Banks Invest in Digital Differentiation to Remain Relevant

If video killed the radio star, then what has digitization done to the banking landscape? Well, some observers believe it may have just given the industry a new lease on life.

After all, when viewed in light of the financial services sector’s historical association with in-person brick-and-mortar establishments, digitalization has led to a transformation of the way consumers bank, as well as a reframing of their expectations around convenience.

“Banks are starting to realize the speed at which technology has changed the world,” James Butland, vice president of payments and U.K. managing director at Mangopay, told PYMNTS for the series “What’s Next in Payments: What is a Bank? The Changing Landscape of Banking and Financial Services.”

“The challenge that a traditional bank has, is that they sit on 150, 200 years of legacy infrastructure and probably 60 years of legacy technology. So, banks have found it difficult to innovate quickly,” Butland said.

But in the face of digital changes wrought by the COVID-19 pandemic, which reshaped consumer expectations dramatically, digital innovation has become an imperative for banks to meet the growing demand of their customers for swift, transparent and accessible banking services round the clock.

The convenience of online banking is “so much greater than visiting somewhere in person,” said Butland, noting that the digital shift within financial services has been coupled with “the changing in payment networks, which are now 24/7.”

“If you have a payments network that’s 24/7, you want to have a bank that is 24/7,” he added.

Navigating the Great Digital Shift in Banking

While the surge toward digital banking at first may have seemed poised to eclipse traditional banking methods, the reality has been more nuanced.

That’s because despite the convenience of digital platforms, a substantial segment of consumers still values the trust and assurance provided by physical bank branches.

“A lot of people were predicting that the shift to digital would be the end of cash, the end of brick-and-mortar banks, and that hasn’t happened — same with eCommerce and physical shops. … It’s a lot more difficult to build trust via an app or an online banking portal,” Butland explained.

But that doesn’t mean that the role of physical bank branches hasn’t evolved amidst the digital revolution. While routine banking activities increasingly migrate to digital channels, physical branches retain significance for complex transactions and addressing exceptional circumstances. Banks must strike a delicate balance between digital convenience and maintaining a physical presence to cater to diverse customer needs.

“If you’re doing a high-value transaction, if you are purchasing a house or taking out a significant loan, there’s some comfort in speaking to someone in person and visiting a branch,” Butland said, noting that while for individual consumers these type of banking events may be a “once in ten years” occurrence, for many banks with large customer bases, these in-person needs are happening in their branches daily.

Driving Competitive Differentiation in Banking’s New Digital Age

Still, the digitization of banking has created a whole host of competitors that are just a click away, making loyalty a key cornerstone of 21st century success.

And while digital banks emphasize seamless user experiences, traditional institutions often differentiate themselves through competitive financial products rather than perks, Butland said. He noted that, generally speaking, people rarely change their banks and tend to stick with their financial institution throughout their adult life.

As digital transactions proliferate, combating fraud has emerged as a paramount challenge. Banks are increasingly embracing advanced technologies, including artificial intelligence and machine learning, to fortify their security frameworks. However, striking a balance between robust security measures and seamless user experiences remains imperative to foster trust and encourage widespread adoption of digital banking solutions, Butland said.

Looking ahead, he emphasized that the industry’s focus lies on accelerating the speed and efficiency of payment networks, fortifying fraud prevention mechanisms and navigating the intricacies of open banking landscapes against the backdrop of the great digital shift in banking.