The rise of digital banking brings with it increased risk, which in turn requires effective tools, applications and programs to analyse data, assess risk and manage decisions.
According to GDS Modellica, in the future, traditional banks will have to refocus on finding niches in the market that they can exploit by offering more human, in-person services.
Following the 2008 crisis, many financial institutions changed strategy and set themselves new challenges to become more profitable and improve the customer experience through digitalisation. Since then, this change of paradigm has only been further consolidated by the pandemic with the use of digital channels to access banking services increasing significantly during the lockdown. But although the internet and the popularity of mobile devices have made this digitalisation possible, this transformation of the financial sector is now going even further, with the addition of other technologies like big data tools, AI, machine learning, robotics, connectivity technologies, blockchain, cloud computing, Industry 4.0, IoT, edge computing, web.3 and, most recently, the Metaverse.
Digital banking forms part of the Open Banking concept and is 100% based online. Digital banks have no branches or have as little physical infrastructure as possible and operate in a similar way to traditional banks under a range of operating models and regulatory frameworks. Just like traditional banks, the financial services that they offer are regulated, and there are multiple options for acquiring operating licences depending on the country where they are based. This form of banking offers the customer a more transparent service, better support, more information and less small print. Furthermore, unlike fintechs, digital banking still allows for the possibility of visiting a branch or cash machine. Users are adopting this faster and more efficient form of banking because they are able to manage their finances from any device and save time in the process. Around the world, there are now more than 400 independent digital banks with a combined customer base of more than 500 million people. Key players include Nubank in Brazil, Chime in the US and Revolut, N26 and Monzo in Europe.
Digital banking offers countless advantages over traditional banking: it offers effective, transparent communication; there is customer service and support available anywhere at any time of day; there are no physical barriers; there are still in-person options available; it is a comfortable, simple and secure experience; there are fewer costs and fees; apps and websites make financial management faster and more efficient; transfers can be scheduled easily and transactions can be performed on any device at any time.
However, there are obvious downsides to this digitalisation. The main one is that there is still a lot of distrust of modern technology. The relationship with the customer also suffers due to the service being less personal, and this can also open the doors for scammers to exploit customer ignorance for their own gain. As a result, one of the main risks that companies in the banking and finance sector have to face is fraud. According to GDS Modellica, “a good risk management policy requires three things: the best possible data, prediction analysis to anticipate risks and for decisions to be managed in a timely manner. At GDS Modellica, we provide software, decision analysis tools and machine learning techniques to manage risk, combat fraud and build profitable relationships between companies and their customers.”
The main purpose of both traditional and digital banks is to offer financial services, but digital banking is expanding its market share and gaining more customers. Digital banks have become not just an alternative to traditional banks but the favoured option for many customers, and the key to this success has been the time and cost savings on offer, as well as the increased security with regard to hacking and theft. Traditional banks have finally recognised that they are facing fierce competition that threatens their very survival. As a result, they too have begun to offer online services and have even created their own digital banks, often opting to create a brand new 100% digital bank instead of attempting to transform their existing organisation. This ability to adapt to change is vital for any institution wanting to survive and continue to be profitable. This is something echoed by GDS Modellica: “The challenge for traditional banking is how to find a place in the market where they can compete and survive. They need to be stronger and more efficient in what they know best: offering close, personal services, particularly to those segments of the population that are less able to go digital, live in less populated areas or are more vulnerable due to their age. In the future, traditional banks will have to focus on identifying gaps and cracks in the market that they can exploit in order to stay profitable.”
