ave you ever wondered how much lives have changed in the past few decades? We have had a massive leap to the digital era with recent technological developments.
Not long ago, people had to physically go to the bank and wait in the lines to get their work done, but now with just one tap, the bank comes to you. You can easily bank online without walking to a physical location.
Gone are those days when you used to give checks as a money transfer medium. In this fast-paced world, no one has time for the hassle of depositing a check. So instead, people directly transfer the funds to the bank account.
Also, while shopping, people scan QR codes to pay for their purchases. Doing so avoids the hassle of carrying change and money around. It's simply more convenient for everyday life.
Thus, shoppers can conduct monetary transactions online, slowly making cash seem non-existent. With the world shifting to a digital environment, it makes sense that the banking industry is also following suit.
It's no question that banking technology is advancing rapidly, and the world is soon going to be a cashless economy and fully digitalized.
The Digital Transformation of the Banking Industry
The digital transformation of the banking industry has changed the way people bank. The banking revolution has been affected by several factors that have urged the bank to transform itself to sustain itself in this digital era.
The internet's prevalence has resulted in a fundamental shift in consumer behaviors and preferences as people get more accustomed to the internet. More than half of the world's population is now connected to the internet.
At the end of 2018, 51.2 percent of people used the internet, which amounted to about 3.9 billion people. This internet usage is a significant step toward a more inclusive global information society.
Thus, banks also have shifted themselves online through digital banking.
Digital banking refers to the digitization of all levels of banking, from the front end to the back end. This implies that digital banks rely on AI technology to automate back-end activities such as administrative tasks and data processing.
Not only do digital banks allow customers to make account deposits and transfers remotely, but they also allow them to apply for loans and access personalized money management services.
Another critical aspect that has considerably aided the digital transformation process of the banks is the rise of the use of smartphones. According to statistics, mobile phones' global average penetration rate is roughly 70%.
Therefore, it is not surprising that mobile banking applications are at the forefront of modern banks. People can access banking services through mobile banking without physically visiting the bank.
There is no objection that digital banking has made banking services much more convenient and easily accessible.
Bank digitalization has provided banks with new opportunities for digital transformation in products, services, and processes. It has also helped better understand financial consumers' needs in the digital age.
Most importantly, digitalization has helped the bank sustain itself in the financial market while the Fintech companies slowly penetrate the financial sector with advanced technology.
How Fintech Challenges Banks
With the revolution in finance and monetary transactions, many Fintech companies have stepped into the industry. As a result, the prominence of non-bank financial business is growing, which has imposed a significant threat on the banks.
The best example would be the dominance of Ali Pay and Wechat Pay in the Chinese financial market.
Ant group, an affiliate company of Alibaba, was established since Alibaba felt the need for a secure payment mechanism for the buyers on the site.
Thus, Alipay started as an escrow account to transmit money to sellers once the buyer got their items. Soon, it quickly evolved as a popular means of payment. In addition, it implemented QR codes for payments in 2011, which allowed people to pay by just scanning the QR codes.
This payment method flourished, accelerating Alipay's expansion. It has over 1.2 billion active users and has processed $16 trillion in payments in 2019, approximately 25 times more than PayPal, the largest online payment network outside of China.
In 2013, Wechat, China's popular messaging app, added a payment option similar to Alipay. As a result, WeChat pay has also become one of the popular payment methods in China.
Today, Alipay and Wechat pay covers 90% of all mobile transactions in China. Alipay and Wechat pay are non-banking transactions, and it has almost replaced banking in China when it comes to payment systems. So they are the perfect example of how fintech companies pose a significant threat to bank and banking transactions.
The greater risk is that payment systems will become a doorway, allowing tech companies to lure additional customers for financial transactions. These fintech companies can determine a borrower's creditworthiness using data provided by payment transactions.
For example, In 2014, Ant group started lending credits to consumers, and it has already grown itself as a prominent company in China's consumer-finance sector. The threat even involved the government officials stepping in and attempting to curb it.
Fintechs increase competition in financial markets by providing services that traditional financial institutions offer.
However, despite the risk, fintechs will not be able to replace banks. There are plenty of reasons, but the most prominent is the trust that people have built with the banks, and they are not quickly shifting to fintech because it is more convenient or accessible.
Also, Banks are ideally positioned to adopt technology advancements and provide similar services as that of fintechs.
Right now, both fintech firms and banks gain from cooperating rather than competing in the market.
The cooperation between banks and fintech offers a new paradigm for banks to scale up innovation because banks can use the efficiency of a fintech, and the fintech can use their customer's customer's trust, and that's where the concept of open banking comes into play.
The 2008 financial crisis shed light on the importance of how banks engage and deliver information to their customers. Thus, the concept of open banking was introduced. Open banking creates many new opportunities for banks to communicate with clients and customers to understand their finances better.
Open banking connects banks, fintech companies, and third-party providers (such as budgeting apps ), allowing them to quickly and securely share data for the benefit of their consumers.
It is predicted that open banking act as a catalyst helping fintechs to thrive while also allowing mainstream banks to improve their competitiveness in the digital banking era.
Open banking is a new concept for most people as most individuals are unaware of it. However, it quickly becomes a key source of innovation, potentially restructuring the financial system.
Cash and Cashless Economy
Cash or paper money is on the verge of extinction. While the world is shifting to the digital world, many countries opt for a cashless economy.
It is reported that Australia will become a cashless country by 2025 or 2026. This prediction stems from Australia's internet penetration and smartphone usage being so high that most financial transactions are done digitally.
In addition, China is also speeding up to become a cashless economy, and half of the population doesn't even use cash. Instead, people opt for digital payment methods such as Alipay and Wechat pay.
On top of that, the Covid pandemic has boosted the shift to digital payments and cashless monetary transactions. As a result, the government urges people to use digital payments instead of cash.
Why Are Countries Going Cashless?
There are several reasons why many countries are going cashless. However, the most prominent one is to prevent money laundering and illegal activities.
The major drawback of cash is that cash is a bearer asset, which means any person who possesses it has the right to use it. So if you find Rs 100 on the road, you can use it even though it's not your money. If it's in your hand, it's your money now.
This concept of cash is why there are thefts and robberies. Shifting to digital payments would significantly reduce the crime rates of thefts and robbery as digital assets are not bearer assets.
Suppose anyone found your ATM card, figured out your pin, and withdrew your money. You can file a police complaint, and if the person is found, S/he is liable to pay back your money because it's in your possession.
Usually, illegal transactions are done through cash as one cannot trace back to its source. But, in a cashless economy where everything is digitalized, it is easy to track such illegal transactions.
Also, tax avoidance is challenging in a cashless economy since every monetary transaction flows through digital channels, which the government can track.
While it may seem that a cashless economy is great, there are some challenges and drawbacks.
Challenges of a Cashless Economy
While it is predictable that countries will be cashless soon, governments have some resistance to being entirely cashless.
In China, most people are opting for digital payments and mobile wallets. Cash is almost wiped out in most Chinese financial markets. Chinese people prioritize digital payment over cash.
While this seems like a significant technological advancement and achievement, some people are unfamiliar with the internet and digitalization.
This is why the Chinese government tries to curb digital payment apps' dominance and tell people to use cash.
Is It Really the End of Cash?
It is predicted that most countries will be cashless within a decade. However, there are some resistance and challenges for the countries to be entirely cashless.
To be cashless means that cash should be replaced by something else. People also have started to predict potential means that could replace traditional currency.
The economist predicts that the combination of cryptocurrency, stable coins, central bank digital currencies (CBDCs), and other digital payment systems will soon lead to the demise of physical cash.
Apart from this, a cashless economy is also driven by technological advancement. With the speed of technological advancement, there is a high chance that the end of cash is coming very soon.
With physical currency coming to an end, the era of digital currencies has just begun.
Blockchain Technology and Cryptocurrency
Cryptocurrencies or digital currencies are digital money with no value in the physical world. But, since the world is shifting to the digital world now, people are more invested in cryptocurrencies.
Cryptocurrencies such as Bitcoin are supported by blockchain technology. Blockchain is essentially a network of computers that collaborate to authorize and execute the transaction.
As a result, there is a perception that it will be critical for businesses and consumers in the future.
In the future, blockchain might help users and businesses complete transactions more swiftly and securely, perhaps reducing administrative and processing times.
NFTs are another popular cryptocurrency at the moment. Non-fungible tokens, or NFTs, are cryptographic assets on a blockchain that include unique identification codes and metadata that identify them from one another.
They cannot be traded or swapped at equivalency, unlike cryptocurrency. This is different from fungible tokens, such as cryptocurrencies, which are identical. Thus, NFTs can be used as a medium for economic transactions.
The way we bank has changed dramatically over the years. The bank's digital transformation has altered the banking structure.
Banks are shifting from physical to online workspaces, and we no longer need to go to the bank; instead, the bank will come to us.
Digital transformation for banks is inevitable if they want to sustain themselves in the competitive market, as fintech businesses are gradually taking over financial services due to their advanced technology.
As a result, there is great rivalry between fintech companies and mainstream banks, but there is also space for collaboration. Banks and fintechs will need to collaborate adopting open banking, which could be the future of banking.
However, the future of cash seems to be non-existent since the world is opting for a cashless economy and fully digitalized banking.