Challenges and Opportunities for Banks in Digital Transformation

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All sectors continue to make a rapid transition into the digital age. In fact, many industries today have even started offering services in a fully digital world. The banking sector is one of the sectors most affected by the advancement of the digital age. The increasing use of fast internet and smartphones is leading to higher demands and expectations from bank customers. Technology makes banking transactions more convenient.

Digital transformation offers customers a more efficient, cost-effective and perfect system in all industries in which it exists. In addition, with the emergence of innovative approaches after the 2008 global economic crisis, the demand for customer-oriented products and services among banks increased.

This is why financial technology companies and big tech companies have started competing with banks in recent years. While banks have gained significant advantages through digital technologies, they have sometimes even encountered significant difficulties.

The importance of digitalization in the banking sector

The digitalization trend is still on the rise today. Digitalization, which makes consumers’ lives easier and offers many advantages in transactions, is also being used extensively in the banking sector. While the digital technologies developed in banking contribute to the development of banks, they are also at a strategic point when it comes to protecting their commercial assets.

While banks gain a competitive advantage through the time they invest in digital technologies, they can offer services to consumers at a lower cost. Digital transformation in banking around the world began with the internet and today the transformation continues through mobile applications.

In addition, digital transformation enables financial technology companies and large technology companies to achieve higher numbers. As a result, compared to the past, hardly anyone prefers to do their banking in a branch. Since everyone wants to bank via the Internet and especially mobile applications, the banking system can be further developed by focusing on technologies that bring advantages on these platforms.

The importance of financial technologies in the transition to digital banking

In fact, the digitalization of the world goes back much earlier, beginning in 1960 with the Third Industrial Revolution. During this time, electronics and information technologies, i.e. computers, began to be used in production and service. While the term Industry 4.0 emerged in 2011, steps were taken to transition into a truly digital era. In these steps;

- Internet of Things (IoT), which allows more data to be obtained through Internet connections between objects.
- Cyber-physical systems that connect the physical world with the Internet world

Studies on the virtual world and virtual reality

The concept of digital transformation that emerges with the development of digital technologies
Financial technology steps resulting from studies of banking and economics are included.

Financial technologies (FinTech) are, of course, technologies that will impact the world of business, finance and banking. These technologies, now simply called FinTech, are adopted by small businesses, medium-sized companies receiving investments, or large technology companies. Small or large FinTech projects are important in the banking sector to create a larger economy.

While the banking sector is experiencing a digital transformation, financial technology companies and fintech are also having a significant impact on the banking sector. For example, while traditional products are important for banks, FinTech is customer-oriented.

The bank’s competitive advantage over financial technology lies in its ability to provide low-cost deposits and a stable customer base. Financial technologies attract the younger generation more easily. Although financial technologies support the future of banks, it takes a long time for existing customers to get used to digitalization.

One of the important impacts of financial technology in the banking sector is that financial technology companies have started offering banking services. This situation has triggered market competition and is partially affecting banks’ profitability.

As financial technologies make their way into the banking industry, they add confusion to the system but increase risks through the new products and services they offer. The partnership of banks with financial technology not only enables the emergence of an innovative culture, but also provides the opportunity to offer customers solution-oriented services.

Companies with huge capital that develop big technologies can more easily enter into big competition with the banking sector. That’s because big tech companies can provide better credit to their customers than banks and provide consumers with convenience for new technologies by focusing on consumer preferences. Additionally, large technology companies can more easily access funding by more easily accessing data and leveraging their technological advantages. It also offers partnerships with banks or sets up its own banks.

Today, the impact of financial technologies, especially on large banks, is sometimes challenging. The lack of legal regulations and laws in some countries makes it difficult for large technology companies to enter the financial services sector. Since banking regulations do not affect these companies, they pose problems for banks with their cost-effective and competitive structures. Additionally, as large financial firms reduce their costs, the sector becomes attractive to many different competitors.

What effects does digital transformation have in banking?

If the most important question we have to examine is the impact of digital transformation in the banking sector, the results of all the mentioned technologies and developments in the industry can be examined. Banks provide a payment system and safe haven for people whose primary source of credit in the economy is money.

While targeting consumers and businesses with banking and financial products; they offer services with interest rates, fees and proprietary products. To ensure the continuity of these services, banks have made many innovations by keeping up with technology and trying to maintain their continuity.

The digital transformation of computers and mobile phones has led to profound changes in the banking sector in recent years. Banks are trying to offer many advantages to their customers, especially mobile applications, open banking, better customer experience and virtual reality customer services, to change their habits and find the innovation they are looking for. This digital transformation has a significant impact on the banking sector.

Benefits of digital transformation in the banking sector

If we have to look at the benefits of digital transformation in the banking sector;

New services provided with large transformation budgets can enable bank customers to receive simpler and perfect service.
As customer needs and experiences have become more important through digital transformation, people have started analyzing customer data and offering customized products and applications.
After the transformation, banks began to reach out to people who did not have easier access to banking products and services and began offering new products and services.
Thanks to transformation tools such as mobile applications, people can access products and services anywhere and at any time.
As bank branches became sales offices instead of main service points after the transformation, bank employees focused more on working on technology.
Documentation requirements in banking have become simpler and data collection has become easier.

Risks of digital transformation in the banking sector

If we have to look at the difficulties and drawbacks faced by the banking sector in transitioning to digital banking;

The banking sector has had to allocate more resources and spend more on all the tools and new services required for digital transformation.
It emerged with the need to seek services from financial technology companies in terms of new technologies to increase customer focus and meet customer needs.
The increasing use of mobile banking and open banking systems means that bank branches are gradually becoming less important. However, due to the declining number of branches, there are employment problems in the banking industry, which is leading to some banks breaking ties with their employees.
In the new system, bank customers feel more insecure and vulnerable when it comes to reaching bank customers, requesting documents and carrying out transactions.
Today, payment systems are developed by growing financial technology companies as well as giant companies such as Google, Facebook, Apple and Amazon. In response to this situation, banks are forced to compete with these giant companies as they transition to digitalization.
Especially after the digital transformation, banks are taking more risks due to the complex structures that have arisen. As security risks increase, the need to compliantly adapt to changing regulatory technologies becomes necessary.

See you in the next post,

Anil UZUN