Digital Banking: Post COVID-19 Landscape

The past decade has seen significant technological and regulatory advances in digital banking. Unconstrained by outdated legacy systems, the new "challenger" banks have been able to serve consumers efficiently and at low cost, often competing with established, traditional banks.

The way in which individuals interact with banks has changed considerably as technological developments have transformed the industry. In the consumer market, there has been a seismic shift away from branch-based banking, led by the disruptive forces of the "challenger" or "neo banks", and new digital platforms created by high street lenders.

COVID-19 impact

The events of 2020 drove the banking sector to rapidly accelerate its digitalisation plans. Many banks joined forces with third parties to be able to deliver services to their customers as quickly as possible. The pandemic was a catalyst for the consumer trend toward digital banking as the virus forced branches to close due to lockdown and social distancing measures. The pandemic has also accelerated existing trends within banking, such as the rise of digital payments – almost seven in 10 consumers around the world believe the shift to digital payments seen in the past year is likely be permanent.

The lines between professional and personal lives have also blurred, as millions of people have been forced to work from home, with flexible working now likely to remain the norm for many.

Corporate banking behind the curve

Corporate clients are experiencing the benefits of digital banking in their personal lives, and increasingly expect to be able to access the same efficiencies in the corporate environment. These expectations have been heightened by initiatives such as the Payment Services Directive (PSD2) and open banking in Europe.

An online banking platform can offer a broad range of services such as digital records. This eliminates the need for physical documents, helping to improve resource footprints from an environmental, social and governance (ESG) standpoint.

More recently, as part of the on-boarding process, digital signing technology has replaced "wet signatures". This has been particularly important during the lockdown and stay-at-home conditions of the pandemic, and has enabled corporates to set up accounts, as well as make and receive payments quickly. A true digital banking platform can offer greater efficiency for corporates, reducing the costs and time involved in traditional banking and enabling remote working in a post-pandemic world.

In particular, the financial services sector itself is lagging behind in access digital banking for asset managers, alternative funds, family offices and other investment vehicles. Given the highly regulated nature of financial services, concerns remain about security, compliance and data privacy, including data storage, privacy and protection; digital identity authorisation; and local regulatory pressures or different regulations for different jurisdictions. The complexity involved in running accounts for asset managers, due to a labyrinthine regulatory environment, makes them unviable for many traditional banks operating in the asset management sector.

Opportunities for challenger corporate banking

Traditional banks, hampered by a wealth of legacy infrastructures and systems, are struggling to provide a fit-for-purpose, modern digital banking offering for corporate customers, quite apart from providing a tailored service for financial services companies.

While the challenger banks fight for consumers and some turn their attention to small and medium enterprises, there remains a gap in the market to serve more complex corporates and financial services firms eager to benefit from the advances of technology to enhance their processes and efficiencies.

One of the more time-consuming and frustrating experiences for corporates is setting up and opening new bank accounts — something that now only takes a matter of hours in the consumer world. While it is not technically a banking issue, the process is a regulatory and legal requirement for asset managers, made more complicated by the complexities of some fund structures. It involves several different regulatory requirements,  such as know your customer, anti-money laundering and financial crime regulation, and is a painstaking, paper-based process involving highly confidential material. Technological advances — such as facial recognition, automation and digital checks — are, however, making it easier to share and authenticate information in a secure manner.

Despite the considerable changes seen in recent decades, the pace of technological innovation means that banking is likely to get even more sophisticated in the years ahead. New developments will have a profound effect on how businesses bank in the future. For example, blockchain and distributed ledger technology will offer limitless opportunities, from financial transactions to automated contractual agreements, particularly as it removes the need for authentication. Meanwhile, advances in artificial intelligence will be able to help spot and defend against cyber-attacks. Further innovations in cloud-based software as a service and development of infrastructure could also see more non-core functions transferred to the cloud. This new technology will require greater oversight, additional regulation and the strengthening of existing regulatory regimes.

Outlook

In collaboration with fintechs and specialist providers, banks have found themselves able to deliver new digital accessible solutions to meet the needs of their consumer customers. As banks emerge from the pandemic and accept some of the permanent changes it has brought about, they must commit to supporting corporate customers and providing them with the same digital benefits. Services and products for corporates need to be convenient, accessible and, above all, flexible. Looking ahead to the remainder of 2021 and beyond, the new challenge is to ensure that the innovation and collaboration which consumers have come to expect from their banks is delivered for corporate customers.

Produced by Thomson Reuters Accelus Regulatory Intelligence