Three digital transformation trends to watch in the years ahead

Dr. Hsiang-Chieh (Alex) Yang, Assistant Professor at the Hull College of Business at Augusta University

By Dr. Hsiang-Chieh (Alex) Yang, Assistant Professor at the Hull College of Business at Augusta University

Recently, JPMorgan Chase and Apple have been in talks about the former possibly replacing Goldman Sachs as the latter’s banking partner for its Apple Card. These talks are only one recent reminder that banking and finance are continuing to undergo digital transformations that are altering the financial services from the perspectives of both the industries and consumers alike. Moreover, these trends are set to not just continue but grow in speed and scope, and it will become increasingly important for industry professionals to stay abreast of them. From where I sit, there are three that particularly stand out among the many developments on the horizon.

The Arrival of Fintech Revolution 2.0

The word “revolution” is sometimes used to mean any kind of significant shift or trend without the original disruptive meaning of the word. But the fintech revolution of the last 14+ years has been genuinely revolutionary in the sense that fintech poses a real threat to the dominance long enjoyed by traditional banks and financial institutions. Major disruptors such as Robinhood, Square, Stripe, Affirm, and SoFi have been radically reshaping and democratizing investing, point-of-sale (POS) payment processing, online payments, buy now-pay later (BNPL) financing, and banking and financial services.

The last few years have seen the fintech sector run up against some challenges, leading some to proclaim that fintech may be “dead. But this is far from the case. Yes, the sector has stumbled somewhat in recent years due to a range of societal, economic, and regulatory factors including traditional banks stepping up their response to the fintech threat. Despite this, there are signals that fintech may be poised to make a big comeback. In fact, research from MicKinsey & Company show that between 2023 and 2028, fintech revenue is set to grow nearly three times faster than that of the traditional financial sector. How and why? It has a lot to do with the next two digital transformation trends: convergence between tech and traditional financial services and the growing prominence of AI and new sub-trends such as hyper-personalization that will be possible due to AI.

The Tech-Banking Convergence Will Continue

The aforementioned talks between Apple and JPMorgan – and, previously, Apple’s partnership with Goldman Sachs – point to an ongoing convergence between tech and the financial services sector. Driving this convergence forward are the many mutual benefits for legacy financial firms, on one hand, and tech giants such as Apple, on the other. Tech companies, with some notable exceptions such as SoFi, generally do not have their own bank charter. Pairing up with traditional financial firms therefore enables tech giants such as Apple and Google to offer a greater range of services and convenience to their customers. At the same time, by offering a range of financial services they can keep these customers in their digital ecosystems, deepening brand loyalty and selling more of their own products and services in the process.

Financial institutions, for their part, also reap numerous benefits from this convergence. Generally speaking, they do not have the same level of brand strength and loyalty commanded by tech brands such as Apple, Microsoft, Amazon, and Google which occupy 1st, 2nd, 3rd, and 4th place in Interbrand’s ranking of the Global Best Brands, respectively. The highest rank for a financial institution is JPMorgan at 26 followed by American Express and Visa at 28 and 37. Traditional banks have moreover struggled to provide enjoyable digital user experiences for their customers who are becoming increasingly likely to abandon traditional banks and flock to fintech brands for their needs. Rather than compete with fintech, it makes sense for traditional banks such as JPMorgan to partner with a giant like Apple whose credit card services have a proven track record of customer satisfaction and loyalty. Partnering with tech companies also enables financial firms to tap into the vast amounts of customer data collected by tech companies and leverage it to offer more personalized services through a proven user experience.

AI Will Empower Multiple Sub-Trends

There’s a third digital transformation that links back to both fintech’s future comeback as well as the tech-banking convergence. It will also empower numerous sub-trends of its own. And that is of course artificial intelligence and machine learning. The full implications of AI for the banking and finance sectors are so far-reaching that we cannot possibly cover them all in a single article, but here are a few to look out for.

Data-driven decision making: Banking and finance inherently rely on the so-called Four Vs of big data: volume, velocity, variety, and veracity. In other words, there are vast amounts of data, it is generated at tremendous speed, there are many different types of it, and making good decisions relies on the accuracy of that data and the effective analysis of it. Since AI is able to analyze vast amounts of data much faster and easier than humans or traditional data processing tools ever could, we can expect to see data-driven decision making powered by AI playing an increasingly important role in banking and finance.

Regulatory compliance and risk management: AI will also be increasingly used for managing risk and compliance. For example, in a recent study of mine I looked at how the implementation of CECL regulation has influenced the loaning practices of banks. Because CECL, in contrast to the incurred loss model, requires banks to factor in potential losses at the outset of issuing loans, I found that this leads to capital-constrained banks raising loan pricing and reducing their lending. By leveraging AI’s ability to efficiently process the aforementioned Four Vs of big data, banks will be able to lower risks, comply with regulations, and make better decisions through automated, data-driven decisions – in the process displaying the interdependent nature of these trends.

Personalizing financial services: Another major future trend will be an increased focus on personalized financial services. There is the perception that younger generations, Millennials and Gen Z, want more personalized products and services, but while this is true, when it comes to banking and financial services this is not limited to young people. Fintech company Q2, in collaboration with The Harris Poll, found that 74 percent of consumers of all generations want more personalized banking services and are comfortable with financial firms using their data to provide those personalized services. Yet despite this, a study by Accenture suggests that only 23 percent of consumers think that their banks are doing a good job at personalizing their financial services. This clearly represents an unmet need and an area of future opportunity. Here again, as with regulatory compliance and risk management, AI’s ability to quickly and effectively process big data will undoubtedly be key in the banking and financial sector’s shift towards more and more personalized services.

These are by no means all of the digital transformation trends that we will likely see for banking and finance in the years ahead, but in my view they are among the most prominent ones. And rather than develop as separate and self-contained trends, I expect that we will see these trends merge with and cross-fertilize each other in various ways, leading to some interesting surprises and entirely new transformational trends tha as-of-yet may be difficult to imagine.