Yasamin Alami, Assistant Professor at University Canada West, discusses how digital banking is transforming customer and organisation experience.
Remember needing to deposit a check or speak with a banking advisor on a Sunday afternoon, only to find that the bank was closed? This common frustration is becoming a thing of the past thanks to the ongoing digital transformation in banking.
The evolution of digital banking
The journey began with the introduction of 24/7 ATMs and online banking for simple tasks like transferring funds and paying bills. These innovations significantly improved the banking experience by providing convenience and flexibility.
However, more complex transactions and services, such as handling large cash deposits or obtaining financial advice, still require a visit to the bank.
The rise of fully online banks
Disruptors in the banking industry have taken digital banking to the next level by offering fully online, self-service alternatives. These digital-only banks operate without physical branches, significantly reducing overhead costs.
By eliminating expenses related to maintaining brick-and-mortar locations and employing fewer staff, these banks can offer lower fees and more competitive rates to their customers.
Challenges for traditional banks
Established banks are also embracing digital transformation, but they face unique challenges.
One major hurdle is the fragmentation of data across multiple legacy systems. Over the years, banks have implemented new software solutions without fully integrating them, leading to data silos and inefficiencies.
This lack of data consolidation complicates efforts to offer seamless digital services, as manual interventions are often needed to reconcile disparities within these systems.
Consumer expectations and technological advances
Today’s consumers expect a high level of digital sophistication. With smartwatches, smartphones, and other wearable technology becoming ubiquitous, carrying a physical wallet is increasingly seen as cumbersome.
The widespread adoption of contactless payment methods, like tap-to-pay with credit cards and virtual cards, transactions are faster and more convenient.
Both individuals and businesses are demanding real-time access to financial information for better budgeting and decision-making, and use of their data for trends and patterns. However, the banking sector, traditionally strong in economics and finance, often lacks expertise in areas like computer science, cybersecurity, and data integration. This knowledge gap has slowed the implementation of robust digital banking solutions.
The imperative of data security
Security and privacy are critical in banking. Handling sensitive financial data with zero margin for error is a daunting task. Consumers are rightly concerned about the privacy of their data, fearing that it might be exposed or misused.
As a result, banks are cautious in selecting technology partners who can ensure data integrity and security without compromising trust.
In-house development vs. outsourcing
Banks face a critical decision: develop their digital banking platforms in-house or outsource to external providers. Building proprietary software requires rigorous testing to ensure security, prevent hacking, and implement sophisticated encryption.
The software must be accessible to authorised personnel without risking unauthorized access or data breaches. This approach demands significant investment in technology and talent but allows for greater control over the system.
Alternatively, outsourcing to a trusted third-party provider can expedite the digital transformation process. However, this requires partnering with companies that adhere to high ethical standards, prioritise cybersecurity, and seamlessly integrate with the bank’s existing systems.
While potentially more efficient, outsourcing also involves substantial initial costs and ongoing fees for maintenance and support.
Balancing costs and benefits
While digital banking promises long-term cost savings by reducing the need for physical branches, staff salaries, and other overheads, it also entails upfront investments in server infrastructure, software development, and cybersecurity measures.
Despite these costs, the convenience and efficiency of digital banking offer significant advantages for both banks and customers.
Preserving the personal touch
Amongst security and data transfer risks, there is one potential drawback of digital banking – the loss of personalised service. Face-to-face interactions with bank advisors foster trust and loyalty, offering customers tailored advice and a sense of security.
While chatbots and automated services provide efficiency, they lack the personal connection that can enhance customer satisfaction and long-term loyalty and the ability to cross-sell or provide useful solutions to saving or borrowing needs of individuals and businesses. This opens the door to more potentials for misinformation or costly advisors that consumers must pay for.
The next step: Central Bank Digital Currencies (CBDCs)
For many countries, the next step in digital banking is the creation of a Central Bank Digital Currency (CBDC). Canada and the US have been researching and testing the feasibility of digital currencies. Unlike cryptocurrencies, which are unregulated, CBDCs would be regulated and governed by the issuing country.
For instance, the Bank of Canada would issue, control, and facilitate a Canadian CBDC, a digital version of the Canadian Dollar.
Like the digital transformation of banking, CBDCs face challenges related to record-keeping, regulation, privacy, and security. While these issues are being addressed, traditional paper currency remains in use.
Despite the potential for efficiency and paperless transactions, there are concerns about data privacy and the potential for misuse by authorities and governments with so much data being tied back to individual users.
The future of digital banking
Digital banking is revolutionising the financial industry, offering unprecedented convenience and efficiency.
As technology continues to evolve, both traditional and digital-only banks and central banks must navigate the challenges of data integration, security, digital currencies and customer service.
By balancing technological advancements with the need for personal interaction, banks can ensure they meet the growing expectations of modern consumers while maintaining trust and security.
