We cannot repeat often enough that COVID-19 has done more for the digital transformation of many actors in the financial sector than the digitization programs and projects that were underway at the beginning of 2020. 

However, financial institutions cannot continue planning their digital transformation projects by looking to the recent past. 

Now, they must have into account two of the most important and emerging trends of this period, which are the ability to innovate – quickly and at scale – and to humanize digital experiences.

In the pre-pandemic period, the banking sector assumed a passive role concerning change and innovation, as the current technological transformation aspect had as main objectives the reduction of costs, the protection and security of systems, the response to new regulations, and the identification of new sources of revenue, which derived from a macroeconomic context of the financial crisis, low-interest rates, and inappropriate operating costs. 

The ongoing digital transformation included changes in systems, processes, products, and customer usage experiences, representing iterations and evolutions of what was already considered existing and traditional in the physical world. 

The result was a financial sector without differentiation, leading to the successful emergence of many fintech and true digital banks, such as neobanks, which quickly gained market share, especially in young and digitally literate segments.

This paradigm changed radically with the pandemic, as it was clear that banking would have to react and was not prepared to replace fintech or respond to new opportunities in the digital market.

In Portugal, we witnessed many proactive and innovative initiatives, with new services and online products, some of which leveraged the advantages of the SIBS Open Banking platform or in partnerships with new players in the world of payments, such as Apple Pay or Revolut.

In 2022, we continue to identify a lot of challenges, which with the very significant growth of active customers, led to increased pressure on banks. The question is, how to manage this new relationship and respond to new business opportunities and expectations?

1. Changes in customer banking behavior and habits: The greater digitization of banking, the offer of fintech firms, and the new “digital generations” led to a profound change in the behavior, habits, and expectations of individual and corporate customers. Therefore, it is not understood the existence, in many customer journeys, of physical and manual processes, documents to sign, in online or offline forms. In short, these “digital pseudo-processes” are still based on a deficient omnichannel.

2. Security: It is one of the most significant challenges for online banking, considering the current context of increase and visibility of cyber-attacks, which can contribute to increasing customer distrust and insecurity. Although banking systems are designed to be virtually impenetrable, these activities are still a reality and, in many situations, customers themselves do not realize that their online habits can put them at risk, so banking will play a decisive role. in increasing digital literacy.

3. Technical issues: The digitalization of banking and its online positioning created the expectation of “Anytime, Anywhere”, but whenever we use the internet we run the risk of experiencing service interruptions, as the stability and efficiency of the systems can affect your access capabilities. Thus, it also does not matter how sophisticated the technology used in digital channels is if the systems architecture with legacy applications still does not allow the full exploitation of the potential of banking services.

The banking sector must know how to properly manage communication and relationships with customers, regarding potential failures in the availability of online or face-to-face services.

4. Absence of personal relationship: Today, the ideal scenario will be a combination of online banking for day-to-day transactional needs and personal relationships with bank teams to help clients find the right solutions for their most complex and customized global financial needs.

This ideal scenario, however, does not yet exist and the challenge is to humanize and personalize the digital, as the essence of the digital transformation that took place focused on the functionally correct and efficiency, neglecting the emotional aspect of the trust relationship of the service.

Many entities have already understood this challenge and are investing in this dimension, to bring “humanity” to online banking, creating seamless operations and exceptional experiences.

Many examples of this digital humanization are the increase in the personalization of solutions and the increasing availability of proactive and personalized suggestions and recommendations. Technology alone will never make banks better, as new technologies in advanced data analytics, robotic automation, Machine Learning, Artificial Intelligence, and Bots will only work if bank leadership teams accept to rethink, for the context of the digital world, end-to-end business models and operational models (from UX / Service Design, Interaction Design, to integration and implementation in Agile and Change Management).

5. The Change in the Banking Scenario: The emergence of fintech firms and new players in the financial sector has considerably increased competition, leaving many traditional players behind in terms of digital transformation. However, these will have more advantages if they combine their traditional regulatory and security management capacity with the ability to establish partnerships with fintech firms.

New banking players, such as neobanks, are also offering simplified banking solutions, and have registered an impressive adhesion of new customers, being considered more agile and transparent, having fully embraced the power of digital to offer a banking experience perfect with a very competitive price or, in many cases, with few or no commissions. These represent significant competition for traditional banks, as just considering the online banking component is no longer enough.

In short, the banks that emerge as leaders in this digital transformation will be those that respond strategically to these challenges and can do the best job of collecting, processing, and managing data, particularly those that manage to extract the best insights from these data, fulfilling, in parallel, the requirements imposed on privacy and protection.

Data will enable mass personalization of product and service offerings, which appears to be one of the key digital trends of the future.

Additionally, the bank will have to deal with the fight for talent, not only in acquiring new skills but in retraining the current workforce and establishing partnerships with specialized service providers.

Finally, all these challenges will only work if the culture is rethought for a new hybrid and collaborative work environment, where the bank bets more than just on traditional methods of compensation and benefits.

Ricardo Rodrigo
Banking expert at askblue