Traditional banking institutions have been slow to adapt to the change that is taking place in the financial services industry. The digital age makes it possible for people to move their money around for free, when they want, and wherever they are. That’s why more and more people are turning to digital banks due to their improved digital banking solutions.
This makes traditional banks rethink their business models and success factors. This article will discuss the lessons traditional banks can learn from digital banks.
Why are traditional banks failing?
Digital banks are making it very difficult for traditional banks to exist. Banks have been facing a lot of challenges.
Traditional banks have been facing issues with high costs, declining revenue, and competition from nimble fintech startups.
Traditional banks are slow to react to change and have huge, complex, and expensive structures. They have large workforces, legacy systems, and massive balance sheets.
Key challenges that traditional banks struggle with
1. Slow digital transformation
Traditional banks are known for having a slow-moving culture. They are far behind their digital counterparts because they cannot transform their ways of doing business. Digital banks have replaced traditional banks as the go-to places for checking and savings accounts.
Traditional banks are still following paper-based processes, even though a paperless environment would be more efficient. Traditional banks cannot compete with digital banks when it comes to the adoption of technology.
2. Impediments of legacy infrastructure
Traditional banks have large, complex, and expensive structures. They have large workforces, legacy systems, and massive balance sheets. These make it difficult for financial institutions to improve their services, change their business models, and adapt to new technologies.
Traditional banks also find it difficult to offer better services and products to their customers as it is not cost-effective to do so.
3. Emergence of new disruptive banking models
Traditional banks face tough competition from newer banking models such as peer-to-peer lending, Oracle digital banking experience, and crowd funding. These models have made banks more accessible and have opened the doors to digital services.
They have also made it more effective for the banks to diversify their funding sources in the form of P2P and crowdfunding.
Traditional banks are also losing customers to online-only banks, as they provide lower fees, more control, and 24/7 online accessibility.
4. Higher operating costs of retail banks
Peer-to-peer lending and crowd funding platforms charge much lower fees and commissions than traditional banks. This has made them an attractive option for retail investors, especially in the current environment of low-interest rates.
Traditional banks have also been facing increasing operating costs. Regulatory compliance, internal restrictions, and confidential data security costs are increasing in nature.
5. Poor customer experience
Face-to-face interaction is considered the gold standard of customer service, but over the last few years, the customer experience in banks has deteriorated.
Outdated technology, long processing time frames, and poor customer service have left banks to face tough competition from alternative banking services.
The rising sales of investment products and the growth of alternative finance platforms have attracted many peer-to-peer investors.
6. Invasion by tech giants in the banking space
Technology has taken over the banking industry. Giant tech companies such as Amazon, Apple, Facebook, Google, and Microsoft are trying to move into the space of banking. These tech companies provide the perfect solutions for alternative finance platforms.
The recent developments in distributed ledgers and alternative finance have made it easier for alternative finance platforms to operate.
7. Strict regulatory standards and policies
Regulatory standards and policies always play a vital role in the success of any banking sector. Traditional financial institutions have always been criticized for not meeting regulatory standards, especially in the case of cross-border transactions.
Since the introduction of blockchain technology, it has become easier to keep a check on the transactions happening on a network. The auditable nature of blockchain ensures transparency and security. Distributed ledger technology has removed the need for third parties and middlemen.
What is a digital bank (or digital-only bank)?
A digital bank is a new kind of Internet bank that primarily targets consumers interested in digital banking. Digital banks are completely operated over the Internet.
You don’t have to visit their physical location to open an account. You can access their services and products via the Internet.
What is attractive about digital-only banks?
1. Providing a frictionless customer experience across channels
Customers can interact with the digital bank in the way that they prefer. They can use their mobile devices or computers to access the bank’s website, app, or other preferred channels. The digital bank provides a consistent experience across channels.
2. Real-time analytics for offering relevant products & services
Digital banks can analyze customers’ behaviors and transaction data in real-time.
They can make better decisions on what products and services to offer and how to communicate them. It leads to a better customer experience and generates more revenue for the bank.
3. Saves time and effort for both customer and banker with smart automation tools
Automation is a great way to save time and effort. Smart tools, like OBDX can achieve this goal by looking at a customer’s spending patterns, behavioral patterns, and even social media profiles to make suggestions for financial planning.
4. Distributed omnichannel presence
Digital banks can do more than brick-and-mortar banks by distributing their omnichannel presence. They offer multiple digital, mobile, and even physical channels instead of just one channel.
This helps digital banks gain customer trust, retain customers, and build a solid brand image.
5. 365/24/7 Customer Service
Digital banks can provide 365/24/7 customer service with digital tools and AI. Some digital banks use the latest AI with customer service assistant bots.
The digital banks’ bots can answer customers’ questions on the website, provide real-time updates on the customer’s account, and even make suggestions on the customer’s finances.
6. Better rates, lower fees
Digital banks can offer better interest rates and lower fees than traditional banks because there is no real estate, labor, or other fixed costs to maintain thousands of branches.
This leaves digital banks with more profit and the ability to offer better interest rates and lower fees to their customers. The low-interest rates and fees are why more and more customers are willing to switch their banks to digital banks.
Traditional banks have a lot to learn from digital banks. As the digital age develops, financial institutions will have to adapt and offer better digital banking solutions. The financial services industry is changing rapidly, and traditional banks need to update their products, services, and business models to remain competitive.