Digital Transformation in Banking: What It Means for Financial Institutions

Traditional banking technologies are being eclipsed by newer ones in a paradigm shift better known as the digital transformation in banking.

For example, 53% of Americans prefer to use digital wallets instead of traditional payment methods. This is a result of better technology, making it easier for users to get things done, including managing finances, checking account balances, and making payments.

In this article, we’re going to show you more examples of how this digital transformation is changing the banking industry and what that means for the future of banks. 

What Is Digital Transformation in Banking?

Digital transformation in banking refers to changes in how people control their finances in today’s age with modern technology. 

Before the 21st century, customers routinely visited banks for most account interactions and used traditional payment methods, like credit cards, debit cards, and checks. 

With the rise of the Internet, banks started creating online portals so their customers could access accounts digitally. They also made it possible to integrate with digital wallets such as Apple and Google Pay. 

However, one of the most significant catalysts of modern banking was still to come. 

After the U.S. financial recession of 2008, innovators wanted to put the control of money back into the hands of people instead of governments and financial powerhouses. As a result, the rise of Bitcoin and other cryptocurrencies, in addition to non-fungible tokens (NFTs), changed the financial landscape around the world. 

From a business point of view, whether you’re involved in a traditional financial institution or a crypto exchange, it’s important to keep up with these developments. They can help you better adapt your business models and give you the knowledge you need to provide a cutting-edge digital experience to accommodate your customers’ needs. 

Examples of Digital Transformation in Banking Today

Let’s further understand this digital transformation in banking by familiarizing ourselves with a few examples. 

• Mobile banking: Nearly every major bank in the United States offers mobile banking or a way for people to access their bank accounts on their smartphones.
• Digital account opening: Banks and credit unions may also enable customers to open accounts online. This helps people save time from visiting their local branch and waiting in line. 
• Open banking platforms: Open banking uses APIs to share financial data with third-party digital platforms. For example, Chase allows customers to integrate their credit information into a mobile app and track their scores on the go. 
• Digital-only banks: Digital-only banks, or Neobanks, operate solely on the Internet. Chime is one of the most popular digital-only banks with no physical locations. 
• Access to digital assets: Digital assets, like stablecoins and cryptocurrencies, are becoming more popular with each passing year. Many crypto-friendly banks allow customers to deposit and withdraw their crypto earnings and spend them while shopping. 

Key Drivers of the Digital Transformation in Banking

What factors have driven the evolution of this digital transformation in banking? New technologies, innovations, and a shift in customer expectations all play a part.

Here are some of the most important ones: 

The Rise of Fintech

Financial technology (Fintech) is the intersection between finance and modern technology. Fintech companies empower banks and other financial institutions to deliver world-class financial services to their customers. 

Here are some ways they do this:

• AI automation: AI makes it possible for computers to process large amounts of data, find customer behavior patterns, and build automated workflows. Generally speaking, AI fuels banking services and makes them simple to use. 
• Security: Fintech also leverages cutting-edge security protocols such as two-factor authentication (2FA), multi-factor authentication (MFA), and Know Your Customer (KYC). 
• Big Data: Banks and other financial institutions process massive amounts of data. As a result, banking solutions must properly analyze this data, make accurate interpretations, and keep it safe from unauthorized access. 
• Blockchain technology: Blockchain adds a layer of security and efficiency in transactions, ensuring transparency, reducing fraud, and fostering tamper-proof record keeping.
• Personalized finance management tools: Fintech services use data analytics to give customers more insights into spending habits, helping them make more informed financial decisions (including budgeting and investments) based on their individual financial goals.

Blockchain Technology

A blockchain is an immutable, decentralized public ledger distributed across a secure network. This public database is shared across a network of anonymous computers and has become popular in its use with cryptocurrencies. 

Financial institutions use blockchain to optimize the transparency, efficiency, and security of their main initiatives. For example, some banks use blockchain technology to accelerate bank transfers and improve customer satisfaction. 

Instead of banks relying on custodial services to settle transactions, they can process them quicker on a public blockchain.

Data Analytics and Artificial Intelligence

Data analytics, fueled by AI, makes it possible for financial institutions to implement personalized services and real-time intelligent decision-making.

Some personal finance companies, for example, are using robo-advisers and chatbots to help people make smart investment decisions. These robots process data from a customer’s risk tolerance and financial bandwidth, providing them with advice or making automatic investments for them. 

Cloud Computing

Cloud computing refers to running digital operations over the cloud, instead of in physical warehouses. Generally speaking, financial institutions use cloud computing to receive scalable, cost-effective, and secure data management solutions.

Cloud computing is extremely secure and efficient since it doesn’t rely on expensive physical infrastructure that can be affected by natural disasters. Cloud computing is even evolving, with many providers relying on blockchain technology to promote higher data privacy.

Changing Customer Expectations

The digital transformation in banking ties right into modern consumer expectations for finance. 87% of millennials and Gen Z customers value convenience when using technology. 

To keep up with modern audiences, financial institutions have to employ up-to-date banking systems that make banking accessible and convenient. 

Competitive Landscape

The gradual shift to modern banking is placing the onus on traditional banks to adapt to maintain their market shares and dominance. 

Major banks like Chase and Bank of America have quickly embraced modern financial instruments like cryptocurrencies. This produces a competitive landscape that encourages more innovation to benefit customers.

Inflation

Inflation makes investors hesitant to deal with traditional financial investments. Many are turning to decentralized digital assets to provide a buffer against this rising inflation. 

Cryptocurrency exchanges, like Coinbase and Binance, also attract millions of customers who want to invest in digital assets that the federal government doesn’t control. 

The Benefits of Digital Transformation in Banking

Digital transformation offers several key advantages for both banks and their customer base. These benefits are:

Enhanced Customer Experience

Digital banking transformation ultimately improves customer experiences through personalized digital services and convenient digital channels.

Customers, for example, can better access their finances and integrate with their favorite third-party apps with the help of mobile banking. 

Increased Efficiency and Productivity

Another advantage of digital transformation strategy in banking is its impact on efficiency and productivity. When financial institutions rely more on customer data analysis, they can leverage AI to automate workflows that result in seamless omnichannel operations. 

For example, some financial institutions are experimenting with offering peer-to-peer crypto services. This allows customers to buy, sell, and hold cryptocurrencies, storing them in their digital wallets.

Improved Risk Management

Banks are also under increased government and consumer scrutiny because of their handling of money and financial assets. 

To effectively manage these risks, some banks use blockchain technology, which you can’t alter, providing accurate information about transactions. With blockchains, banks can fight against fraud and money laundering from the inside and out. 

The Challenges of Digital Transformation

The digital transformation in online banking comes with its fair share of challenges. These include:

Cybersecurity Risks

The more powerful technology becomes, the quicker hackers rise to the occasion. 

Hackers spend much of their lives finding vulnerabilities in financial data systems to exploit. One single error can open a backdoor for them to infiltrate private networks and steal customer assets. All banks are susceptible to data breaches, and many of the world’s leading financial institutions spend substantially to protect their systems. 

By embracing digital banking, you’ll have to accept this reality and become vigilant in your approach to combat hackers on a daily basis. Otherwise, your organization could become a victim of a cyberattack and lose the trust of your customers. 

Cultural and Organizational Change

Innovation comes with a widespread change in how banks run their operations. 

Getting buy-in from customers and employees can be challenging. For example, let’s say that a bank wants to add a crypto exchange to its suite of financial products. This bank must work hard to get its staff on board with the idea and implement a process to either develop the crypto exchange from scratch or invest in a white-label solution like AlphaPoint. 

Integration with Legacy Systems

Many financial institutions struggle to integrate new technologies with their legacy systems. For example, if a bank switches to cloud computing, it may have trouble integrating its data management tools into this new operating model.

This process can frustrate employees and result in a lot of wasted time and money. As a result, making widespread changes can take a lot of time, causing banks to fall behind other financial institutions that are already innovating. 

Regulatory Compliance

The banking sector is already a highly regulated industry. The more you adapt to modern fintech, the more government oversight you’ll be subjected to. 

For example, if you plan on offering crypto services, your finance team will have to review a comprehensive list of financial and legal guidelines set forth by the Internal Revenue Service (IRS) and the Securities Exchange Commission (SEC).

Experience the Benefits of Digital Transformation in Banking With AlphaPoint

As the digital transformation in banking continues to expand, many businesses want to make the shift to better support customers. However, making swift and massive customer-centric digital changes requires a partnership with a trusted technology provider like AlphaPoint. 

AlphaPoint is a global financial technology company providing digital asset infrastructure to power the next generation of exchanges, brokerages, payment networks, and banking. We help our customers: 

• Empower their users with digital asset access.
• Enable their customers to easily buy, sell, send, receive, and earn digital assets through their platforms.
• Meet customer demands for digital assets and boost engagement and loyalty.

 

Ready to try AlphaPoint for yourself?  Request a demo today.