Digitisation of the banking industry: past, present, and future

Digitisation is the conversion of data from the analogue form to digital with the adoption of technological advancements. Such transformation impacted the banking industry significantly over the past 60 years. It improved customer service, saved time, lowered operational costs, created convenience, reduced human errors, and built customer loyalty.

In the past ten years, the world has witnessed a drastic, yet, consistent change within the banking industry. Customers of various financial institutions began to experience some changes in the way they used to conduct banking activities. For instance, making payments through online banking and eWallet has become a prevalent practice in recent days. Digital banks, where banking services are delivered over the internet, are becoming a reality as technology improves. Physical presence in a branch is increasingly becoming a thing of the past and fund transfers, retrieving monthly banking statements, and payments of bills and credit cards can now be completed with a couple of clicks or taps on your mobile phone or your personal computer.

A brief history with a Malaysian context

In 1953, the first bank mainframe was built by the Stanford Research Institute to process cheques for customers of Bank of America.

In 1959, the Malaysian government established Bank Negara Malaysia (The Central Bank of Malaysia) as the main regulatory body of the financial industry in the country. Malaysia began to take after the model of convenience from different advanced nations around the world.

In the 1970s, Malaysia began to take serious action to connect rural areas to banking services and introduced mobile bank services (bank on wheels) to address rural demand.

In 1981, Maybank launched the first ATM at its Ampang Park outlet, changing the daily relationship between banks and customers forever.

And as the 1990s arrived, Stanford Federal Credit Union became the first financial institution in the US to offer internet banking to all of its customers.

In 2001, the Bank of America reported that over three million of its customers now use online banking. In the same year, Malaysia was taking steps to go digital. Maybank had already begun to offer online banking services and was considered the first in the nation to do so. After that, online banking began to be adopted widely by several banks in Malaysia.

In 2007, Apple Inc. launched the first iPhone, and the game began to change drastically. The launch of the iPhone can be a subject on its own. However, the iPhone ecosystem puts the internet in everybody’s pocket. Even if users didn’t use the iPhone, the Android ecosystem, which was introduced a year after iOS, borrowed many of the iOS features. With this much power in people’s pockets, financial institutions began to develop apps for their services, banking websites became responsive to mobile browsers, and customer experience changed forever.

By 2010, banks around the world had implemented some form of digitisation like online banking, mobile banking, digital currency, and other types of digitisation of banking services. Some banks even began to examine the adoption of cryptocurrency as a new form of service.

The present state of digitisation and why many banks are behind on technological innovations

Today, a significant portion of the global population has access to banking services around the clock due to online and mobile banking solutions. Managing a large amount of cash is much more comfortable through the facilitation of cashless transactions. However, there are still issues to address.

It is fair to assume that every bank in the world today has online/internet banking, and mobile banking in some form. It is also reasonable to think that some banks recognise some types of cryptocurrencies and digital wallets (also known as eWallets).

So, why didn’t banks go fully digital yet?

There seem to be some setbacks that put many banks behind the advancement of technology:

Lack of customer understanding: many banks have problems understanding the needs of the customers.
Focus on flows, not needs: banks tend to focus on business systems and workflows and do not put much focus on customer experience.
Stuck with legacy systems: traditional banks still operate hard-to-transform legacy systems that have been in operation for a long time.
Cost of change: changing the existing IT architecture, implementing new banking systems, and adopting new technologies can be painful, costly, and slow.
Lack of trust: financial institutions are known to be risk-averse when selecting IT vendors, which might be the biggest obstacle for them to catch up.
Internal culture obstacles: it is reasonable to assume that the natural state of banks lacks the agility to make far-reaching changes in their culture or operational structures.

These issues do not represent all the problems and obstacles. However, expert observers argue that such complications stand in the face of change and create a sense of conformity that keeps the struggle of banks with innovations and technological advancements a real problem.

The future and the anticipated, accelerated digitisation

The banking landscape is rapidly changing now as a new wave of technologies revolutionise the way customers engage with financial institutions and do their finances. As a result, banks are facing the reality of having to rethink the way they do business and deliver a better experience to their customers. Additionally, many countries are changing their regulatory structures to adapt to the “new normal”.

Such changes are accelerating the transformation and placing some of the power back into the customers’ hands. Convenience, speed, and flexibility are no longer considered attractive add-ons, but instead becoming a standard that a customer expects a bank to provide as part of the service.

Understanding customer needs will be the primary measure of success for financial institutions. Therefore, banks need to keep pace with customer needs and demands and embed appropriate services into the broader ecosystem of digital products.

The direction that financial institutions need to consider to accelerate digitisation may include:

Autonomous banking solutions:

Financial institutions need to understand the customer needs without relying on direct feedback from the customer all the time. To do so, this requires significant investment in technological capabilities that allow financial institutions to become more intelligent. Such solutions include artificial intelligence and machine learning.

Much like the technological advancements that led to autonomous vehicles through artificial intelligence (AI) and machine learning, it is reasonable to assume that the finance industry should also have similar progress. Many banks do rely on artificial intelligence in features like chatbots to interact with their customers. However, artificial intelligence and machine learning can take this much farther than mere intelligent interaction tools. Virtual financial assistance, automated credit scoring, predictive analytics, shorter processing time, and cost-efficiency can and should be the hallmark of superior banking experience.

Leveraging on smart data:

Customers are becoming more tech-savvy. They are increasingly seeking tailored experiences for their particular needs. Leveraging on big data and intelligent ways of processing it are vital to the success of future digitisation. Investing in data processing, data visualisation solutions, collecting quality data, and capturing the right data is essential to maximising the effectiveness of smart data to tailor the experience for customers.

Some experts in banking, insurance, and technology industries stated that a gradual evolution is no longer feasible. It would require a leap or a jump for a faster response to the unprecedented changes the entire world is facing. These experts point out critical elements that financial institutions need to put under serious consideration. Such elements include:

Leveraging on cloud technologies to reduce data centre costs and move to more flexible and scalable operational models.
Rethinking operating structure and business processes with the implementation of work-from-home practices.
Thinking of adoption of technology and working with IT vendors, as an asset to differentiate and not a risk to be managed.

Opportunity in times of crisis

COVID-19 is, without a doubt, changing the world as we know it. It is not only impacting all businesses in all industries, but it also presents unique challenges to different sectors. Enforced social distancing, unprecedented fiscal/monetary stimulus from governments, drastic fall in energy prices, mass adoption of digital tools, and rapid transition from physical to digital interactions, are just among the many changes that happened quickly and unexpectedly.

The financial services industry is no exception. The banking industry must now adapt to a remote employee and consumer base, pushing the role of a banker into a purely digital experience. The question now is: what do banks need to do to help their customers and employees while addressing remote interactions?

The answer lies within the responsibilities of banks to help their customers and assist in reviving global and local economies. They need to adapt to the new normal, proactively change the way customers interact with banks and provide an experience that gives customers the best possible solution to their financial problems.

Another question that needs an urgent answer is how financial institutions can operate under the assumption that there will be no physical branch?

Accelerated digitisation of banks

According to data published in the Payments Journal reflecting on the digital banking report, 17% of banks have been successful in deploying digital transformation at scale, and only 43% have a clear digital strategy and vision with a well-defined road map for digitisation. Over 50% of customers still need to visit physical branches, and banks are focusing on improving customer experience in areas of front-end web design.

However, there seems to be a lack of focus on building the infrastructure to support real transformation.

The above is proof that many banks do not have a clear direction for rapid digital transformation. However, this is the time for financial institutions to grab the opportunity to explore solutions to solve the digitisation challenges. Banks that have already made that leap will have an advantage over their competitors while people clamber to get their payments made.

Access to critical tools

It is clear at this point that many banks want to transform and attempt to improve some of their online interactions with their customers. However, there seems to be a lack of educational materials to help customers figure out how to navigate and access credit and insurance services, portfolio management, and what services are available digitally such as payments, mobile deposits, credit lines, and loans.

Experts highlighted that such transformation attempts are not a mere trend. It is a significant change in the workforce and customer experience, with their impact extending to road traffic and environmental issues.

These are real problems that require radical solutions and cannot be ignored.

Digital Banks: more to come

Many countries around the world are taking active steps to go beyond the digitisation of existing and legacy processes that come along with traditional banks. There is a significant move towards having fully-fledged actual digital banks. Among the world’s most popular banks, here are the top ones: Tide, bunq, Crypterium, Atom Bank, ANNA Money, Monese, Starling Bank, Mettle, Monzo, and Revolut.

In Malaysia, Bank Negara Malaysia announced its intention to award up to 5 new digital bank licences by 2021 to drive further innovation in the market. There is a very similar situation in South Korea, Hong Kong, and Singapore.

Bank Negara Malaysia has indicated that the award of digital bank licences should focus on financial inclusion and the underserved, such as the B40, micro-SME, and SME market segments, addressing the need of a significant consumer segment.

To conclude

1. While banks have digitised some parts of their legacy practices, such practices are no longer sufficient to acquire more customers and participate in the future stimulation of the global economy.

2. Banks need to shift their focus from workflows, business processes, and product-centrism to a comprehensive customer-centric approach to solve broader problems and provide customer-based solutions.

3. Financial institutions should turn to active collaboration with solution vendors and rely on them as partners and not as risky organisations to manage. They should build strong relations to bridge future challenges and solve the new-age problems that would come along with full digital banking experiences such as digital money laundering, fraud, cybersecurity, and privacy issues.

4. Financial institutions should work with regulatory bodies to help economies bounce back from the current crises, such as creating policies that support small businesses, provide training and new job opportunities for new staffing strategies, and allow new businesses to thrive and compete in a healthy market.