Digitalization banks - opportunities, challenges & solutions

The digital transformation has fundamentally changed the banking landscape. Banks and other financial institutions are facing the challenge of adapting to the new requirements of the digital age in order not to fall behind and remain competitive. This development affects not only the customer experience, but also internal processes and banking supervision.

A recent Bitkom study "Digital Finance 2023" shows in a clear overview that the digital offering of many banks is only given a grade of 3, i.e. "satisfactory", by customers. This underlines the urgent need for action in the "banking industry" to improve digitalized services and meet customer expectations.

The banking sector in upheaval

The digital revolution is not only changing individual processes within a bank, but also the fundamental rules of the banking business.

Three main factors are driving these changes: technology, competition and customers.

Technology

Advances in data processing, broadband networks and smartphones are creating new opportunities for the financial sector. With advanced IT, processes can be automated and costs reduced, while at the same time services can be increasingly tailored to individual customer needs. Digitalization enables banks to offer their services more efficiently and at the same time increase customer satisfaction, at best back to "very good".

Competition

FinTechs are entering the market with innovative, IT-based solutions and presenting traditional banks with new challenges. These young companies are developing efficient solutions for payment transactions, credit brokerage platforms and wealth advisory services that demonstrate the potential of digitalization. This underlines the need for the financial sector to adapt to the new rules of the game and develop innovative digital solutions.

Clientele

Bank customers' expectations have changed. Online banking, mobile apps and digital payment systems are now the general standard in the financial sector. Customers are increasingly accepting and demanding digital banking services such as online banking, video advice and digital loan brokerage. This development shows that customers are increasingly open to and demanding of new technologies. The modern customer lives digitally, shops online and works from home. These habits are also influencing expectations of banks.

Banking and the role of banking supervision

The Bundesbank and other supervisory authorities play a key role in regulating and monitoring the sector. They set guidelines and standards to ensure the stability and integrity of the financial system. They monitor banks to ensure that they implement appropriate risk management practices and comply with legal requirements. At the same time, digital transformation ensures that banks' systems and information are protected against cyberattacks and that the requirements of banking supervision are met.

Options for action in the digital age

Based on everything that has already been discussed in this article, it is crucial for banks to play an active role in shaping the digital transformation. Two key messages are particularly important here, which the Bundesbank also emphasized back in 2016 in a Press release announced analogously:

  • Standing still means going backwards - Banks must act proactively in order not to be left behind. Anyone who hesitates today could be overtaken by innovative competitors tomorrow.
  • Pursuing progressive approaches and looking beyond the horizon - Cooperation with FinTechs and the use of own strengths such as trust and experience offer great opportunities. Strategic alliances, the establishment of own digital platforms or investments in start-ups are sensible approaches that lead back to the "golden age".

The importance of data and finance

Advancing digitalization has also changed the way banks handle data. Data has become a valuable resource that is used to make informed business decisions and offer personalized services. Banks collect and analyze large amounts of data to understand customer behavior, assess risks and identify new business opportunities.

Digitalization from the perspective of banking supervision

Change also brings challenges for supervisors, but also solutions. In view of the banking system's weak earnings due to persistently low interest rates in the "euro currency", digital transformation can open up new business areas and increase profitability. At the same time, a modern IT architecture helps to better manage risks and ensure the stability of the financial system. However, new risks must also be taken into account. The focus is on cyber risks and the protection of IT systems. There is an urgent need to catch up and improve the protection of customer data.

Management and digital transformation in companies

However, it is not just the financial sector alone that can pull the strings with regard to Digitization draw. Management in companies also plays an important role in the successful implementation of the digital transformation. It is important that management recognizes the importance of modern developments and provides appropriate resources, contact and support. Companies must continuously train and educate their employees to ensure they have the necessary digital skills.

The practice of digitalization in banking

Digital platforms should be introduced gradually in order to improve the customer experience and transparency. A fast and lean on-demand basis for process handling is necessary to make banks attractive. Customer interaction should be mapped as an end-to-end process ("straight-through" process) that connects customers, employees and technical systems. Platforms that link customers, employees and technical systems together have been triumphant in recent years.

Regulatory developments and challenges

Digitalization is creating new regulatory challenges. For example, the Digital Operational Resilience Act (DORA) addresses ICT risks at EU level and strengthens digital resilience and cyber security. The regulatory framework is being expanded to monitor cloud providers and critical third-party providers.

The Markets in Crypto-Assets (MiCA) Regulation is a response to the growth of the crypto-asset ecosystem. In future, crypto service providers and issuers will have to manage risks appropriately and apply for authorization. In addition, the Basel Committee on Banking Supervision is working on adjustments to the Basel framework in order to adequately back crypto-asset exposures on bank balance sheets with equity and liquidity.

Technological changes and regulatory adjustments

Banks are increasingly using new technologies such as artificial intelligence (AI), which requires appropriate regulation. The Bundesbank has published a discussion paper that describes key factors and supervisory expectations regarding the use of machine learning.

Effects on the banking business

Digitalization can make the financial system more efficient and user-friendly. It remains to be seen whether digitalization will change the core of the banking business and make traditional intermediaries obsolete. Smart regulation and supervision should make the financial system more stable and promote innovation at the same time.

Challenges for banks and regulators

Banks must adapt quickly to avoid being forced out of business - "back to the future" is the motto here. Regulators must be able to identify new risks at an early stage and take appropriate measures. The exact development is not yet foreseeable, so it is advisable for banks and regulators to remain flexible and learn continuously.

Digitalization of banks - Conclusion

Digitalization offers banks enormous opportunities, but also challenges. Four measures are essential. In the overview:

  1. Developing a digital agenda and strategy - Every bank needs a clear digital agenda and must be able to react flexibly to changes.
  2. Find balance - Existing strengths should be combined with new digital business models.
  3. Emphasize IT security - Awareness of IT security must be raised both internally and among customers.
  4. Modernize IT infrastructure - A modern and secure IT infrastructure is essential.

Understanding and actively shaping the new rules of digitalization is crucial to being successful in the digitalized financial market. The banks that proactively embrace this change will be ahead of the competition. Let's wait and see what the outcome of digitalization in banking will be this year - to return to the beginning of this article.

"The journey is the reward."

Confucius

This is particularly true for the digital transformation in banking. The solutions that Confucius has in his repertoire are just as intelligent as the quote from this famous mastermind. Take Contact to the Konfuzio experts or get your own impression.

Click here for an overview of Konfuzio solutions for industry-specific digitalization projects in the banking sector.

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