For all businesses, the bottom line is that the impact of digitalization on financial services means the rise of technology has become a game-changer, but the upheaval in financial services has been particularly striking. The Covid-19 epidemic, on the other hand, demonstrated that a reliance on technology – for both customers and employees – only helped to underline the necessity of digitization.
According to the consulting firm Alpha FMC’s “2020 Digital Readiness Survey,” digital transformation became a top priority for asset managers during the epidemic. According to the survey, “almost two-thirds (60 percent) of organizations have already launched some type of digital transformation initiative across their organization,” according to a poll of 40 international asset managers.
According to the report, 79 percent of global asset managers regard digital transformation to be a top or high priority issue, up from 64% the year before. Furthermore, 55% of respondents predicted an increase in their digital budgets in the following year.
As a result of the epidemic, several financial services companies have accelerated their digital transformation, with digitalization and technology combining to alter their operations. According to the poll, the top driver of digitization in the asset management industry was increasing client expectations, followed by sales, new technologies, cost reduction, competition, fee and revenue pressure, and regulation.
The path to an impact of digitalization on financial services
“The use of digital technology to modify a business model and produce new revenue and value-producing opportunities; it is the process of changing to a digital business,” according to Gartner.
In the financial services industry, digitization has changed the business models of a number of companies working in several sectors. Simultaneously, a slew of new firms, most notably fintech start-ups, have cracked the financial services industry and disrupted the status quo.
There are various trends and technologies to watch as the sector embarks on a long journey of digital transformation.
The use of online and mobile banking is growing in popularity.
Digital banking has gained in popularity since the turn of the century. Its initial popularity was limited to younger, more tech-savvy customers, but the Covid-19 pandemic has broadened its appeal to people of all ages all around the world. This is partly owing to the fact that during lockdowns, physical bank branches were closed and phone banking services were regularly overwhelmed and understaffed.
Indeed, according to data from Fidelity National Information Services, new mobile banking registrations increased by 200 percent in April in the United States, while mobile traffic increased by 85 percent.
Although the shift to mobile and internet banking surged in the early months of the epidemic, digital transactions have grown in popularity in recent years, paralleling a steady fall in ATM withdrawals.
Furthermore, according to a survey by consumer rights publication Which?, 34% of UK bank branches closed between January 2015 and August 2019. This translates to 3,303 branch closures in August 2019, leaving only 6,549 branches open.
Traditional banks are giving way to challenger banks.
Customers have been progressively adopting online and mobile-only banks in recent years, in addition to moving more towards online and mobile banking services supplied by their traditional bankers.
Indeed, according to a 2019 analysis from management consultancy A.T. Kearney, 21% of UK consumers regard challenger banks to be their primary banking relationship, with this proportion rising to 32% among millennials.
Three of the most successful challenger banks in the UK include Monzo, Revolut, and Starling. With the exception of Metro Bank, challenger banks differ from traditional lenders in that they do not have physical branches in order to keep costs low and offer better prices to their customers.
Clients transfer from traditional lenders to challenger banks for a variety of reasons, according to the A.T. Kearney study, and ease of use, ease of account opening, and compelling use of technology are all major factors.
Customers choose online or mobile banks because of the superior online experience and functionality they provide, as well as more appealing rates or fees and better service quality, according to a 2017 survey from data management platform Relay42.
Furthermore, according to a GlobalData report on digital banking, “Artificial intelligence [AI]-powered money management helps digital banks like Monzo drip-feed highly personalised spending tips to build trust and engagement in the absence of in-person interaction, just as Amazon once did with real-time order progress notifications.”
The Importance of Fintech
Fintech, or financial technology, is one of the most visible signs of the financial services industry’s digital transformation, hence the need to talk about the impact of digitalization on financial services.
Fintech is altering the financial services business by delivering a number of technological solutions that improve the customer experience, such as expenditure tracking, customer service chatbots, and budgeting tools. As a result, financial services innovation, technology, and start-ups are among the market’s primary drivers of digitalization.
As a result of the quick transformation that fintech is bringing to financial services, traditional lenders are taking exceptional measures to catch up and rethink their goods and services. Traditional banks are increasingly collaborating with fintech companies to provide clients with more efficient and affordable services.
Robo-advisors are on the rise.
Another innovation that is transforming a continuously changing financial market is the robo advisor.
These digital platforms offer financial advice as well as investment management, which is based on portfolio managers’ algorithms. Robo advisers automate the investing process with little to no human oversight.
Account setups, customer assistance, account services, portfolio management, and goal planning are just a few of the services provided by Robo advisors. These are usually done at a low cost. After acquiring information about their clients, their financial circumstances, and their ambitions, Robo advisers invest their clients’ assets automatically.
The Robo advisor sector appears to be on the rise. According to data compiled by InsideBitcoins, the US Robo adviser business is expected to exceed $1 trillion in value by 2020, indicating a 40% year-on-year increase.
The impact of blockchain
Blockchain is considered as yet another piece of technology that is accelerating the financial industry’s march to digitalization. Bitcoin and other cryptocurrencies use blockchain technology.
“The major purpose of blockchain technology was to facilitate the movement of value inside trustless networks; where the different parties did not have to trust each other to perform transactions involving the exchange of value,” according to a GlobalData report on blockchain in banking.
Due to blockchain, financial or real assets are now represented in digital form, which has changed how individuals think about money, invest their wealth, and trade on marketplaces. This technology allows for the identification, recording, and storage of assets as digital tokens in a database.
“Beyond the arena of cryptocurrency, trust is crucial to most economic relationships,” according to the GlobalData research. Most commercial blockchains will reject the bitcoin platforms’ completely trustless architecture in favour of permission platforms where members are verified and approved before joining the network.”
The technologies that are driving the transformation and the impact of digitalization on financial services
In their quest for digital transformation, financial services are adopting a variety of technology developments, including artificial intelligence (AI), data analytics, cloud computing, and the internet of things, among others. These technologies enable financial service providers to respond and adapt to changing situations more quickly.
Artificial intelligence (AI) has been a significant addition to the financial services industry, since it has introduced a number of applications, notably in retail banking, such as virtual assistance, client profiling, identity verification, and fraud detection.
The cloud infrastructure also has significant advantages, such as lower costs, improved security, and increased flexibility. Automation is also an important aspect of digital transformation since it enables financial institutions to process the massive volumes of data they generate, allowing them to secure new clients while reducing staff burdens.
Covid’s effect
There has been a strong reliance on technology in recent years, particularly after the onset of the Covid-19 epidemic, and the widespread adoption of computer and communications technology tools.
As a result, financial services have undergone a digital transition, allowing users to obtain access to additional services and products with the touch of a mouse. It has, however, fueled competition among financial services firms to introduce better, more technologically advanced products and services, which has benefited customers.
Customers, on the other hand, face challenges as a result of this digital change, including the possibility of personal data being hacked or exposed.
Conclusion – the impact of digitalization on financial services
However, this digitization has facilitated global financial inclusion, which is a critical enabler of economic growth. The Covid-19 pandemic has had a huge impact on financial inclusion, as some of the steps adopted to stop the virus’s spread have pushed the use of online banking and mobile payments by tiny, remote businesses and people of all ages all over the world. We believe it has come to stay.