Digitalization of banks: the positive and negative sides of progress
Technological innovation is a powerful driver of progress in a multitude of market sectors. The digitalization of banks offers enormous opportunities for the delivery of financial services, improving approaches to the system as a whole. Innovation, in turn, is forcing a rethinking of traditional regulatory mechanisms and policies.
The synergy of modern technologies and the financial sector has given the market special types of products and instruments. A new category of securities, venture capital funds, credit scoring, and many other things appeared. The spread of modern mobile devices, the Internet, API products, and solutions based on DLT and artificial intelligence also stimulate the segment. However, the digitalization of the banking system also has its negative sides. Experts from the European Council presented an analysis of the impact of modern technology on the financial market. They highlighted three possible ways of development of the sector for the period until 2030.Smartphones and mobile apps provide instant data exchange. Thanks to this, many people have switched to a remote format of interaction with banks. As a result, the traditional physical branch mechanism has become irrelevant, and instead, fintech companies providing payment services have emerged. This caused one of the variants of the banking system to emerge, where classical financial institutions will use aggressive methods to survive. They will actively lobby their interests and prevent fintechs from accessing central banks’ payment systems.
According to the second scenario, classical financial institutions will have to reduce their activities. They will focus on servicing businesses and individuals from a particular region. This will force small and medium-sized banks to leave the arena, which will not be able to compete in such a narrow niche. Fintechs will become the main source of payment services, which will lead to dramatic changes in the system as a whole.
The third scenario involves digital currencies from central banks. Their issuance would increase costs and lead to funding instability for traditional institutions, as some customers leave the retail deposit sector for crypto. Fintechs will expand their presence in lending and asset management, reducing the role of banks in the functioning of the financial system.
Whatever the prediction, governments must already set the stage for market change today. It is important that digitalization should take into account the classical model of functioning, and help it to become better, rather than cancel it. Therefore, experts suggest granting fintechs access to bank security systems to strengthen protection against fraudsters. In addition, the activities of such companies should be clearly regulated and include legal provisions for customers and the reduction of money laundering risks.