Trends in Technology

Can Banks Stop the Digital Technology Surge?

February 10, 2022 by Bobby J Davidson

Noticed that more and more online businesses today have started to accept Bitcoin as payment? If you have, then you would be aware of the fact the digital technology surge—including the rise of Bitcoin as a payment method, poses a real threat to traditional banks. What is the threat posed by technology to the banks and can they stop the digital technology surge? Let’s find out!

Technology has led to unprecedented change—with the internet and smart phones revolutionizing the banking landscape. As a result, banks are in a conundrum today and soon, the entire baking value chain will be impacted. Technology has diminished the barriers to market entry—making competition tough for banks that would previously have no problems fending off competitions while dealing with regulation at the same time. The marketplace has changed considerably over the past decade or so and the banks are ill-equipped to deal with these changes.

Why Banks Resist Digital Transformation

While they acknowledge the need for it and have even exhibited a keen understanding of the digital landscape, banks are yet to embrace digital transformation wholeheartedly. There are 101 reasons for the banking industry’s hesitation to move towards digital transformation.  Often exacerbated by past mergers & acquisitions activity and a subsequent failure to assimilate, several complex intertwined processes have grown naturally within the back office. At the same time, acting as an inhibitor of business change and agility, the existing technology is a massive cost burden.

The above has led to a situation where an average of over 70% of all IT budget of banks goes towards keeping the existing systems ‘operational’—leaving little behind for the digital transformation of the banking operations.

The Need for Change

Banks have been resistant to digital transformation till now but this will have to change soon and there’s good reason for it. Today, a variety of tech-savvy rivals are posing unprecedented competitive threats to banks—including established banking brands. While the industry has managed to fend off such threats in the past, it won’t be able to do that anymore. Many of the protections that banks had in the past are no longer valid.

Today, a variety of online and mobile channels can be used for facilitating customer acquisition, servicing and retention. Additionally, recent scandals and failures have tarnished the reputation of the banking industry somewhat. No longer do customers trust banks blindly or like they did in the past. The problem for the banks is further exacerbated by technology giants such as Google and Apple that offers financial services to people. Today, Apple, Google and other-technology based companies have access to the customers of traditional banks thanks to the payment innovations brought forth by non-banks that enhance the customer experience.

With the growth of cashless payments via smart phones and computers, banks can no longer use ATM and other basic technology-driven banking services to differentiate themselves from the competition. It is no secret that new digital technologies will drive the business model as banking becomes more mobile and virtual.

The ability to create a virtual, lean, efficient banking organization that does not have the same problems as the more established names is what these technologies provide new entrants with. With this, scalability and flexibility is enhanced—simplifying products launches and enhancements.

The Banking Industry Faces a Major Threat from Technology Giants

Since they provide easy-to-use applications that have impact almost every aspect of traditional banking, fintech companies are the primary ‘technological’ threat that the banking industry has been focusing on. By combining digital technology with advanced analytics, fintech companies have provisioned advanced banking technology but they’ve had problems achieving scale—forcing them to ultimately partner with the traditional banks. This is probably the biggest reason technology giants and not fintech companies are the biggest threat to the banking industry.

Today, technology-based companies such as Google, Apple, Amazon, and Facebook are giving increased competition to traditional banks. By carrying out more core functions, technology giants are undermining the value proposition of banks and insurers—even at a time when these institutions are putting increase competitive pressure on the technology firms.

There are three capabilities that the technology based companies are using to differentiate themselves from the financial institutions: advanced analytics, customer-facing artificial intelligence (AI), and cloud computing. Compared to the banking organizations, technology firms such as Google, Apple, Amazon, Facebook are far more proficient at these capabilities. And, this is a major reason many banking institutions are partnering or trying to partner with the technology giants for the provision of some core functions. An example of this is the countless financial services provided by Amazon AWS to organizations such as Capital One, American Express, NASDAQ, Stripe and Bankinter.

Bitcoin and Other Cryptocurrencies are Another Potential Threat for Banks

Off late, there has been increased interest in Blockchain—the distributed ledger technology serving as the basis for cryptocurrency. Recently, one of the cryptocurrencies enabled by blockchain reached $10,000 valuation and this is expected to increase over the next year or so. The blockchain and cryptocurrencies are a real threat to banks as they have an intrinsic value and are not regulated by any government.

The appeal of the blockchain and bitcoin is too good of an opportunity for most people to pass on and this includes the customers of traditional banks. More bitcoin and blockchain companies are expected to emerge in the near future and if the banking industry does not take measures to counter this threat, then it won’t be long before banks become a thing of the past.

A digital technology surge is threatening to make banks irrelevant in the future and if the banking industry does not do something quick to deal with this threat, this may well happen.

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