Top 5 Tips to Navigate The Future of Retail Banking

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Written By Devansh Vijay

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The banking sector is seeing a higher adoption of digitalization than ever. Digital natives and those who are already digital see great value in increasing their digital transformation efforts. Innovation is essential to remain relevant, as was the pandemic. John Dangoia is Head of Product Management in the U.S.A and Europe at Finacle. He shares his insights about how the retail banking sector is responding to this call.

Last year was a momentous year. It was unique in the way that the pandemic disrupted every aspect of daily life. The world became more digital, whether it was in work, education, or shopping. Banking is also seeing a higher uptake of digitalization than ever, even traditional banks are taking the leap to remain relevant.

The 2021 Innovation in Retail Banking Report was produced in collaboration with Efma. It examines the industry's pulse to determine how it can innovate and grow. Not surprisingly, more than two-thirds (or more) of our respondents stated that they intend to significantly increase innovation. Traditional financial institutions are now looking to technology, such as data analytics, cloud computing, and API-based ecosystems, to change their structure. - to enable change quickly. A significant shift in mindset from pre-pandemic is to prioritize user experience over product creation by retail banks.

Interesting insights were also provided by these innovative efforts to improve customer experience through digital delivery.

Channel Delivery Innovation: Thinking Long-Term

Respondents to our survey revealed that 44% of bankers had increased their digital delivery investments by more than 10%. This was due to the lack of physical banking transactions that caused pandemics. Banks had to quickly move to enable all services online and provide them with the necessary infrastructure. This gave banks the green light to invest in innovation in channel delivery throughout customer engagement. All customer interactions, including cross-selling and up-selling, had to be digitalized.

Customers are now more likely to transact digitally on open banking networks outside of their primary banking journey. Banks will need to invest in channel innovation in the future to stay competitive in an industry where challenger banks and BigTech banks have established their strengths.

Develop a Challenger Mindset

Our study found that many banks rated below fintech start-ups, challenger banks, and consumer technology companies when it comes to innovation over the next five years. In terms of innovative products and services, Neo banks hold the torch. By offering innovation and enhancement in basic banking services, non-bank digital providers are challenging the traditional banks.

These new-age players have the reputation of getting products out quicker and at lower rates. However, big tech players have an inherent advantage due to their technical knowledge. These challenges are not something incumbent banks can afford to ignore, but they should be considered as a potential formidable collective force for the future.

To be a challenger bank, an incumbent bank needs to think like one. This means that they must build their innovation strategies using the customer's perspective and then support it with their technological advantage. A new-age provider may offer to automate receivables and payments for start-up businesses with customized features. This would result in cost-effectiveness, quicker implementation, and easier use for the customer. In the same way, incumbent banks should examine the strengths they have in the market to determine where their innovative offerings can be directed.

New Business Models

The most popular business model predicted by our respondents was the open platform player-ecosystem operator model. It is currently being adopted at 8% and is expected to rise to 21% by 2030. Open platform players are more popular than universal banks that rely on a single model. They cover many business models and seem to be steadily growing in popularity.

In today's economy, incumbents face many challenges: slow revenue growth, shrinking margins, and falling valuations. Consolidation is also possible for some slow-moving companies. They have a path to success through business model innovation, but they will need to act with greater urgency. The emerging business models are broadly classified as digital-only banks and banking-as-a-service providers. We also found embedded finance and financial and non-financial. All of these models are driven by the open platform.

Digital Powering Up

Only 14% of respondents felt that digital transformation had been implemented at scale, and this was contrary to their expectations. This is twice the number we have previously recorded, but digital maturity still remains a dream for many. Although they may have taken a while to start their digital transformation journey, or invested for years in it, a real transformation of their organizational capabilities will not happen overnight. Only if they are patient, organized, and persistent will they see the full benefits of digital at scale.

Innovation and Accelerating Change

For banks and credit unions that have not yet joined or are slow in their digitalization journey, branch consolidation is likely to be followed by organizational-level consolidation. Nineteen percent believed that at least 25% of credit unions and banks would be consolidated before 2025. Another 52% thought it would happen by 2030. 38% of our respondents believed that 25% of the existing banks would be consolidated by 2025. Another 47% thought it would happen by 2030.

The digital leaders are rapidly outpacing slow movers. DBS sold 73% more mortgages via digital channels in 2020 than the 42% it had in the previous year. The same goes for auto loans, which increased by 3% over 25%, and deposits, which rose by 12% over 55%. Their advantage is their speed and quality of digitization.

Becoming Future-Proof

The gap between incumbent banks and new-age providers has widened over the last year. We were left feeling more urgent for banks to accelerate their digital transformation journey after our survey.

It is no longer about when, but how fast they can embrace digital transformation and allow innovation. Digitalization at scale will decide whether they lose revenues, remain relevant, or die trying. They will need to develop new strategies and a mindset that is open to challenger technology in order for their company to be future-proofed.

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