Digital transformation has reached the financial sector as well. In a series of articles, we present the effects of transformation from different perspectives: What does this change in customer behaviour mean? How do banks react? What role do FinTech companies play? We want to show you the context of the most recent developments and reveal why the financial sector must act now. In our first article you can read how technological progress influences customer behaviour, accompanied by new challenges for banks.

Digitalisation presents banks with considerable challenges

After several industries, such as the media industry, have already experienced the effects of digital transformation, the financial sector is under pressure to transform digitally. The behaviour of bank customers has changed dramatically with the new technological possibilities available. Social media, mobility and cloud computing are the essential components of this change. Today, customers are networked and can be reached anytime and anywhere. An “always-on culture” has developed. As a result, customers need to be able to conduct day-to-day banking business when they are on the move. 63% of all bank customers already use online services offered by their financial institute (source: Roland Berger “Digital Revolution in Retail Banking”).

Branches, on the other hand, are poorly frequented. In the last 10 years alone, almost 5,000 bank branches have been closed. The German banking landscape shrank to 30,000 branches (source: KfW Research), with a continuing downward trend.

Transferring money, checking account balances and setting up standing orders – these services are often conducted today using a bank’s mobile application. From a customer perspective, banks are increasingly losing relevance and appear to be more interchangeable than ever (source: Capgemini).

Financial institutions are faced with the task of reacting to changing customer behaviour. To do this, however, they must first fully understand the customers’ behaviour. And they face additional challenges as well: The ongoing low-interest phase, constant adjustments to comply with regulatory requirements and new competitors in the form of internet giants such as Google and Apple in the payment sector seem to be diverting attention away from the subject of digitalisation.

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The impact on the business model

Nevertheless, the question arises whether the branch-centred business model of German banks makes sense and is profitable for the future. New competitors, called FinTech companies, are pouring into the financial market and nibbling away at the banks’ market share. And they are doing this without any physical “sales rooms”. Digital solutions in the financial sector are gaining more and more supporters and more and more trust among the population. Financial institutions have a duty to change. Banks have to decide to what extent they want to adapt the FinTech’s innovative business models or even cooperate with these companies. With a view to optimising the online offerings of financial service providers, cooperation seems a logical consequence. There is no doubt that banks have a decisive advantage over FinTechs. They have decades of experience in financial transactions and therefore have a high level of advisory expertise. FinTechs can help banks to create a logical bridge in the interface between the online world and being advised at a branch.

Banks continue to enjoy the highest level of trust from their customers when it comes to financial management (source: Roland Berger “Digital Revolution in Retail Banking”). General security and data security also play an important role here. This must be utilised.

In the next article, we examine the rise of FinTech companies pushing into the financial market and their approach to adapting financial services to changing customer behaviour. We want to take a closer look at how these companies manage to offer existing services from the traditional banking business in a cost-efficient and more customer-oriented manner. As part of this series of articles, we will also show how banks are meeting the new challenges of the financial sector and what effects the digital transformation has on the entire sector.

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Cover: Flickr Steven Snodgrass Licence: CC BY 2.0