Winston Churchill tells us never to waste a good crisis. While it’s hard to find good in the current COVID-19 pandemic, challenging times do prompt us to question the status quo and find new answers, more quickly. Our financial world has been able to
weather this global crisis thanks to always-on digital banking services. We’re at an inflection point: Now is the time for the banking sector to fully embrace digital banking.
In some ways the 2008 global financial crisis can be viewed as a dress rehearsal for the inevitable economic fallout of COVID-19. That crisis, coupled with tremendous advances in technology, accelerated the emergence of all-digital challenger banks across
the globe. Fast-forward 12 years, and look at the evolution. The most successful challengers – particularly in Europe, the U.S., and Brazil – have grown to boast a significant, enviable customer base.
Clearly the world of banking has changed greatly since 2008. Mobile technology and digital have become mainstream, customers are more tech-savvy and discerning, and bank margins are under greater pressure than ever. In the wake of the pandemic, customers
of all ages quickly learned how to use digital banking services when their bank branches suddenly closed. Digital banking is no longer a “nice to have” option, it’s a “need to have” imperative.
Taking a look back may give us a hint of the road ahead.
When Lehman Brothers filed for bankruptcy in 2008, the banking landscape changed forever. As some familiar banks disappeared, a crop of newcomers arrived on the scene, particularly fintechs. Using innovative technologies, these ambitious upstarts successfully
challenged traditional banks by offering something brand new – mobile banking – first on the revolutionary iPhone, which was introduced a year prior, and then leveraging the rapid success of Google’s Android alternative. Fintechs capitalized on advances in
technology as well as diminished trust in banks, which was at an unprecedented low in 2008. Challenger banks appealed to many customers – particularly younger demographics – who were keen to try something new, enticed by the promise of having banking
Unencumbered by legacy technology and outmoded methods, well-funded fintechs began to systematically disrupt global banking and reshape the global financial sector.
Technology, Regulation and a New Ecosystem
In 2020 fintechs are mainstream. They are not only competing with banks, but also collaborating with them. Legislative initiatives such as the Payments Services Directive (PSD2) encourage open banking and new market entrants to boost innovation and competition.
The rules of competition are fluid – banks and fintechs may compete in certain markets and collaborate in others. Traditional boundaries have eroded, creating a vibrant financial ecosystem, and application program interfaces (APIs) continue to redefine what’s
possible across banking and payments.
The emerging champion of this situation is the customer. This is a golden age of consumer sovereignty, with customers enjoying an abundant choice of personalized financial products and services that can be closely integrated and aligned with their busy lives.
Greenfield Banks and Blue Skies
Not all banks have jumped on the digital banking bandwagon since 2008. Greatly depleted, and in some cases on the brink of collapse, some banks reverted to a pre-2008 model. Others addressed the digital challenge piecemeal with digitized versions of what
went before; others decided to launch digital banks of their own. Some of these were built as greenfield startups, often run as “blue sky” projects with insufficient financial discipline and “parental guidance”. Although well intended, many progressed slowly;
despite delivering a good marketing story, they often failed to make a positive contribution to the bottom line.
The 2008 crisis taught us many lessons about what not to do. Banks have neither the time nor the resources to fund more experimental digital banks. The age of dabbling with digital is over. Customers are impatient, and research suggests that one in
three consumers globally would be willing to transfer their primary banking relationship to a digital-only bank.* The customers most at risk of being attracted to digital-only banks are also the most valuable: digitally-savvy millennials, generation X, and
emerging and mass affluent customers.
Think Big, Move Fast
The current crisis highlights the need for digital, and the need for speed. Consumers seek innovative digital banking services, delivered in context and integrated into their daily lives. Banks don’t have time to deliver this by building on legacy technology,
nor is that approach suitable for the long haul; to succeed in the new normal and future-proof their investments, banks must move quickly to embrace modern technology and methods. Cloud computing could be the key.
Cloud is rapidly being adopted by the mainstream; organizations like Netflix have harnessed its power to redefine customer service with cloud-native applications. In a similar vein, digital banks that embrace cloud will immediately benefit from real-time
processing, unlimited scalability, capacity, and elasticity. Processing costs are aligned to business success and are highly cost effective.
Building a digital bank is never easy, but with modern methods and cloud technology it has never been easier or more promising. Our experiences with COVID-19 teach us that digital banking is the way forward. With so little cheer about, it’s refreshing to
be optimistic about what’s actually possible. As Winston Churchill tells us, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
*GlobalData, Digital-Only Banks: Threat or Motivator?