Technologies, Trends, and Strategies Driving the Future of Digital Transformation in Banking

4 Trends Driving Digital Transformation in Banking and Financial Services

Evolving customer expectations, the rise of open banking, increasing fraud and security risks, and the rapidly shifting regulatory landscape are the primary reasons why digital banking is the future. Moreover, those are the most significant drivers behind digital transformation banks should consider.

Customer expectations become more exigent

Between 2019 and 2023, average banking customer satisfaction scores dropped by 6% in the U.S. retail banking sector. Client service remains the most challenging part of the customer journey, ranking the lowest on satisfaction.

As for digital experiences, 62% of financial services customers worldwide say they’d switch their provider if they felt treated like a number. On top of that, 53% would do the same if services felt impersonal.

Satisfying customers’ desire for personalization pays off, making this approach the future of digital banking. Unique experiences lead to a 40% higher revenue growth, lower customer acquisition costs, and a 10-30% increase in marketing ROI.

Open banking is poised to be the new standard

The value of open banking transactions is expected to skyrocket from $57 billion in 2023 to $330 billion in 2027, representing a gross growth rate of over 500%. Powered by data sharing via secure APIs – as authorized by customers – regulations are the most crucial driving force of open banking.

In the European Union, most notably, the Payment Services Directive (PSD2) is responsible for that. It mandates banks to enable their customers to share their financial information with other businesses. Open banking is also in the crosshairs of regulators in the UK and the United States.

Fraud and security risks are on the rise

Keeping up with emerging financial crime threats is the second most pressing long-term challenge for financial institutions worldwide, right after ensuring compliance. Critical financial crime threats include real-time payment fraud (52%), money mule activity (47%), terrorism financing (33%), drug trafficking (33%), and government benefit fraud (32%).

Cybersecurity threats are also on the rise. According to the IMF, the number of malicious incidents suffered by financial firms passed 10,000 in 2022. Over the past 20 years, cyberattacks cost the financial sector $12 billion in losses, with banks representing the number one target in the industry.

Handling new fraud schemes and protecting IT systems against cyberattacks requires modernized legacy systems and robust cybersecurity practices. Advanced data analytics, in turn, can analyze big data in real time. It flags suspicious activity and anomalies for further review, mitigating the risk of fraud.

Regulatory landscape is changing at a rapid pace

As financial services are a highly regulated industry, banks should navigate frequent changes in the legal requirements. This way, they minimize compliance risks, mainly when operating in multiple jurisdictions.

Digital transformation, when applied to risk and compliance functions, reduces costs. It turns the function from a cost center to a revenue generator. The use of data makes it possible to assess risks more accurately and streamline compliance with automation and data-driven insights. Besides, it increases mitigation efforts’ efficiency.

For example, 63% of U.S. banks’ risk experts and 81% of compliance professionals name improving data quality a critical priority in risk and compliance technology.

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Challenges and Opportunities of Digital Transformation in Banking and Financial Services

Banks recognize the importance of digital transformation: 67% agree that digital transformation is crucial for survival. Moreover, 89% of executives state that it can deliver the highest revenue growth.

Even though digital transformation opens to multiple growth opportunities, it’s not without its challenges. Many of them lead to overrun budgets and timelines and failed initiatives.

Challenges of implementing digital transformation in the banking industry

Outdated and overly complex technology estate, data silos and integration issues, data security and privacy risks, and regulatory requirements are the most pressing digital transformation challenges in banking to watch out for.

Legacy systems and complex IT infrastructure

An average universal bank’s applications are 14 years old – as opposed to 3 years for an average digital bank. Legacy systems are notoriously costly to upkeep, update, and integrate due to the lack of agility and talent.

In fact, legacy technology is projected to cost banks $57.1 billion by 2028. Over a third of banks (40%) admit legacy tech is a critical pain point hindering their digital transformation efforts.

Conventional banks struggle to integrate digital technologies into their legacy systems and complex IT infrastructure. These systems can be outdated, fragmented, and not designed to support new banking technology innovations. Overcoming this challenge requires careful planning, modernization of systems, and integration strategies that ensure compatibility and scalability.

Data silos and integration

Since conventional banks usually have several data sources and silos, getting a complete picture of consumer data can be difficult. A data silo is a collection of data maintained by one group within an organization that is not readily available to other groups or departments in the same organization.

Data silos are among the most significant barriers to innovation: 54% of financial institutions cite them above all others, including a lack of buy-in and budget constraints. Therefore, improving access to siloed data is among the top data priorities for 62% of surveyed executives.

Integrating data from disparate sources and ensuring data consistency and accuracy can be a significant challenge. Effective data management and integration strategies are essential for leveraging the full potential of future banking technology.

Data security and privacy

Consumer privacy and data security become increasingly important as banks employ digital technologies. Customers are almost unanimous that transparency over data use and sharing is crucial. Over three-fourths of Salesforce survey respondents value data access controls and the ability to opt out of data sharing, review data shared, and control how organizations use it. However, only 58% of consumers are confident their financial service provider protects them against cyber threats.

Protecting sensitive financial information, preventing data breaches, and complying with data protection regulations present ongoing challenges. Banks must implement robust cybersecurity measures, adopt encryption techniques, and maintain compliance with regulatory standards to build customer trust.

Regulatory compliance

The banking industry is heavily regulated, and digital transformation adds another layer of complexity to regulatory compliance. Banks must navigate regulations related to data protection, anti-money laundering (AML), know-your-customer (KYC), and consumer protection. Ensuring compliance while delivering innovative digital services requires a thorough understanding of regulatory requirements and proactive compliance measures.

Some upcoming regulations are poised to accelerate digital transformation. The CFPB is expected to facilitate open banking in the United States with new laws in 2024. In the European Union, on the other hand, the DORA will become applicable in January 2025, outlining obligations for banks to manage first- and third-party ICT risks.

Opportunities presented by digital transformation for banks

Thanks to the convergence of banks and technology, organizations provide superior customer experiences, maximize operational efficiency, gain new revenue streams, and enhance risk management. 

Enhanced customer engagement

Bank digital transformation allows them to engage customers in new and meaningful ways, making improved client experience a fundamental impact of digital transformation in banking. Banks can build stronger customer relationships through personalization, self-service options, and omnichannel interactions. They can also leverage data analytics, AI, and ML to offer tailored recommendations, targeted promotions, and proactive customer support, increasing customer satisfaction and loyalty.

The quality of digital experiences directly impacts consumers’ banking choices. The absolute majority of consumers — 91% — say digital capabilities are significant in their choice of bank. Furthermore, three-fourths will switch banks if a rival offers better digital services and experiences.

Operational efficiency

Digital bank transformation streamlines operations, automates manual processes, and reduces operational costs. By eliminating paperwork, reducing manual errors, and improving process efficiency, banks optimize resource allocation, reduce operational expenses, and improve profitability. Automation, digital workflows, and data-driven decision-making contribute to operational efficiency.

Half of banks and credit unions with automation (52%) report saving at least $100,000 a year thanks to the technology. A fifth of respondents estimated their cost savings from automation above $250,000 annually. McKinsey’s survey, in turn, put the median cost savings from digital transformation at 25%.

New revenue streams

Digital transformation in banking opens doors to new revenue streams for financial institutions. Banks can expand their product offerings and tap into new market segments by collaborating with fintech startups, leveraging open banking APIs, and offering platform-based services. Additionally, innovative partnerships and collaborations enable banks to monetize their data, explore new service models, and create additional revenue streams beyond traditional banking products.

Fintech partnerships, deemed a driver of growth by 70% of banks, typically focus on creating new products and services. It’s the number one objective behind fintech partnerships as of 2024. Another survey by McKinsey puts the median expected revenue increase realized by digital transformation at 31%. 

Improved risk management

Digital banking transformation allows financial institutions to enhance risk management practices. Banks can detect and mitigate fraud more effectively by leveraging advanced analytics, AI, and ML, accurately assessing credit risk, and identifying real-time anomalies. It enables proactive risk management, strengthens compliance with regulatory requirements, and reduces financial and reputational risks.

Overcoming the challenges through strategic planning, technology adoption, and organizational efficiency will help banks maximize the opportunities digital transformation presents.

As for combating financial crime, financial organizations are already employing technologies like intelligent document processing (62%), natural language processing (50%), and robotic process automation (44%). However, 70% of organizations plan to increase their investment in artificial intelligence (AI) and machine learning (ML) to strengthen financial crime prevention efforts.

Technologies Driving Digital Transformation in Banks

Technological advances in the banking industry  revolutionize financial products and services, and several key technologies are driving banks’ digital transformation, enabling them to enhance customer experiences, streamline operations, and embrace innovative solutions. Let’s look closer at some of them.

Artificial intelligence and machine learning

Artificial Intelligence (AI) and Machine Learning (ML) technologies revolutionize the banking industry. AI-powered chatbots provide real-time customer support, while ML algorithms analyze vast amounts of data to detect fraud, assess creditworthiness, and deliver personalized recommendations.

Artificial intelligence is also used to manage, analyze and protect data, and provide better consumer experience. For instance, AI quickly evaluates customer data, spotting repeating trends. With machine learning, it is easier to identify changes in user behavior and take prompt preventive action.

Feel free to explore AI use cases in banking and finance in our respective guides.

Cloud computing

Cloud computing is one of the most common technologies banks and the financial sector use. It enables banks to securely store and process large volumes of data, providing scalability and flexibility. Improved operations, increased productivity, and immediate product and service delivery are all benefits of cloud-driven services. Cloud computing also facilitates remote access to banking services, enhances collaboration, and accelerates deploying new applications and services.

Blockchain

Blockchain adoption in the financial industry has led to safer data transfers, more precision, and improved user interfaces. This technology helps to enhance the simplicity and transparency of banking transactions. Blockchain offers robust security and efficiency in banking operations. It enables secure and traceable transactions, simplifies cross-border payments, and streamlines complex processes such as Know Your Customer (KYC) verification and trade finance.

Internet of Things

The Internet of Things (IoT) allows banks to connect devices and gather real-time data, enabling personalized experiences and efficient monitoring of assets. IoT applications in banking include smart ATMs, wearables for contactless payments, and connected devices for fraud detection. With IoT and its smart device connectivity, customers can quickly and easily make contactless payments. Risk management, authorization procedures, and access to numerous platforms introduced by IoT have entirely changed the financial environment.

Robotic Process Automation

Robotic Process Automation (RPA) automates repetitive and rule-based tasks, allowing employees to concentrate on higher-value activities. RPA improves operational efficiency, reduces errors, and enhances the speed and accuracy of back-office processes. It is used in customer support to address customer complaints, follow compliance regulations, and prevent fraud. Employing RPA as part of digital transformation in banking allows organizations to lower error rates and save costs.

7 Digital Banking Strategies to Follow 

When designing a digital strategy in financial services, consider these seven approaches to transforming your processes and offerings.

Customer centricity

Client expectations include seamless omnichannel experiences, a high level of personalization, and frictionless digital processes. However, understanding your customers’ specific needs and crucial pain points before designing a digital banking strategy is paramount.

Armed with that knowledge, implement data analytics solutions to personalize recommendations, predict and prevent churn, and power micro-segmentation to improve marketing ROI. Automation solutions for back-office processes will remove some of the pain points related to operational inefficiencies.

Fintech partnerships

Partnerships with your fintech counterparts are a path to securing a strategic advantage. Banks use this approach to implement cutting-edge technology faster and save custom development costs.

Here are the four main types of fintech partnerships:

• Distribution: Reach new customers with embedded finance solutions.
• Products: Improve customer experience and expand the range of products and services.
• Platforms: Modernize core banking systems and accelerate their development and updates.
• Operations: Streamline internal processes and workflows, improve data sharing, and implement automation.

Data-driven decision-making

You need data to understand your customers, power personalization at scale, and identify inefficiencies. Also, it can assist you in predicting churn and even tracking your digital banking strategy success. 

So, if your infrastructure is still disparate and overly complex, ramp up your data maturity before leveraging other types of digital innovation in the banking sector. That means ensuring a seamless, secure data flow between systems with a centralized data warehouse and API integrations.

Ramping up data maturity also requires a cultural shift toward data-driven decision-making. Ensure your teams can access all the insights needed for making informed, bias-free decisions powered by visualization. Also, consider implementing GenAI chat-your-data solutions to democratize business intelligence access.

Data protection

Robust data security and privacy practices are a must for building trust, mitigating compliance, and overcoming reputational risks. Whether you introduce open banking integrations or a new banking CRM, check if your organization complies with privacy (e.g., GDPR, CCPA), cybersecurity (e.g., DORA), and industry-specific regulations (e.g., KYC, AML requirements).

As threats and regulations evolve, your data security and privacy efforts should, too. Stay informed on the latest developments in both regards. Consider enhancing your cybersecurity efforts with AI/ML solutions and invest heavily in your technology estate’s security and cybersecurity talent.

Cultural shift

A culture of innovation and collaboration can significantly improve your competitive edge against fintechs and neobanks. To achieve that, adopt the agile mindset that prioritizes experimentation in short sprints and a collaborative culture.

Besides, senior management might need to change their perspective on fintech companies. Instead of seeing them as competitors, they should view fintechs as potential partners who can bring added value to the business.

Employee experience

Employee training and change management are often overlooked in the banking digital transformation roadmap. Nonetheless, they are crucial for maximizing the transformation’s impact. Ensure your employees are well-equipped to make the most out of new tools. Moreover, they should be on the same page regarding the drivers and benefits of your digital transformation efforts.

Seek frontline employees’ input on your digital banking initiatives to identify the inefficiencies that would otherwise go overlooked. Besides getting a fuller picture of improvement areas, involving employees in digital transformation will secure their buy-in.

Process automation

Automating repetitive manual tasks from operations is key to improving customer and employee experiences and operational efficiency. However, it often requires redesigning workflows and processes from the ground up. As for the most notable technologies, robotic process automation and AI-powered intelligent automation are the two golden standards for eliminating manual efforts. 

6 Future Banking Technology Trends

Transformation is no longer a luxury but a need for banks to be competitive and relevant in today’s changing digital market. Financial organizations that don’t adopt emerging technologies risk falling behind. Let’s look at some digitalization trends that will drive the industry in the foreseeable future.

Enhanced customer experience through AI technologies

Banks will focus on delivering exceptional customer experience by leveraging AI technologies, making them a cornerstone of the future of banking technology. Insider Intelligence states AI technologies can save banks around $447 billion if deployed correctly. AI-powered virtual assistants, chatbots, and personalized recommendations will become more prevalent, providing customers with tailored solutions and support.

Closer ties between traditional banks and FinTech companies 

The global open banking market amounted to $21.3 billion in 2022 and is expected to reach $67.8 billion by 2028, growing at a CAGR of 21.29% from 2022 to 2028. Open banking initiatives will increase collaboration between traditional and fintech companies to power digital transformation in banking. Open APIs will enable seamless integration of third-party services, allowing customers to access a broader range of financial products and services within their digital banking platforms.

The rise of biometric authentication

The global market for banking and financial services biometrics is expected to be worth $15.2 billion by 2030, expanding at a CAGR of 14.4% from 2023 to 2030. It implies that biometric authentication methods, such as fingerprint or facial recognition, will become more widespread, providing secure and convenient access to digital banking services. These technologies offer enhanced security and eliminate the need for passwords or PINs.

Expanded use of blockchain

The use of blockchain technology in the financial sector is anticipated to advance over the coming years, with a market value of about $22.5 billion predicted for 2026. Blockchain technology will continue to disrupt the financial industry, enabling secure and transparent transactions. Banks will explore integrating blockchain-based solutions for cross-border payments, identity verification, and smart contracts.

Emphasis on data privacy

More than 60 countries worldwide have introduced privacy or data protection regulations since the General Data Protection Regulation (GDPR) was launched in 2018. With the increasing reliance on customer data, banks will prioritize data privacy and compliance with stringent regulations. Stricter security measures, transparency, and customer consent mechanisms will be implemented to protect sensitive information.

Operating like tech companies

McKinsey claims banks will operate as tech companies to provide a market-leading value proposition. Leaders in the banking industry should act promptly to benefit from digital transformation. Data analytics, a cutting-edge technology stack, and an agile operating model are three critical capabilities banks will need to focus on proactively to stay relevant with the evolving technology.

Consider Inoxoft Your Trusted Partner in Banking Digital Transformation

Inoxoft is an international software development company and certified partner specializing in custom fintech software development services. We are skilled at building efficient digital banking solutions, from trading and loan and credit management systems to online and mobile banking and banking CRM solutions. We’re ready to leverage advanced digital banking features like AI-powered financial advice, real-time fraud detection, and instant P2P payments.

Our experts excel at putting creative concepts into practice. Our products will boost client satisfaction, streamline processes, and guarantee security as you expand.

With Inoxoft as a trusted partner equipped with expertise in digital banking projects and a track record of solving challenges with practical solutions, you can confidently embrace the benefits of digitalization in banking. Also, we pay special attention to security and implement stringent measures to safeguard your digital banking solutions. Let’s check out our success cases.

Trading Automatization Platform

A British group of stock traders approached us to create an app that uses algorithms to optimize data to automate tedious activities. The client wanted to rid traders of hours upon hours of tedious manual work. They searched and structured exchange rates and managed complex calculations by automating data optimization.

As a company specializing in trading software development services, we ar Inoxoft developed a web application that eliminated manual labor. It produced automatic spreadsheets with data on the best exchange rates and compiled all created orders for profitable purchases following a predetermined financial plan.

As a result of our collaboration, our client has brought order generation time to 30 seconds. Our solution automated workflows like constant recurrent calculations for currency pairs and enabled seamless cross-service communication to speed up this process.

Integrating Online Payment Services with CBS

Inoxoft is a pioneer in enterprise software integration for companies of all sizes with online payment systems. To speed up the processes involved in financial transactions, we adapt “PayPal-like” online payment systems to your company’s needs. By upgrading and updating your business, we add value to it.

A US-based fintech company reached out to us intending to improve the efficiency of its transaction processing and finance tracking. We helped our client achieve this goal by integrating an online payment system with its custom business software.

Our online payment solution improved user experience and finance tracking and reduced transaction costs for secure one-off, recurring, and subscription payments. It enabled instant cross-country payment processing while maintaining EMV security protocol compliance.

As all transactions are now processed directly within the payment system, our client reduced its reliance on manual interventions, streamlining processes and improving operational efficiency. 

Conclusion

Banks need to go digital to keep up with customers. This means dealing with challenges like outdated systems, data security, and new rules. But it also offers huge opportunities to improve customer service, enhance operations, and find new ways to make money.  Technology like AI, cloud computing, and automation can help banks transform.

Ready to join the ranks of the banks with the best technology solutions? Inoxoft is here to secure that spot for you. Our expertise in integration, modernization, and development is at your service whether you need a mobile banking solution, CRM integration, or business process automation system.

Contact us to discuss your bank’s digital transformation journey and get an estimate.