changing the organization from the inside out, focusing not on outward services like online portals and chatbots, but rather on how the organization reacts to change. You will need both to become and maintain a truly digital organization.
Bank digital transformation is easier said than done, as many of today’s banks are failing at their own digital transformation goals.
With reasons ranging from a lack of consistency or support across new digital applications to lack of internal agility, banks can make this shift and continue their digital transformation by changing approach, replacing legacy frameworks, and working to develop a digital culture internally before developing single-use digital features.
Once the digital culture is achieved, digital platforms and services can offer a great deal of value to consumers, especially when supported by automation, AI, big data, and blockchain technologies.
What is the Recent Development in the Banking Industry?
The most prevalent trend in the banking industry today is the shift to digital, specifically mobile and online banking (more on each of those in a bit). In today’s era of unprecedented convenience and speed, consumers don’t want to have to trek to a physical bank branch to handle their transactions.
This is especially true of Millennials and the older members of Gen Z, who have started to become the dominant players in the workforce (and the biggest earners).
This digital transformation has led to increased competition from tech startups, as well as consolidation of smaller banks and startups. In 2018, overall fintech funding hit $32.6 billion by the end of Q3, up 82% from 2017’s total figure of $17.9 billion, according to CB Insights.
Mobile Banking
To be frank, mobile banking is all but a requirement for consumers at this point. In Business Insider Intelligence’s Mobile Banking Competitive Edge Study in 2018, 89% of respondents said they use mobile banking, up from 83% in 2017.
When broken down by generation, 97% of millennials use it (up from 92% in 2017) 91% of Gen Xers (up from 86%) and 79% of Baby Boomers (up from 69%).
Critically for the banks themselves, 64% of mobile banking users said that they would research a bank’s mobile capabilities before opening an account, and 61% say they would change banks if their bank offered a poor mobile banking experience.
But we’ve now reached the point where simply having a mobile app isn’t enough for banks to attract and keep customers.
Additional tools and features – such as the ability to put temporary holds on cards, view recurring charges, or scanning a fingerprint to log into an account – are becoming increasingly necessary. Take a look at the chart to the right to see how valuable these features and more are to consumers.
Online Banking
Online banking is extremely convenient, and is understandably one of the two main ways that consumers interact with their banks (along with mobile banking). But there is still a significant contingent of banking customers who want physical branches.
Despite an overwhelming reliance on digital banking channels overall, and the resulting decline in branch visits, consumers have maintained a preference for depositing checks in-branch, according to a recent Fiserv study.
More than half (53%) of respondents said their top reason for visiting a branch in the past month was to deposit a check, compared with 41% who went to withdraw cash, and 36% who went to deposit cash.
Still, there’s no denying the rising prevalence of online banking, which has led to other innovations such as open banking. This system, implemented in the U.K., involves sharing customers’ financial information electronically and securely, but only under conditions that customers approve.
Open banking forces lenders to offer a digital “fire hose” of data that any third party can use to get standardized access — provided the startup is registered with the UK Financial Conduct Authority (FCA) and the customer agrees to share their data.
Investment Banking
Investment banking is a type of financial service in which a person or company advises individuals, businesses, or even governments on how and where to invest their money. For decades, this has been a human-to-human process that led to a mutually beneficial relationship.
But now, with the rise of robo-advisors, artificial intelligence (AI) is starting to infiltrate the money management space. Predictive analytics can help investors make wiser and more profitable decisions before the market moves.
AI can, in some cases, also help identify M&A targets. Lastly, AI can help validate an investment banker’s hypothesis and lead to more informed future decisions.
Banking as a Service (BaaS)
Because of tight regulations (particularly in the U.S.), not everyone can just open a bank. This is where banking as a service (BaaS) comes in to fill the gap.
BaaS platforms enable fintech and other third parties to connect with banks’ systems via APIs to build banking offerings on top of the providers’ regulated infrastructure.
So, launching BaaS platforms helps banks benefit from fintech entering the finance space, as it turns them into customers rather than just competitors.
While BaaS technically falls under the umbrella of open banking, it shouldn’t be confused with the aforementioned Open Banking system in the U.K. Open banking encompasses all actions in which a bank opens its APIs to third parties and gives those players access to data or functionality.
The UK’s Open Banking focuses on providing third parties with data from incumbent banks, while BaaS looks at how these players can get access to banks’ services.
Why is Innovation Important in Banking?
Amazing and inspiring ideas are all around us. From technology to business and from sport to culture, ideas and innovation are at the very heart of almost everything we do.
Apple is a classic example of how a company can thrive based on a simple yet ingenious idea, yet one wonders how many similar ideas within business all over the world lay dormant – unseen, uncovered and unloved?
Innovation is important to business for a number of reasons and is recognized as having a significant impact on productivity and overall business performance and success.
In banking, there is a requirement to balance funding for innovation with expected returns, either through customer fees from customers or other means. But there is still no real reason why banks and FS organisations cannot be more innovative in their approach.
This adds immense value to customers who would benefit from new ways of banking, different approaches, new products and services, which in turn can have an impact on the bottom line that will always be important in the sector.
Contactless payment capability such as Near Field Communication (NFC) has been discussed for years in the sector and the convenience it will potentially provide to customers and businesses is huge.
Yet until recently, who was really out there pushing the message that this is a new and innovative way of paying and highlighting the benefits to customers of a wider-scale? Doing so could actually be a key deciding factor in someone choosing a bank.
What are the Four Pillars of Digital Transformation?
Digital transformation is the use of technology to increase the value or efficiency of any aspect of your business model. It also includes cutting down on costs, empowering employees, better management and stimulating innovation.
These four pillars of digital transformation can also make you better at providing the same goods or services by ensuring that none of the Digital tools available today go underutilized.
As you once explore the possible avenues to digital transformation, you’ll find new opportunities for improvement that could lead to groundbreaking Business success.
It is important for you to understand that digital transformation is not limited to just incorporating the latest technologies and tools into your organization. It involves building a business model based on a better understanding of your employee, your customer, your organization, and the overall market.
Empowering Your Employees
An employee is a key worker in your organization and It is the glue or the basic element that holds your business together. Modern work environment emphasizes on empowering employees.
A happy and satisfied employee performs better and brings innovation to work environment. Empowering the employees also gives them a sense of belonging in the organization and let them develop loyalty.
Sufficient empowerment and delegation of tasks should be given to employees so that they can foster and aid with the company’s goals. As a result, you have happy and proud employees with booming business.
Engaging Your Customers
You may have noticed that today’s customers are much more different than the older generations of customers. Your customers are now much more aware, technologically advanced, and has the resources to do a market comparison.
Thus, it would be a bad idea to try to sell them your product with old tactics. These tactics include bombarding the customer with piles of information or making a fool out of them by promising much more than you actually intend to deliver.
Now you must build trust with customers by offering them help and tailoring solutions that are a better fit for their needs instead of forcing the same product on everyone. It also means customizing products and incorporating support and services unique to the need of each customer.
If need be, you must be honest with the customer and recommend some other services if you doubt your ability to help through their problems.
Your ability to Digitally connect with customers through Business Emailing Solutions or Business Cloud Telephone System could be a game-changer for corporations’ success.
Hence, with constant connection and personalized interactions, one can build loyal, profitable customer-relationships that would boost sales. Find out about engagement tools that can help you learn the pain points of your clients.
Optimizing Your Processes
If it is not efficient, it is not a solution. What would be the point of having a solution of the cost is much more the worth of the result? For you to have an efficient business solution, it is necessary that you optimize all your business processes.
The optimization means that each business process gives out the maximum benefit with minimum cost and minimum employees. Kick-starting the process of optimization requires performing a detailed data audit at your company.
You can take the first step towards optimizing all processes at your organization by categorizing all data in your organization and storing it according to the risk, sensitivity and management related importance associated with the said data.
Your organizations’ ability to securely manage and store data is key to optimizing the operational efficiency for your business. Our innovative Cloud Solutions can help you manage and store data with unlimited space and regular backup.
Transforming Your Product Or Service
Gone are the days when you could drive customers with the stagnant sales pitch or old products that promised to deliver the same results over time. Consistency is the key but you are now facing a market where consumers change mindset within matters of seconds.
Consumer demands are much more diverse and fast-changing. It presents a challenge for your business to be innovative and flexible in your products and services.
A rigid business model that does not allow breathing space for creativity, agility and innovation cannot survive today’s market. Therefore, it makes meeting customer expectations very vital for business success.
Is Banking a Service Industry?
In financial services, Banking-as-a-Service (BaaS) platforms have surfaced as a key component of open banking, in which banks provide more financial transparency options for account holders by opening their application programming interfaces (APIs) for third parties to develop new services.
Fintechs have been encroaching on incumbent institutions in the banking game — but by moving into the BaaS space, tech-savvy legacy banks can turn this looming threat into an opportunity.
Banking-as-a-Service is an end-to-end process that allows fintech and other third parties to connect with banks’ systems directly via APIs so they can build banking offerings on top of the providers’ regulated infrastructure, as well as unlock the open banking opportunity reshaping the global financial services landscape.
Techy-savvy legacy banks can fend off the encroaching threat of fintech by moving into the BaaS space to share their data and infrastructure.
In a matter of years, access to this level of information will become table stakes for digitally native customers — so banks that begin now will be ahead of the curve and likely rewarded with high demand.
How does banking-as-a-service work?
The BaaS process begins with a fintech or other third-party provider (TPP) paying a fee to access the BaaS platform. The financial institution opens its APIs to the TPP, thereby granting access to the systems and information necessary to build new banking products or offer white label banking services.
In addition to getting ahead in open banking, legacy institutions that launch their own BaaS platforms are also opening up new revenue streams. The two main monetization strategies for BaaS include charging clients a monthly fee for access to the BaaS platform or charging a la carte for each service used.
Which Technology is Used in Banking?
New technology in banking is already transforming the financial sector, and the traditional banking landscape is set to rapidly change in the next five years.
Safety features, such as advanced cryptography and biometrics, will help protect against bank scams, and remote applications will make it easier than ever to do your banking without visiting a branch — but if you do, the experience is likely to be much more customer-friendly.
1. Blockchain Technology
Blockchain technology is set to fundamentally transform banking and financial services. It decentralizes financial management from a central authority to a widespread network of computers.
Financial transactions are broken down into encrypted packets, or “blocks,” which are then added to the “chain” of computer code and encrypted for enhanced cybersecurity — it’s been compared to “email for money” by blockchain startup CEO Blythe Masters.
Because the technology has the potential to improve numerous facets of banking — and is the basis for other banking technology trends like bitcoin — it’s no longer a question of if blockchain will change the banking industry, but when, according to the Wharton School of the University of Pennsylvania.
2. Upgraded ATMs
ATMs transformed the bank tech system when they were first introduced in 1967. The next revolution in ATMs is likely to involve contactless payments. Much like Apple Pay or Google Wallet, soon you’ll be able to conduct contactless ATM transactions using a smartphone.
Some ATM innovations are already available overseas. For example, biometric authentication is already used in India, and iris recognition is in place at Qatar National Bank ATMs. These technologies can help overall bank security by protecting against ATM hacks.
It might take some time to see ATM upgrades in the U.S. financial system because of the strict regulations governing North American banks, according to Bayometric, which is a leading global provider of biometric security systems.
3. Proliferation of Non-Banks
Banks are hoping that technology will allow them to deliver a faster, more transparent experience to consumers. A large portion of their resources, however, is necessarily dedicated to security, compliance, and other industry-specific requirements, which has allowed non-banks — or financial service providers that are not regulated by the banking industry — to flourish, according to a 2016 report from market intelligence firm Greenwich Associates.
Since these companies can devote a greater percentage of their assets to cutting-edge financial technology, they might be able to innovate more rapidly than traditional banks, attracting tech-savvy customers in the process.
4. Mobile and Digital Banking
The mobile and digital transformation in the banking system has only just begun and growth is already explosive. Banks are investing heavily in digital banking technology, in which customers use mobile, web or digital platforms to use banking services.
Artificial intelligence solutions, such as chatbots, often assist customers in simple tasks such as making payments. In a Forbes survey on banking customer engagement from late 2016, 86 percent of banks indicated that these types of services represent their top technology investments.
5. Partnerships
Although banks can pour lots of money into technology, the fastest way to deliver financial innovation in the future is likely going to involve strategic partnerships.
Fast-growing companies that already have new-wave fintech or social media platforms in place could make excellent partners for traditional banks seeking to enhance customer experience.
Card-linked marketing company Cardlytics, which engages in data analytics, is partnering with several financial institutions like Bank of America to leverage secure purchase data in order to tailor marketing based on consumers’ card use.
6. Wearables
Wearables — such as smartwatches — are poised to become the future of the retail banking experience, according to Samsung Insights. One example is that banks could use Bluetooth beacons to push personal greetings to customers’ smartwatches when they enter a banking location.
Read Also: Best security practices for online banking and online transactions
Another type of wearable might be smart glasses for bank tellers, according to a report from Deloitte, which could process customer banking information for the employee as the employee is simultaneously doing other customer service tasks.
Overall, consumer behavior and smart device trends are steering banking technology advances in the direction of convenience. An increasing number of remote technologies will allow you to interact with your bank right from the palm of your hand.
And from your email inbox to visiting an actual branch, you can expect to encounter a whole new customer experience, perhaps even sooner than you think.
Finally
According to a survey of bankers conducted by PwC: “Respondents say skills in their organization lag across a range of highly important areas, including cybersecurity and privacy, business development of new technologies and user experience and human-centered design. Worse, skill levels have declined even as the demands of digital keep advancing.”
As the banks recognize this skill gap that stops them from transforming to meet the potential presented by technology – they are beginning to invest significant amounts into banking technologies they seem most relevant for their business models.
For example, blockchain might not be a priority for most industries today, but banks and financial institutes foresee a great advantage in implementing these. Therefore, the financial services industry as a whole sees them as a high priority investment.
Further, the evolution of the banking industry makes it imperative that technology becomes a “core competency” with enterprise-wide engagement. The technology focus cannot be limited to the top alone, or even to an IT department cutoff from the rest of the operations.
Finally, the focus of technology implementation must be customer experience – and not revenue or cost savings. Those are important but will come automatically if you can retain customers in the years to come.
In the years to come, bankers will have look at FinTech startups as partners rather than competitors. Remember that a bank can be the biggest customer for a FinTech company and can help them reach a newer customer base.
This is where developing a banking platform will come in handy and result in better customer satisfaction. Bankers should work towards new business models where they own the customer relationships and pull together FinTech resources from around the globe to generate the most value for the end customer.
