Online-only challenger banks such as Monzo and Starling have revolutionised the financial services landscape in the UK. (Photo by Adrian Dennis/AFP via Getty Images)

The rise of technology has been a game changer for all industries, but for financial services the disruption has been particularly notable. However, the outbreak of the Covid-19 pandemic highlighted that a reliance on technology – for both customers and staff – only served to emphasise the importance of digitalisation.

Indeed, digital transformation became a top priority for asset managers amid the pandemic, according to the ‘2020 Digital Readiness Survey‘ from consulting firm Alpha FMC. The survey, which was conducted among 40 international asset managers, found that many of them were ahead of the game when it comes to digital transformation, however, as “almost two-thirds (60%) of firms have already mobilised some form of digital transformation effort across their business”.

The survey also revealed that 79% of the global asset managers who participated in the survey see digital transformation as a top or high priority area, up from 64% the year before. Moreover, 55% of respondents predicted that there is going to be an increase in their digital budgets over the next year.

The pandemic has accelerated the digital transformation of many financial services companies, with digitalisation and technology coming together to revolutionise their operations. Indeed, the survey found that increased client expectation was the key driver for digitisation across the asset management industry, followed by sales, new technologies, reducing costs, competition, pressure on fees and revenues, and regulation.

The journey to digitalisation

According to a glossary produced by global research and advisory firm Gartner, digitalisation is “the use of digital technologies to change a business model and provide new revenue and value-producing opportunities; it is the process of moving to a digital business”.

With regards to financial services, digitalisation has altered the business model of several organisations operating across all aspects of the industry. At the same time, many new players, most notably fintech start-ups, have managed to crack the financial services market and disrupt the traditional financial players.

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As the industry is going through a long journey of digital transformation, there are several trends and innovations to observe.

The shift to online and mobile banking

The popularity of digital banking has been growing since the turn of the century. Its popularity was largely concentrated on younger, tech-savvy customers, but the outbreak of the Covid-19 pandemic has accelerated its use among people of all ages around the world. This is largely because visits to bricks-and-mortar bank branches have not been an option during lockdowns, while phone banking services were often overwhelmed with customers and understaffed.

As a result, digital payments have emerged as the safest, quickest and most convenient option for financial services, as transactions can be carried out in a short time on a laptop or a mobile phone with no hygiene risks.

Indeed, data from Fidelity National Information Services shows that there was an increase of 200% in new mobile banking registrations in April in the US, while mobile traffic rose by 85%.

The shift towards mobile and online banking may have accelerated in the early months of the pandemic, but digital transactions have been growing in popularity over the past few years alongside a steady decline in the usage of ATM withdrawals.

On top of that, according to a study by consumer rights magazine Which?, 34% of UK bank branches closed down in the period from January 2015 to August 2019. This amounts to 3,303 closures, leaving only 6,549 branches open in August 2019.

The shift from traditional banks to challengers

Apart from moving more towards online and mobile banking services provided by their traditional lenders, customers have been increasingly using online and mobile-only banks over the past few years.

Indeed, a 2019 report from management consultancy A.T. Kearney found that 21% of UK consumers considered their primary banking relation to be with a challenger bank; this figure rose to 32% among millennials.

Among the most successful challenger banks in the UK are Monzo, Revolut and Starling. A key difference between challenger banks and traditional lenders is that the former don’t have physical branches (with the exemption of Metro Bank), in a bid to keep costs low and provide better deals for their customers.

The A.T. Kearney report also looked at the reasons why customers move from traditional lenders to challenger banks, and found ease of use, ease of account opening and an attractive use of technology to be key factors.

A 2017 report from data management platform Relay42 found that customers tend to opt for an online or mobile bank because of the better online experience and functionality they offer, as well as more attractive rates or fees and a better quality of services.

Additionally, a report on digital banking from GlobalData states: “Artificial intelligence [AI]-powered money management helps digital banks such as 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 notifications on order progress.”

Fintech’s big role

Fintech, an abbreviation of financial technology, is one of the key indicators of digital transformation within financial services.

Fintech is changing the financial services market as it offers a number of technological tools, including spending tracking, chatbots for customer service as well as budgeting tools, which create a better user experience for customers. As a result, innovation, technology and start-ups operating within financial services are among the drivers boosting digitalisation in this market.

The rapid change that fintech is bringing to financial services is causing traditional lenders to take drastic action in order to catch up and rethink the products and services that they are offering. It is becoming increasingly common for traditional lenders to partner with fintech companies to offer customers faster and cheaper services.

The rise of the robo advisors

Another product that is transforming a rapidly changing banking world is the robo advisor.

These digital platforms provide financial advice as well as investment management, which is based on algorithms designed by portfolio managers. Robo advisors automate the process of investing, with little-to-zero human supervision.

Among the services that robo advisors offer are account set-ups, customer services, account services, portfolio management and goal planning. These tend to be done for a low fee. Robo advisors also invest the assets of their clients automatically after gathering information about them and their financial circumstances and goals.

The robo advisor market looks set to keep growing. Indeed, there are expectations that the US robo advisor industry will reach $1trn in value over the course of 2020, according to data gathered by InsideBitcoins, representing a 40% year-on-year increase.

Blockchain’s impact

Blockchain is seen as another piece of technology that is boosting the shift to digitalisation in finance. Blockchain is the technology used by cryptocurrencies such as Bitcoin.

“The original purpose of blockchain technology was to enable the transfer of value within trustless networks; where the different parties did not have to trust each other to conduct transactions involving the exchange of value,” says a GlobalData report on blockchain in banking.

Because of blockchain, financial or real assets are now represented in digital form, which alters the way customers approach money, invest their wealth and trade on markets. This technology offers the opportunity to identify, record and store assets in a database where they are held as digital tokens.

The GlobalData report also states, however, that “beyond the world of cryptocurrencies, trust remains important to most commercial relationships. Most commercial blockchains will reject the wholly trustless model promoted by the cryptocurrency platforms in place of permissioned platforms where participants are vetted and approved before they can join the network”.

Technologies behind the transformation

Financial services are embracing a number of technological advancements in their journey towards digital transformation, including AI, data analytics, cloud computing and the internet of things, among others. These technologies are allowing financial services providers to react and adapt faster to changing environments.

AI has been a particularly important addition to the financial services world, as it has introduced a number of applications, especially in retail banking, such as virtual assistance, customer profiling, identity verification and fraud detection.

The cloud infrastructure also brings key benefits, as it permits lower costs, enhanced security and extra flexibility. Automation is also a key part of the digital transformation, as it helps financial companies to process the large amounts of data that they are generating, allowing them to secure new clients while lowering workloads for staff.

The Covid effect

Over the past few years, but especially since the outbreak of Covid-19 pandemic, there has been a great reliance on technology amid the extensive adoption of information and communications technology tools.

This has led to the digital transformation of financial services, which has offered customers the opportunity to gain access to more services and products at a click of a button. However, it has also driven competition among financial services providers to launch newer and more technologically advanced products and services, something that has worked to the benefit of customers.

However, the advancements brought by this digital transformation also bring challenges for customers, including the risk of personal data being hacked or leaked.

Importantly, however, this digitisation has encouraged financial inclusion across the globe, which is a key enabler for economic growth. The Covid-19 pandemic has had a significant impact on financial inclusion, as some of the measures taken to combat the spread of the virus have encouraged the use of online banking and mobile payments among smaller, more remote companies and people of all ages across the world.