Shopping, entertainment, education, and nearly every major activity we usually do outside, were put to a grinding halt due to the COVID-19 pandemic. The solution put forward by small and large players in all these segments was to bring their respective experiences to our homes via digital channels. 2020 saw the digital economy blowing past all predictions in terms of growth, aided by the rapid penetration of smartphones and affordable internet services. When all other sectors moved into their digital avatars, the banking industry was no exception. While traditional financial institutions have long offered extensive digital banking services, the rising prominence of digital banks is a new dimension for the banking sector as well.
A digital bank, in its simplest form, is a banking entity that offers all regular banking services like deposits, loans, transfers, wealth management, etc. in a digital format. From the Americas to the Asia Pacific, digital banks have become a mainstream player in both consumer and SME markets. For example, South Korea-based KakaoBank, a digital bank that started operations in 2017 now holds a 5% share in the consumer loan market of the country.
In July 2020, studies showed that nearly 14.2 million customers in the US consider a digital bank as their primary bank, which is more than 67% higher than the figure in early 2020. The increased awareness brought in by the pandemic is the right way to explain the rise of digital banks in the global economic scenario. They have been around for a while and events like the pandemic impose a very valid question – Are digital banks becoming the new norm?
The answer is yes. The banking sector, which hasn’t witnessed a radical transformation for a pretty long time now, is poised to showcase digital banks as the next big thing, and here are five reasons why:
A recent survey by Chase bank found that 4 out of 5 customers or nearly 80% of their customers prefer to digitally manage their finances rather than seek in-person help. Today’s customer base is increasingly depending on digital channels for much of their needs. As the pandemic accelerated the push towards digital in areas like education, entertainment, and shopping, more people became accustomed to the convenience of digital channels and will not be hesitant to get the same experience from their banking service providers as well.
In a digital banking environment, everything from account opening to customer on-boarding, transactions, and customer engagement happens through digital channels with automated back-office processing available for most transaction workflows. As such, banking entities, as well as government authorities, can easily enforce compliance norms to accounts. With this, customers can be relieved from having to periodically submit documents or proofs to verify transactions or processing of bills as all transactional behavior such as source, tax credentials, and recipient details can be transparently managed autonomously.
In the initial days, customers were apprehensive of financial credentials being managed in a completely digital environment. Any compromise of data could result in the misuse of customer credentials resulting in fraudulent transactions. Over the years, digital banks have brought in world-class analytics and AI-powered fraud prevention solutions to completely transform the banking experience into a safer and secure one. Today, most digital banks compete with leading tech titans in areas such as technology supremacy. This will assure customer data privacy while at the same time foster engagement through innovative relationship management.
Studies have shown that banks, as well as credit unions, are increasingly preferring to partner with fintech companies globally to offer personalized services to customers. 86% of the surveyed folks in the study opined that the partnership will significantly improve customer experience. In this context, digital banks are more favorably placed to integrate with leading fintech players as they have more advanced technology stacks with more flexible API architecture that can easily transact with 3rd party services. As such, digital banks can offer a wider basket of digital services together with fintech players in markets where traditional banking firms lag in digital supremacy.
Digital banks are great proponents of self-service. Even though support from a human associate is just a phone call or a few clicks away, digital banks invest in building banking platforms that allow customers to virtually manage all their financial activities on their own. With advanced automation, digital banks can quickly onboard customers, validate credentials for loans, offer easy self-service loan applications, empower loyal customers with personalized rates autonomously, and much more. In a traditional banking ecosystem, each of these processes may take hours or even days where they need to pass through multiple layers of hierarchical and departmental scrutiny.
This year alone it is forecasted that nearly 3 billion people globally will carry out retail banking operations through devices such as their personal smartphones, Tablet PC or wearables. Digital banks are in a great position to leverage consumer preferences for convenience, safety, and features by offering them attractive digital-first channels for their banking needs. The future of banking in a digitally mature economy is definitely weighed in favor of digital banks, and they will be the new norm of banking in the years to come.