The past two years of the pandemic have fast-tracked digital behaviors and redefined how customers engage with their banks. We’ve seen a new cohort of customers using digital banking for the first time, the acceleration of contactless and mobile payments, and a mushrooming of QR-code, order-at-table apps! Still, the “death of cash” has once again been exaggerated. One thing for sure is that digital channels now dominate. According to Forrester Analytics data, in 2021, 76% of Spanish banking customers used their mobile banking app at least monthly, and 34% of UK online adults who applied for a loan in the past 12 months did their research on a smartphone. Meanwhile, digital (online and mobile) is now the top channel for US borrowers to purchase home loans.

Innovative Entrants Are Changing The Industry Landscape

Although some of the worst pandemic forecasts haven’t materialized, banks continue to face long-term revenue pressure and tighter competition. They’re also feeling pressure to act on sustainability. And while high street banks speed up their plans to close branches, digitize their experiences, and launch new ESG (environmental-, social-, and governance-focused) products and experiences, new entrants are doubling down on innovation to put their business in customers’ pockets, create new business models, and drive the next wave of transformation. Here are a few trends we’ve outlined in our The State Of Digital Banking, 2022 report:

  • Challenger banks are again all the rage. After a blip during the pandemic, current account switching has returned to normal levels in the UK. According to the Financial Conduct Authority, 8% of personal current accounts are now held with a digital “challenger” bank, up from just 1% in 2018. Forrester Analytics data reveals that 40% of UK online adults would consider banking with a provider that does not have any branches. Digital banks are also making deep inroads into the small- and medium-size business (SMB) banking market, forcing banks and lenders to up their game. At the start of 2022, four SMB-focused digital banks — US-based Brex and Novo; Indonesia-based KoinWorks; and France-based Qonto — raised more than $1 billion in total to build out lending platforms that complement credit cards, business accounts, and expense management tools.
  • Inclusive finance has become a hotbed of innovation. A new breed of fintechs has emerged, leveraging mobile technology, open access to data, artificial intelligence, and machine learning to drive innovative business models that target underserved consumers. In 2021, Nubank — one of the world’s largest digital banks, which targets the underbanked in Latin America — grew its customer base by 62%, taking the total to 48 million in Brazil, Mexico, and Colombia. In Africa, digitally savvy unbanked and underbanked consumers, who have been largely ignored by traditional lenders, are now turning to fintech startups such as Chipper Cash, Flutterwave, OPay, and Wave.
  • Fintechs are riding the green wave. Sustainability is the new reality. A variety of environmental-, social-, and governance-focused and sustainable-investing fintechs have entered the market to cater to values-based customers. In the US, digital bank Aspiration lets customers measure their impact with a personal sustainability score based on where they spend their money. In addition to its banking products, Aspiration offers managed IRAs and taxable accounts that invest in 100% fossil-fuel-free companies.

Banks Are Improving Their IT To Deliver Innovation

How are banks, credit unions, card issuers, and lenders responding to the seismic shifts affecting the industry? We surveyed decision-makers at financial institutions worldwide and found that:

  • COVID-19 has brought a greater focus on product innovation and customer experience. While growing revenue is once again dominating business priorities, financial services firms are also prioritizing improving their products and services, the experience of their customers, and their ability to innovate.
  • Improving IT has replaced operational efficiency as the top digital transformation driver. As COVID-19 reshapes customer expectations and competition heats up, a growing number of banks have embraced end-to-end transformation, focusing more on improving their IT to promote agility and innovation. Banks are also focusing on improving the customer experience, product and service innovation, and improving operational efficiency.
  • Technology strategies and lack of resources impede banks’ efforts. Twenty-five percent of services decision-makers at banks say that their company’s technology strategy is among the biggest challenges to executing digital transformation. Twenty-five percent also say that employee availability of time devoted to digital transformation execution around their other job responsibilities is also a challenge.

In order to meet the needs of the future customer and the rapidly changing financial landscape, banks must pivot and reboot their strategy. The economics of the next decade will challenge banks to adopt a future fit technology strategy — rooted in customer obsession and enabling an unprecedented level of adaptivity, creativity, and resilience — or fail. Banks must capitalize on the pace of change and innovation and set their course for the next decade.

If you’d like to learn more, please take a look at our new report, The State Of Digital Banking, 2022. Do reach out if you have any questions or would like to know how we can help you and your firm tackle your priorities.