Rob Hetherington, Global Head of Financial Services at SAP

The digitalization of banking is a transformative process. Its pace is not determined by banks but by client demand, technological innovation, and regulatory imperative. The Open Banking Initiative in the UK and the Payments Services Directive in Europe are both examples of the need to bring financial technology (fintech) into the digital age.

Authorities have voiced growing concern about banking technology failures over recent years, while concurrently arguing for greater competition in banking. These two points are now being brought together through the regulation of service providers, liberation of data, and encouragement of fintech start-ups.

The effect on traditional banks will potentially be very tough. Confidence in the sector has not noticeably risen, return on equity and interest rates are still low, and costs are rising. If customers are to re-engage with banking, they need to see success.

That merits an assessment of the competitive landscape and the challenges that banks face. Regulators are setting a bar for entry that many low-cost competitors can clear. As the rules improve the portability of accounts and access to transaction data, new players including fintech firms and challenger banks will be able to nibble away at high margin areas of banking activity.

Innovation promises better services and greater competition. Those banks leading the process have developed innovation hubs, R&D teams, and laboratories in centers of innovation such as Silicon Valley and Israel, to keep their finger on the pulse of the latest technology and concepts.

Embedding these new developments into the mainstream of their business will prove to be the next challenge for existing banks. Some are making significant strides, but banks do not have a start-up culture and naturally so, given the importance of process and control in managing risk. Finding a balance between maintaining the robust processes that are in place while seeding innovation throughout the business will not be simple, but it will be necessary.

Wave after wave of cost cutting and re-engineering has taken its toll on the financial services sector.  Tougher choices now need to be made, banks will have to invest first, in order to move to the next level of efficiency.

The advent of digital technology is already transforming the customer experience – account aggregators like ING’s Yolt are preparing for launch – and as firms see the impact of new ways of working on customer relationships, those principles will need to reach across into the wider enterprise.