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The Changing Landscape Of Retail Banking: Digital Channels And Embedded Financial Services

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As pressures to transform banking operations increase, consumer interest continues to shift from traditional channels to digital engagement, only adding to the urgency for change. The retail banking sector has drastically changed over the last 10 years because of technological improvements and shifting consumer preferences, and it continues to evolve in how it delivers products and services.

Customers looking for banking services no longer only have access to traditional brick-and-mortar facilities. Instead, the new retail banking sector has been shaped by digital channels such as the mobile phone, which provides easy access to banking. Yet, challenges remain to ensure the customer can consume products and services easily.

Digital gives rise to embedded finance

Banks are now facing the new competitive threat of embedded financial services. The market capitalization of organizations engaged in embedded finance globally is expected to reach $7 trillion by 2030, according to various analyst reports.

With embedded financial services, banks that are not present at the consumer’s point of need, are at a disadvantage in the marketplace. It is now not only banks that compete to deliver financial services but also fintech companies and brands that collaborate with banking license holders.

However, as regulators across the globe increasingly turn their attention to the embedded finance sector, banks are in a clear position to lead the market. Banks have the ability to deliver the exact services their customers want, when and where they need them, by leveraging strong balance sheets and expertise in risk management and compliance.

The difficulty of participating in invisible banking

With this combination, financial institutions can compete and succeed, but they must alter their strategy to reflect the preferences of the consumers who will use their goods and services. For example, my 23-year-old daughter believes that all services must be accessible online and cannot comprehend why she would ever need to enter a bank premises.[AS1] 

The challenge is how to stay relevant while leveraging the years of expertise and trust that they have built up while servicing customers through more traditional channels.

“One fundamental change that stands out as the biggest game-changer in customer dynamics is the necessity for businesses to be there when customers need them. The way customers interact with different businesses has changed because of this paradigm shift.”

For example, the traditional need for credit cards is dropping. Many millennials are now purchasing through Buy Now, Pay Later solutions. There are advantages to this model for banks as well, including increased security through digital transactions.

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To remain relevant, banks must provide a streamlined digital experience for their clients. Customer experience, goods, offers, data integration, flexibility, and sales all benefit. Understanding digital consumer behavior while migrating to digital services is critical for the digital transformation of banks.

Balancing legacy technology with innovation

The financial services industry is known for its use of legacy technology. Larger banks usually use outdated technology stacks with many basic functions, as well as disjointed front- and back-office systems or product silos. Such silos also result in data duplication as employees waste time rekeying information repeatedly. These banks find it difficult to compete with neobanks and fintechs, whose agility enables them to quickly create competitive products and draw in new clients.

A digital transformation program is necessary to create and launch new products and services to market quickly to reach ever changing customer demands, including the need to provide embedded finance by collaborating across the ecosystem.

The fintechs, brands, and marketplaces that want to embed financial products typically want to own the user experience and need modern APIs to interact with. This can be a challenge for banks to provide on the scale required with legacy technology.

Combined with the need to provide instant decision-making and compliance checks such as KYC (Know Your Client), increasingly using Artificial Intelligence (AI), which is explainable in terms of outcome, CTOs face the challenge of how to support this new business model.

Business line leaders in banks invest in moving quickly to capture this rapidly evolving market, while their CTOs manage legacy technology that’s not designed for volume spikes caused by seasonal shopping trends. As consumers increasingly use embedded finance to support their lifestyles, the industry will experience demand at ever-increasing volumes. This is where Software-as-a-Service (SaaS) can support banks not only at scale, but also in their need to innovate at speed.

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Digitally augmenting your customer experience to the next level

It’s important to think not just about digital channels but also about a digitally augmented customer experience. As a customer deals with various moments in life, the bank must be ready with personalized products and services to help them achieve their goals.

Open banking means more data, and the cloud means more computing power. Together, they provide the foundation for mass personalization driven by explainable AI. Automating decisions and processing must happen for financial services to be embedded at the customer’s point of need. Let’s face it, any friction typically means they are finding an alternative to the problem.

Driving digital transformation to succeed

Consumer behavior changes are driving the digital transformation of retail banking. Banks are in a unique position to succeed and lead the market by utilizing their balance sheets and risk and compliance expertise to deliver the service that customers want, where and when they want it.

In recent years, much momentum has come from the fintech sector, but as regulators increasingly focus on the embedded finance sector, this is changing.

The efficiency of the entire process must be considered, not just the application process. Customers expect instant delivery of their requirements and financial services. Responding within 24 hours with a decision is no longer competitive.

Technology deployment necessitates a fresh future perspective. The fundamentals for success are obvious as the industry continues to migrate to cloud and SaaS implementations. It is no longer an option to be left behind. The industry’s size and global scale redefine how products and services are supplied at the point of customer demand. To meet market demands, banks must embrace and use innovative technology to digitally adapt to keep up with the ever-changing marketplace. 

By: Andrew Steadman – Senior Product Director, Retail Banking, Temenos
Originally published at: Temenos

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