Disruptive Trends & Transformation in Digital Banking Services
Massive digital disruption has become the norm in the banking domain. Deposits, payments, or loans – the disruption pervades through the sector, shaking it from top to bottom. This digital disruption is emerging from advancing financial technology which the emerging FinTech companies are armed with to the tooth. Banks have to integrate their functionality with their existing systems or fully refurbish them, else they risk antagonizing their customers and losing business in an intensely competitive environment.
Currently, banking is undergoing a colossal change. From physical branches, banking has moved to use information technology and big data. Technology is playing a big role in the capitalization of companies. That the capitalization of tech-based conglomerates like Amazon or Google is more than double that of JP Morgan Chase underlines how technology is affecting the business landscape.
The sheer pace of the transformation has left several financial institutions stuck with obsolete technology. A major chunk of users, who have had exposure to the user-friendliness of the interface and transparency, have similar service expectations from every bank they work with. Even in underdeveloped geographical terrains of Asia and Africa, FinTech companies have taken banking services to previously population segments, riding on rapid technological advancement. Banking has taken a tangible shift towards a customer-centric platform-based model and banks must survive for their own.
Thanks to technological advancements, even the startups can collaborate with banks and run complex operations. Take neobanks, for instance, that operate exclusively on technological infrastructure. Revolut, a British FinTech company, has cultivated 1.5 million customers without physical customer-facing operations.
Supply & Demand side disruption
The technical upshots have multiplied the weight of reams of codifiable information and the tools at hand – Artificial Intelligence (AI) and Machine Learning (ML) – to process it. This particularly affects the functions with more exposure to information processing, such as payment and transaction services.
When it comes to technological disruption, the supply side refers to technological developments while the demand side is about changes in consumer expectations of service. The supply side mainly includes factors like Application Programming Interfaces (APIs), Blockchain Technology, Digital Currencies, Cloud Computing, and Smartphones.
APIs are key to seamless data sharing, which works behind Open Banking applications. Cloud computing is a process that involves a gamut of remote servers for the provision of IT services and data storage/sharing. Smartphones have played a phenomenal role in making banking services personal in real terms, enabling customers to execute functions like payments, deposits, online shopping, and more. Digital Wallets and Mobile Banking have removed any practical need to visit a branch. Blockchain technology has liberated financial services from the clutch of centralized authorities, while digital currencies have added another dimension to the prevalent financial ecosystem.
The demand-side driver is the greater service expectations of the customers today. Cutting-edge digital banking solutions have made customers used to higher speed, greater convenience, and simplified operations.
Most regulatory frameworks predate the emergence of FinTech. Authorities, though, are working to catch up with the changing realities, and regulations have been updated or framed from scratch. The 2015 EU Payment Services Directive II (PSD2), for instance, intends to promote competition by giving non-bank licensed providers of payment initiation and account information services API access to specific types of customer banking data. Such regulations aim to protect customers against fraudulent activities and payment issues, make online payment services safer and more convenient and promote innovative banking services. PSD2 requires that customers should be able to view all their accounts, regardless of the banks, from a single app.
When it comes to technological and financial innovations, two opposite views are generally implied by regulatory bodies in different countries – ‘regulate and restrict’ and ‘let things happen’. The former often proves ineffective while the latter implies heightened risks in shadow banks. Recognizing this, the European Banking Authority (EBA) favors both approaches in tandem for the supervision of FinTech enterprises. This approach puts in place a tiered regulatory structure where each firm needs to fulfill different requirements in line with the risks it faces, its customer base, the state of the financial sector and overall economy.
How digital disruption influences financial stability
The entry of FinTech firms has positively or negatively impacted the profitability of banks. If the incumbents find their operations stressed, they would tend to take excessive risks to try and counterbalance the pressure. Regulators, in response to the risk in enhanced risk, might raise banks’ prudential requirements, which may incentivize shadow bank activity, outside the regulatory parameter.
The 2007-2008 financial crisis in the United States emerged from very low interest rates and loose lending standards resulted in a housing price bubble. Something which had begun with good intentions had severe repercussions on the economy. Post-crisis, regulatory scrutiny was tightened, leading to the expansion of shadow banking. In the 8-year period after the crisis, the market share of shadow banks in mortgages nearly tripled. Let us take the case of FinTech lenders. In 2007, FinTech lenders originated fewer than 5% of residential loans. By 2015, however, the figure shot up to more than 12%.
Regulatory restrictions on new entrants and support from the public sector play a major role when it comes to their competency as compared with established incumbents. For example, a neobank with access to central bank reserves will be shielded from market and liquidity risk, and present a stiff challenge to banks. Such a neobank will also enjoy advantages such as facilitating cross-border payments and fostering innovation.
The digital dawn has brought customers to the center of all processes. While technologies like cloud computing and blockchain were steadily moving the epicenter of goalposts of banking operations, the final push was thrust by the pandemic. 2-3 years under the ugly shadow of Covid-19 led to the reshaping of the banking sector at an unprecedentedly fast pace.
Customers today want the service operational round-the-clock, optimized in omnichannel mode. Moreover, they also expect it to be personalized, venturing beyond the analysis of Big Data. When they wish to converse with the bank, the customer service should be simple, quick, and intuitive. With the help of the analysis based on Big Data, the customer service should be able to establish a personalized dialog.
The Security Shield
In the financial sector, security is of paramount importance. Some essential steps include a One-Time Password (OTP) system, mandatory password change, monitoring, short log-in sessions, and adaptive authentication, among others. Rather than a solution, cyber security is an ongoing process that needs to be integrated into the SDLC (Software Development Life Cycle). Online security institutions clock over 350,000 malicious applications a day which underlines the threat looming over banks and end users.
When a financial institution suffers a cyber-attack, not only does the organization suffer a loss of reputation, but the customers’ assets are also in peril. Banks are forced to spend a considerable amount while trying to recover the lost data. Robust cyber security ensures sensitive data and ensures customers don’t lose trust in the bank. At a time when more and more people are going cashless and using digital wallets, debit/credit cards, or Internet banking for transactions, cyber security gains great significance.
Threats to cyber security include unencrypted data, malware, third-party services, spoofing, phishing, and more. When the data is left unencrypted, criminals can use it right away. Encryption prohibits criminals from using the data, even if they manage to steal it. Malware refers to compromised user devices like computers and smartphones. Often, banks use third-party services to serve their customers. If a data breach happens with a vendor, the bank working with that party will suffer as well. Spoofing is the act of copying a banking website for stealing login credentials. Phishing is about disguising as a trustworthy entity to obtain the credentials of bank customers.
Role of Modefin in the transformation of digital banking
Aimed to deliver a positive digital disruption, every Modefin solution functions with speed, agility, and flexibility, catering to the evolving customer needs and preferences. Solutions are embedded with advanced analytics, AI-based decision-making, and a range of cyber security features. Products rolled out by Modefin include Omnipresence Ecosystem Banking Platform (OEBP), intuitive and highly secure Mobile Banking solution, advanced Internet banking modules, low cost and scalable Agent Banking solution, flexible Mobile Wallet, and solution to facilitate wallet operations encompassing Micro Savings and Lending services.
Modefin also offers Digital Onboarding, In-Store Banking, Social Banking, Personal Finance Management, Merchant Acquiring Solution, POS Lending, SME Banking, Conversational Banking, Loyalty & Rewards Management, Doorstep Banking, and Children Banking. The most significant part of the Modefin OEBP solution portfolio is the API Manager as it poses as the game-changer, an integrated suite that will permit interaction with multiple parties while protecting customer privacy and ensuring data security. Modefin’s API Manager, the outcome of in-depth research and market intelligence, is an all-in-one solution that facilitates connectivity and increases digital revenue for the Bank.
The way ahead
Digital disruption is a blessing in disguise, helping banks boost efficiency with innovation, expand supply diversity, and set up a more competitive financial system. Though it puts pressure on the bottom line of the incumbents, it encourages banks to take calculated risks and prompts competition that eventually benefits all stakeholders.
Powering radical transformation and restructuring in the financial services industry, digital disruption is pushing things towards a customer-centric platform-based model. It fosters new challenges for the regulators to keep a level-playing field between competitors and strike the right balance between innovation and financial stability. Digital disruption could shape up a business or technical process improvements, or new digitalized innovations