Digital transformation is everywhere. Regardless of what industry you’re in, digital technologies are increasing in relevance as organisations strive for new ways to keep up with the competition and deliver the maximum value to customers.
Over the past three decades, the digital revolution has disrupted multiple sectors rapidly and significantly. The digital wave transformed industry segments such as music, retail, entertainment, travel and more, and paved the way to the rise of the tech forerunners that we all know today including Apple, Netflix, Airbnb and Amazon among others.
More recently, the world has witnessed digital technologies reshape more traditional industries such as banking and financial services, driven primarily by increasingly digitally savvy customers.
The Middle East and Africa’s banking and finance industry spending on information and communications technology (ICT) is expected to reach $15.24 billion in 2023, according to the latest insights from IDC.
In the IDC report, the firm’s senior consultant for the Middle East and Africa, Nagia El Emary highlighted that the banking and finance industry is becoming increasingly reliant on emerging digital technologies to attract and retain customers. “The sheer magnitude of financial technology (fintech) products and services on the market today is staggering, and financial institutions are increasingly embracing third-platform technologies and innovation accelerators such as cloud, mobility, and artificial intelligence (AI) to increase their market penetration rates, enhance customer satisfaction through the delivery of personalised services, and streamline operations to cut costs and maximise efficiencies. As such, these technologies are becoming an inextricable part of the sector as a whole.”
Digitalisation in the banking industry primarily entails the shift from manual and often paper-based processes to offering online and digital services to enhance experiences and build customer loyalty.
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Today, millions of consumers are embracing fully integrated digital banking experiences, using smartphones, tablets and wearables to do complete transactions such as making payments, opening new accounts, applying for loans and more. A study conducted by McKinsey revealed that consumers in the UAE and Saudi Arabia are already heavy users of digital banking channels with 80 to 90% of respondents saying that they prefer to do at least some of their banking on mobile devices, and visit branches and call service hotlines only to meet specific and more complex needs.
Digitalisation arms banks with the bandwidth and capabilities to continuously put the customer at the centre of their innovation processes, which also enables them to stay competitive.
However, while digital transformation presents a multitude of opportunities for banks, it also comes with an array of challenges. Here we look at some of the key opportunities and challenges of the increasing digitalisation in the banking industry:
OPPORTUNITIES
Data, data and more data
As with most digital objectives, the success of digitalisation within banks all comes down to data.Â
A recent Accenture survey C-level executives revealed that companies that leverage data for their development have higher growth rates. With data at the foundation of its products and services, banks can develop tailored solutions that will enable them to personalise banking experiences and improve customer engagement, which in turn increases revenue.Â
By unlocking data’s value, banks can also derive rich insights that will help them make accurate and nimble decisions. They can also use this data to create new products and services, and ultimately revenue streams.Â
Tech-savvy generation
It is undeniable that everyone is going the digital way. The era of digitalisation is inhabited by the digital natives of Generations Y and Z. These two demographic are driving the demand for ubiquitous access to digital products and services. Additionally, Generation X is becoming increasingly digitally-savvy as well and the majority of the population is expected to be technologically-adept by 2025.
This means that digital initiatives by banks will be able to reach more customers and drive growth.
Tech advancements
More than anything, technology plays a vital role in the digital transformation of banks. Emerging technologies such as Bitcoin, blockchain, new Open APIs, new IT infrastructures are all part of the digital shift. The game-changing features of these technologies provide banks with the opportunity and capability to stay on top of the next wave of banking innovations.
As with any industry, it is also expected that AI will drive significant disruptions within the banking sector. In fact, global business information provider IHS Markit forecasted the business value of AI in banking to reach $300 billion by 2030.
CHALLENGES
Security
Banks continue to remain an attractive target for cybercriminals. Threat actors are still giving financial institutions a run for their money. The cost of cyber-attacks is highest in the banking industry, reaching $18.3 million annually per company. Therefore, banks need to ensure that cybersecurity is at the top of their agenda.Â
Leaders in the banking sector need to look beyond traditional security solutions to improve their security postures. Investments in cybersecurity should be focused on tools that will enable them to better prevent, detect and respond to threats.
Legacy and siloed environments
Many bricks and mortar banks still rely on traditional banking systems. They use a COBOL programming language, which has been around for more than six decades, making back-office technology in desperate need of a refresh. However, organisations often find the transition from these dated and disparate legacy banking systems to a modern, digitally connected environment daunting.Â
What’s more is that the shift will require huge upfront investments for the necessary applications, custom processes, and integrations with external systems, security, and maintenance. They will also need to develop a more centralised platform to monitor that these newer systems are secure and in compliant with the right regulatory requirements. On top of that, people will have to be trained and constantly updated to enable them to maximise their investments and derive great value from it.
Challenge and opportunity: Rise of FinTech challengers
While many traditional banks are investing heavily to transform their legacy, siloed systems, this may not be happening fast enough. According to ResearchandMarkets, the value of global Neo and challenger bank industry is projected to reach $471 billion by 2027. These FinTechs offer digital-native services and many consumers view them as more customer-centric as compared to traditional banks.Â
However, many banks have found a way to take advantage of FinTech firms’ disruptive technologies through strategic partnerships. Bank-FinTech partnerships offer financial institutions with the opportunity to accelerate its digital initiatives as well as save time and resources by leveraging existing solutions instead of creating new ones.
Challenge and opportunity: COVID-19 pandemic
The current environment is undoubtedly challenging for banks. The behavioural and economic effects of the COVID-19 pandemic are profound and have placed immense operational and consumer pressures on them. Due to health and safety precautionary measures many physical branches had to be closed, forcing banks to quickly and definitively deal with the rise in demand for digital services.
However, the pandemic has also pushed banks to fast-track their digital initiatives and those that were able to quickly adapt have a unique opportunity to succeed in the long term.
To get more insights about the evolution and the impact of increasing digitalisation in the banking industry, click here to watch our ‘Doubling Down on Digital’ roundtable.
