After COVID-19, can we expect a new wave of digital transformation in the Financial Sector?

By Karim Parra

Vaccines are finally here! And, with no hesitation, they are the bright light at the end of a tunnel that has kept the world in a state of uncertainty about the future and the sustainability of society as we know it. One of the sectors that has suffered greatly in the pandemic is the financial sector. At the same time, it has been one of the sectors with the most effective response to the crisis, thanks to a strategic partner that has accompanied it in the last decade: technology.

We are going to look at how financial institutions, especially retail banks, have reshaped themselves to survive and stay relevant in the new world created by COVID-19. To do this, we will focus on two of probably the most important aspects: distribution channels and risk management. With distribution channels, we consider more specifically how financial institutions have massively adopted new technologies to maintain the link with their clients, increase their market share and face the entry in the industry of new competitors with natural advantages that challenge the traditional model of the financial sector.

Attracting and retaining clients

Distribution channel is a broad term that contains several crucial parts such as the customer experience, the portfolio of products and services, and the infrastructure deployed by the bank to support its operations. In its report “Remaking banking customer experience in response to coronavirus” published in April 2020, McKinsey & Company highlighted that banks could play an important role in reducing the spread of the virus by allowing their customers to make every kind of transaction through digital media. Actually, reducing face to face interactions was within the industry’s reach well before the paradigm shift of the pandemic pushed them into implementation. One of the main limitations that financial institutions have faced is how complicated is to differentiate products so as to increase market participation and own a larger slice of the pie than competitors without entering into a price war that could rapidly degrade the conditions of the industry. This is why service has been the only way to gain loyalty and recognition from clients in this market of homogenous products.

In the last five years, the financial industry, especially the banking sector, has been very aggressive, making extreme decisions to tackle the technological disruption created by events such as the world-wide massive usage of smart phones, the reduction in costs of internet and the migration of consumers towards virtual channels. Probably one of the most famous examples of this situation is ING Bank that in 2017 announced in its annual report[1] the investment of near 800 million euros in its strategy for digital transformation. The bank’s goal was summarized by the statement made by the CEO of ING Group, Ralph Hamers “We want to be a tech company with a banking license”[2].

Something else that will be common, one might even say mandatory, to a successful growth strategy in the financial industry is partnership with fintech companies[3]. Take the example of ScotiaBank and Kabbage. The bank adopted Kabbage’s new technology that fully digitalized the lending process ScotiaBank was using to expand its operation in Mexico while increasing its presence in the SME segment at the same time. Financial institutions can also collaborate to develop specific products such as Corda, a blockchain technology developed by R3 with direct investment from banks such as Bank of America, UBS and HSBC.

The willingness of financial institutions to make partnerships with “younger” and local companies will probably have a very positive impact on reducing inequality in developing countries, since fintech partnerships makes it easier and more efficient to expand presence in new geographies and segments.[4] One can expect that the accelerated increase in access to financial services will reduce income inequality and poverty rates[5].

COVID will also boost the adoption of cutting-edge technologies and will force the consideration of products that in other times seemed unrealistic, most of which are oriented towards enhancing the customer experience. In this sense, technologies such as augmented reality, smart machines (used for virtual assistants), hybrid cloud and robotic process automation (RPA) will probably be the protagonists of the coming developments that banks will add to their portfolio of services and will be key to empowering the brand management of each institution.

REFERENCES

1. McKinsey & Company, “Remaking banking customer experience in response to coronavirus”. April, 2020. Bensley, Eleanor. Chheda, Shital. Schiff, Robert. Stephens, Daniel. Zhou, Nicole.
2. Vitas Argimon, “The New wave of Partnership Models between Banks and FinTech Startups”. Center for Financial Inclusion. September 2016. https://cfi-blog.org/2016/09/08/the-new-wave-of-partnership-models-between-banks-and-fintech-startups
3. Abdullah Omar, “Does financial inclusion reduce poverty and income inequality in developing countries? A panel data analysis. Journal of Economic Structures. April 2020. https://journalofeconomicstructures.springeropen.com/articles/10.1186/s40008-020-00214-4
4. ING Group Annual Report 2016: Accelerate. March 2017, published in www.ing.com/About-us/Annual-reporting-suite/Annual-Reports-archive.htm
5. ING Group, press release. August 8, 2017. ‘We want to be a tech company with a banking license’ – Ralph Hamers | ING

[1] ING Group Annual Report 2016: Accelerate. March 2017, published in www.ing.com/About-us/Annual-reporting-suite/Annual-Reports-archive.htm

[2] ING Group, press release. August 8, 2017. ‘We want to be a tech company with a banking license’ – Ralph Hamers | ING

[3] It refers to new technologies used in the financial industry to improve the quality of a service, reduce some cost, increase efficiency, etc.

[4] Vitas Argimon, “The New wave of Partnership Models between Banks and FinTech Startups”. Center for Financial Inclusion. September 2016. https://cfi-blog.org/2016/09/08/the-new-wave-of-partnership-models-between-banks-and-fintech-startups

[5]Abdullah Omar, “Does financial inclusion reduce poverty and income inequality in developing countries? A panel data analysis. Journal of Economic Structures. April 2020. https://journalofeconomicstructures.springeropen.com/articles/10.1186/s40008-020-00214-4