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This article was originally published in Finance Derivative and can be found here

The evolution of digital banking: What traditional banks must offer to remain competitive

Manoj Mistry, Managing Director, IBOS Association

Financial services continue to experience a massive upheaval as digital transformation is rolled out across the sector at a dramatic rate. By 2030, the everyday banking experience could be entirely virtual with more than two billion people having digital bank accounts on digital platforms, according to the Bill and Melinda Gates Foundation.

But in most cases, that level of digital transformation remains a work in progress while customers continuously adjust to a dazzling array of new digital technologies which are being accelerated through constant innovation, creating new behaviours and increasing their expectations.

For global banks, this creates a series of complex challenges and opportunities as they calibrate and re-calibrate their digital offering in various regions of the world, where the pace of digital transformation moves at distinctly different speeds.

Meanwhile the branch networks of retail banks in many national markets are shrinking inexorably as more customers switch to online services. The result is fierce competition between domestic banks to enhance their customer offering through a range of new digital technologies, not only with each other, but also with an increasing number of challenger banks that operate entirely online.

In trying to fend off the challenger bank threat, traditional players are facing assorted battles over digital products – cards, payments, crypto – often available on a single mobile app. To remain competitive, many traditional banks are continuously re-evaluating how they offer digital products and services to their customers.

It is widely acknowledged that the transformations created by these new digital products succeed best when they are cost-effective, incremental and lead to high levels of customer satisfaction. Banks are therefore acutely focused on outcomes, trying to ensure that value is always being added to the customer experience: new products and improved processes that let them build capabilities, add business value, and critically, buy-in from their customers for each digital transformation.

Arguably the most critical component of digital transformation in financial services is open banking, which connects banks, third-parties and technical providers, enabling them to exchange data simply and securely for their customers’ benefit.

This data exchange is achieved through application programming interfaces (APIs), which allow access to the data, services and capabilities of an organisation. By facilitating third-party applications to synchronise and connect to a bank’s tools and services, this data sharing benefits customers by integrating with systems that personalise financial products and services to suit their needs, and make them quick, efficient and easy to use.

But the move from traditional banking networks to digital banking services and open banking technology is not all plain sailing. Beyond ensuring that they work, security and risk are the two most important factors. Interwoven with the need for security in making the transition from traditional to digital, how banks manage digital risk and combat digital fraud is a primary concern.

Banks have dealt with cyber threats for almost two decades, but being keen adopters of new digital technology at the same time has the potential to make them more vulnerable.

To mitigate the inherent risks that ensue, they make enormous levels of investment in cybersecurity. And with good reason: a major breach could potentially have catastrophic consequences, both in terms of financial loss and the enormous damage that it would do to their brand’s reputation.

In addition to strong cyber governance practices and employing a CISO or CSO, big banks are also aiming to detect weaknesses in their systems by deploying advanced cyber defence practices, such as red team testing or scanning for vulnerabilities. Because the banking sector is inherently high risk, it attracts many different types of attackers. Sustained investment in cybersecurity will therefore remain critical.

Attempted fraud on individual bank customers comes in many guises often through psychological manipulation that tricks people into making security mistakes or revealing sensitive information: phishing emails, shopping scams, skimming, malware, clone websites and so on.

When customers receive notifications of a personal banking fraud incident, it damages faith in their bank. Moving beyond username and password protection, some banks offer more advanced protections, such as two-factor authentication, fingerprint and facial recognition.

To combat the risk of fraud, security is every bank’s number one priority. Newer systems like instant biometric verification add to their existing armoury. In future, protection against cybercrimes and fraud may well be powered by predictive analytics and artificial intelligence.

The rapid pace of digital transformation and the security systems that underpin it means that making precise predictions about what we can expect in the future of banking over the next decade is difficult. But it is certain that digital banking services will be based on personalised, practical platforms that are predominantly online supported by the highest levels of available security.