COVID-19: A boon for digital transformation in the financial industry?

Globally, the financial services industry was already evolving rapidly in the pre-COVID era due to heightened customer expectations and need for convenience, evolving regulations and technological upgradation and advancements. Digitalization of the industry was well in works, evidenced by the consistent growth in digital channels and tools like mobile money, internet banking, e-insurance etc. However, customers had been reluctant to change and firms’ hesitancy in investing had resulted in disparity in digital services across the world.

With the onset of COVID-19, health became a priority for citizens across the globe, but they still needed access to their money and the various services banks offer. Bills needed to be paid, top-ups had to be done and money was to be remitted back home to families. There was a reluctance to go to banks, and in many countries across the globe, banks were shut. So people were forced to change their behaviors, moving a substantial portion of the economy online and driving customers to engage digitally. The pandemic has accelerated transformation in the financial services industry and can be a game changer for the same. Additionally it has also exposed the urgency for digital transformation.

A study by Deloitte identifies the following four fundamental shifts that are creating ripple effects in the financial service industry:

  • Forced adoption of online, mobile and call center channels

Consumers’ willingness to adapt to digital banking services has been catalyzed by the coronavirus pandemic. Demographics like senior citizens and boomers who were reluctant to this change, surprisingly have been driving this change. In the US, which has traditionally lagged in digital adoption, 35 percent of customers have increased their online banking usage, with a significant share coming from seniors and boomers. Banks in America are also experiencing record numbers in mobile logins and check deposits. In Nepal, the scenario is no different. The transaction volume of PrabhuPay has gone up by 30-40 percent and most of these transactions include mobile top-ups, utility payments, and remittance transfer. Likewise, the number of new users of IME pay has also surged by 30 percent growth, during the lockdown period. In Nepal, this shift has also been driven by semi-urban and rural population in the country, as 60 percent of new users generated at IME Pay since March belong to this population demographic.

  • Tipping point for digital and contactless payments

COVID-19 has catalyzed the shift towards digital and contactless payments, as consumers shift a greater share of their purchases only due to fear of paper money being contagious. Non-traditional players have benefitted substantially as majority of their market share is concentrated in digital avenues: Paypal reported a 20 percent year-over-year growth in payments volume in April 2020, Paytm witnessed a 33 percent increase in digital payment usage in the month of April 2020. This shows that hygienic forms of payment such as digital wallets and tap-to pay have taken off and surged as well. Businesses also sprint to set-up ecommerce capabilities to ensure sales and continuity during lockdowns, albeit either by choice or by necessity.  Looking at the business landscape in Nepal, a fifth of businesses surveyed in a study carried out by International Finance Corporation (IFC) and World Bank showed that they have started to use or have been using the internet, social media, specialized apps, or digital platforms for business purposes. Not only that, businesses have started promoting online payment gateway in Nepal and providing exclusive offers on digital payments. This is a bid from them to boost the culture of digital transactions.

  • Overnight virtualization of workforce and working ways

The pandemic has revealed that remote working or working from home is possible for almost all kinds of businesses. The financial industry has successfully moved hundreds of thousands of employees to remote work model. Bank of America and Wells Fargo have each transitioned over 150,000 employees, which is approximately 70 percent of their workforce to work from home. Even traders, which has predominantly been in an occupation requiring an office and a physical presence, financial institutions such as TD Bank has built new features allowing 80 percent of its traders to work remotely.

Many financial companies across the globe are also looking to make this change permanent. However, in countries like Nepal with distorted internet access, the bandwidth and internet speed becomes a major concern for employees who work from home.

  • Evolution of underlying market structure and economics

The coronavirus has ignited a radical shift in the structure of the financial services industry, implying margin pressures for organizations. Banks are being hit with lower interest rates as governments announce recovery policies and packages and increased loan loss provisions. Additionally, competition is predicted to intensify as “big techs” anchors its entry into financial services leveraging its scale and diversifying into consumer necessities such as delivering essential products and services during the lockdown, allowing it to gain more negotiating power. Meanwhile, smaller fin-tech firms face additional risk, particularly with their funding models.

COVID-19 has smashed the traditional barriers, providing room for digital transformation

The CIO of DBS Bank, which is often named “the world’s best digital bank” stated that COVID-19 has: “… brought forth the value of technology and the investments we’ve made over the past decade to modernize our technology stack. But the transformation we’ve undertaken is not just in the way we’ve architected our infrastructure. One of the biggest things we realized was the change in the mindset of our people.”

Conversely, most banks in Nepal now are racing to digitize their services, fearing that they may miss out on the digitization train as they realize speed is the key. They fear losing customers to more digitally savvy banks, as more and more customers feel comfortable to avail banking services from their phone. In this process, banks and financial institutions have been exposed to staggering gaps in the technology and responding quickly to close the gaps. Apps are improving, new products are emerging and online e-commerce market places are being set-up. Earlier, banks and financial institutions have often refrained from digitizing their processes as they are held back by their risk aversion and dilemma whether the heavy investment is justified. COVID-19 has swiftly removed these hurdles by revealing an organization’s true capacity for innovation and showcasing the promise a digital future holds. The pandemic has also unlocked potential partnerships between financial institutions and digital service providers such as fin-tech and digital payment companies. For example, ‘mDabali’, a platform which gives you digital access to your funds from cooperatives and finances was established in Nepal.

Looking ahead in the future

There are four key areas for making digitalization work for both banks and customers, namely:

  1. Redefining customer experience: Customer is the king and they need to be the focal point while building solutions. Banks must ensure that customers using these online channels have a favourable experience both during and beyond the crisis. Customers need to come first, not one’s business rules or technology because a bank’s business is just a click away from one’s competitors.
  2. Taking a mobile-first view: Product and service accessibility from portable devices should be prioritized as customers expect convenience and smooth interfaces.
  3. Developing a data strategy for personalization: Centralizing existing datasets is the key.
  4. Selecting the right technology platform: Making the right choice in terms of usability and interface while choosing platforms is important. Population demographics of the country and regulations should be considered.

However, the lessons from such international banks may be hard to replicate in a country like Nepal, where digitization started late. The country and the banks operating in the country need to learn a lesson from winners in this revolution is that talent is pivotal and only if the bank has adequate and efficient personnel who has the technical know-how its digital business strategy can succeed. Additionally, in the past, the central bank’s policy on financial data to remain in-country has made digitization and foreign participation challenging. The government should give consumers control over their data. It should protect the privacy of a customer and prevent firms from hoarding information. Moreover, it should pave way for regulation that fosters innovation.