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News | 16 Aug 2022
Digital Banking. Transformation of traditional banks
Przemysław Pala
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Do you remember going to traditional bank branches? Nowadays, everything has been digitalized. Online banking is faster, more convenient, and suitable for today’s world dynamics.

 

However, “online banking" and "digital banking" differ. Online banking indicates a more straightforward online experience - secure access to information such as account balances and superficial knowledge. 

Thanks to online portals, digital banking allows consumers to manage their accounts and run any financial errands online. 

What has changed over the last decade is consumer preferences. It is a visible challenge for a vast number of financial institutions to adjust their operations to online channels and become digital or even mobile-first brands. There’s no time to waste since customers’ demands in this sphere are growing daily: online payments, credit applications, bill settlements, etc.

 

 

A change that came seemingly unexpected

Moreover, until the past few years, banks didn't forecast the tremendous shift in consumer behavior. They can blame it on the millennial generation shift because they have become the biggest consumers of financial products in general.

 

Rather than searching for the blame, it’s helpful to look at the statistics. Having said that, the numbers are speaking for themselves since over 70% of financial customers use digital or online banking at least once every month. There’s no surprise that banks intending to adapt to such a tempo are investing more and more in building mobile channels and trying to deliver new opportunities. 

It turns out that banks are prioritizing digital attempts to satisfy their clients. Furthermore, almost half of banks globally have made the mobile transition their top priority. Surprised? Let’s see what we can expect.

 

 

What is the future of digital banking?

We can quickly state that artificial intelligence and machine learning have recently been scorching subjects. Many people genuinely believe that AI could help them manage their finances. Sounds like Star Wars, right?
 
 

It’s the truth! Especially young people trust in technology and wouldn’t be afraid to make AI analyze their financial situation, pay the bills and even operate between different personal accounts. The foreseen outcomes are clear: The more consumers entrust their AI assistance, the more they depend on banks. That creates a need for a very detailed personalization of bank accounts and secure operations within them.

Revolution is on our doorstep. Front offices are a thing of the past since AI will change everything: compliance, data processing, authentication, underwriting, etc.
 
 
 
 

Personalization of digital banking with artificial intelligence

Erica is a personal assistant tool for Bank of America in the bank's mobile app. Erica uses artificial intelligence and advanced analytics to help customers understand their spending patterns and alert them to trends and areas where they can cut spending to improve financial health. Erica tracks current expenditure to ensure customers aren't paying for subscriptions they're not currently using.

 
The artificial intelligence tool is available to all 25 million mobile banking customers and sets the bar for personalized financial advice in digital banking.

 

Artificial intelligence and machine learning tools like Erica allow consumers to take real-time action to improve their financial health. While AI is changing the face of digital banking, the banking industry is wary of the tools. Consumers are more inclined to be surgical with AI than to use it for financial guidance. Part of this caveat may be due to a misunderstanding of artificial intelligence and security concerns about digital banking and personal information.

 

 

Different types of digital banks

Here's one way to classify current digital challenger banks based on their business models and services.

  • New banks have full banking licenses and are direct competitors of significant banks, offering the same services as traditional banks. Examples include Monzo, N26, Starling Bank, and Revolut.
  • Neo banks do not have a banking license but partner with financial institutions to offer licensed services. Typically, Neo banks still require customers to have an account with an existing licensed bank, offering a more user-friendly interface and complimentary services. Tencent's WeBank, Yolt, Lunarway, and Moven are examples of Neo banks.
  • Beta banks are joint ventures or subsidiaries of existing banks that offer financial services under license from the parent company. Beta banks are often created to enter new markets, offering limited services to a broader range of customers. Examples of beta banks include AiBank (a joint venture between China's CITIC Bank Corp and search giant Baidu) and Simple (a partnership between Bancorp and BBVA).
  • Nonbanks are not related to traditional banking licenses. They provide financial services in other ways. Money operates under an electronic money license.

 

 

Benefits of digital banks for users

These different business models demonstrate how diverse the digital banking industry is becoming. And while each type of challenger bank tailors its services to its target customers, they all offer the same benefits.

 

Easy configuration - Creating an account with a challenger bank is simple and paperless. Most accounts can also be fully set up from a mobile device.

Lower commissions - With lower transaction costs, challenger banks can charge more competitive service prices.

Greater financial accessibility - Out-of-office banks have lower operating costs and, therefore, can afford to accept customers who can't get traditional financial services because of a lack of credit history or bad credit ratings.

Focus on security - Traditional banks are known for being slow to adapt to the demand for more flexible services. Many are security-ed and rely on the latest security threats.

Additional features - Many banking apps offer their customers built-in payment, budgeting, and savings tools.

 

Is it the end of the traditional banks?

The trend and general switch clearly show in which direction banks are moving. There’s no certainty if we will get rid of physical branches in the near future, but we will definitely use digital banking more and more.

It’s like that New Year’s Eve quote:

Out with the old. In with the new.

 

Whether we vote for or against such a transition, it will evolve and spread. We are not saying that it’s bad. Actually, we are the ones who help build such solutions from scratch. To check more, read how we built a mobile banking app in a year or how we managed to create a mobile banking application targeted at corporate clients in 7 months.