Banks Adapt to Survive the Digital Shift

As customer sentiment turns towards digitalization and ease of use, embedded finance has grown to meet their needs. 

Experiencing an uptick in interest, fintechs and big techs have risen to the challenge. In an EY survey from March 2023, 97% of respondents said they felt the key to the success of a financial product is the ability to meet customers’ requirements in real time. In the same study, 70% of respondents felt that the majority of financial products in the future would be offered via non-financial platforms as they shift to customers’ point of need.

Within this landscape, banks are at risk of being left behind. Often synonymous with roadblocks and clunky infrastructure, Banking has traditionally fallen short of its clients’ needs. With technology driving much of customers’ daily lives, fintech and big tech have been placed at the forefront of responding to the shift. Customers now expect personalized, digital experiences that ease interaction with their finances. 

“When the young generations, who were born with phones in their hands, become clients, they will have much more of a focus on the technology,” says Schuyler Weiss, CEO of Alpian, a Swiss neobank, in a study commissioned by Temenos. “If you do not have modern technology, they will not bank with you. It doesn’t matter how long you’ve been around.”

The shift to a customer-centric digital ecosystem has blurred the lines between financial service offerings. Fintechs and tech-led brands have built solutions that sidestep direct engagement with banks. As finance becomes more embedded, banks are faced with a challenge. Staying within the confines of a brick-and-mortar incumbent institution could limit their ability to serve customers in the digital landscape.

Embedded Finance, Easing the way for a Bank-centric digital ecosystem.

The year 2023 showed a high percentage of bank executives incorporating fintech partnerships and acquisitions into their long-term strategy. 

“New technology and customer demands are the top two trends expected to impact banking in the next five years,” said Jonathan Birdwell, Global Head of Policy and Insights at Economist Impact. “To maintain their direct connection with the consumer, banks are recognizing that they must become true digital ecosystems.”

The Temenos study showed that banks’ focus on creating a digital ecosystem had brought them to consider the development of their own digital products as well as third-party offerings. One in every five respondents said they are prioritizing building their own banking super app. 

Despite this, only a few banks globally are approaching the development with the same speed as their big-tech and fintech counterparts, leaving the sector at a distinct disadvantage. A BCG report conducted in March 2023, found that of the small percentage of banks that had engaged in creating their own digital ecosystems, most were still in the testing phase. The delay could cause banks to miss out on significant value that, as more big-tech and fintechs entered the market, would become highly competitive. 

The report found that banks’ reluctance to engage was rooted in uncertainty. The banking environment in the US has been hit with regulatory changes and instability this year, and while profits have been high, many executives may be concerned with a move from the traditional business model. 

Temenos found that the uncertainty could be offset through enhanced engagement in the embedded finance shift. “The trend of embedded finance is encouraging banks to drop any reservations that they may have had about opening up and becoming true ecosystems,” the report stated. “The need to tap expertise in emerging tech like AI is similarly boosting the case for greater collaboration.”

Strategies for Bank's engagement in digital ecosystems
Strategies for Bank’s creation of digital ecosystems

Operating as “orchestrators” or “contributors”, banks can create digital ecosystems that engage in embedded finance. Taking the role of “orchestrator” may allow them more control and opportunity for value creation.

“As they become more and more embedded in consumers’ lives, banks have the opportunity to not only deliver more for their customers but also to secure their place at the center of the ecosystem,” stated Temenos.