Financial analysts predict that the digital banking market will grow by $2trn to an estimated $4trn by 2024. So how do banks turn this to their advantage? Mambu CEO Eugene Danilkis writes

Financial institutions of all sizes are realising the massive opportunities of a digital-first approach in both back-office systems and customer-facing services.

Putting them in place can expand existing lines of business and create new ones, while increasing efficiency in an ever-more complex and costly landscape. So what is driving this change?

In 2017, approximately $16.5bn was invested in financial technology companies as funding groups saw opportunities ballooning in the US and across the world, according to research firm Global Market Insights. That is up from the $3.7bn invested in 2013.

Among the trends driving these increases are banks’ ability to use a digital-first approach to tap into new market segments, the myriad banks already using such strategies and developing best practices, the already proven economics of a digital-first approach, consumer expectations for bank integration into everyday life, and the expanding marketplace of financial technology advisers to help banks make the switch.

Tapping new markets

ABN Amro saw a shift in the market and decided to launch a new business to address an underserved segment: Dutch SMEs.

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It realised that it could not do this with current systems and processes; they were just too slow, expensive and resource-heavy.

Embracing digitisation and an innovative approach, a decision was taken to make the new operation independent, fully digital and cloud-native. Relying solely on cloud-based and cloud-native services from partners and third-party suppliers, New10 was built embracing a composable architecture.

Being able to choose the best services to simply integrate into its architecture allowed New10 to go from concept to launch in just 10 months.

Within six months of launch, New10 signed on more than 2,000 accounts. What is striking is that more than 65% of these are non-ABN Amro customers; this shows that the proposition has been well received by SME entrepreneurs, and that there is a need for this type of digital player in the market.

The digital-first approach can help any bank achieve the goal of introducing new products, features and functionalities quickly. In doing so, they must be agile enough to exceed customer expectations while not causing undue costs or disruption. This allows for better innovation, and creates the opportunity to build new products ahead of customers’ needs.

Digital acceptance

Banks have long worked with financial technology companies, but are now building closer relationships, according to Deloitte’s 2019 Banking and Capital Markets Outlook.

“Last year, we urged banks and capital markets institutions to accelerate their transformation, particularly digital transformation,” the report said. “Many banks have embraced digital transformation across the banking and capital markets value chain.”

The results of a 2015 survey published in Banking Exchange revealed that 47% of bankers see an opportunity to improve customer relationships using digital banking, 44% said it was a way to create a competitive advantage, while 32% said it offers new ways to acquire customers.

As clients increasingly demand a fully digital experience, bank integration into every facet of life ensures that those numbers will only continue to grow.

Seamless integration

The advent and prevalence of smartphones has fundamentally changed the way consumers are expected to interact with their finances. Amazon, Google, Uber, Facebook and many others have set the expectations. For banks, the ability to leverage data and analytics to deliver personalised solutions will be a key differentiator going forward.

Consumers are already deciding which financial institution to use based on their digital banking capabilities. Moreover, word of mouth from friends and family around interesting and surprising experiences is creating incentives for consumers to use the new services more.

A growing number of countries are realising the need to take these innovative platforms seriously. Regulators in the EU and the UK have led the way, but as major institutions like Chase, Citi and Goldman Sachs maximise digital functionality while minimising operating costs, US regulators are being forced to keep up.

Meaningful impact

Though some banks might believe shifting their operations to a cloud-based digital platform is not feasible, the reduced cost of doing business coupled with the opportunities that emerge when a bank expands beyond physical boundaries have convinced many.

According to a McKinsey study, many banks have already successfully created systems that overlay and connect previously disparate business processes and management systems, helping to eliminate manual data entry and reduce errors. At the same time, banks of all sizes have found that digital banking allowed them to reduce their physical footprint while better serving customer needs.

If financial institutions are willing to change their thinking and take a digital approach now, they can benefit from a rapidly growing digital market.