Digital banking: Making the most of what is available
The UK’s ongoing cost of living crisis has, and will continue to, place considerable financial pressure on businesses and families. In these challenging times, how can banks assist their customers in managing their finances to reduce costs and achieve better returns?
First of all, banks can offer tools to simplify budgeting for the average customer. Several mainstream UK banks already provide apps that not only categorise spending into groups such as food, utilities, entertainment, and travel but also enable users to set and monitor budgets for each category.
For retail customers, some banks also support planning for future expenses by creating “savings pots” where funds can be set aside for certain expenses, such as school fees, home renovations, or emergency funds. Business customers can also use virtual accounts to be more efficient with their use of funds, reduce overdraft costs, and increase returns through money market investments.
While these tools can help customers gain insights into their spending habits and take informed actions to improve their financial well-being, a more comprehensive approach is required to improve the overall financial health of the bank customers.
Banks should collaborate with government and educational institutions to promote financial literacy among the general public. For instance, Barclays’ LifeSkills initiative has aided over 13 million young people in acquiring money management skills, including budgeting and fraud prevention. HSBC has also recognised the importance of early financial education and uses storytelling and gaming to teach money concepts to children as young as three. This sustained education is essential to ensure that younger people can plan for their future finances effectively in times of prolonged crises.
Banks can also further use their analytical insights to send contextual alerts to customers, encouraging them to pay their bills on time, transfer surplus funds into higher-yield deposits, and renew their insurance policies.
Greater visibility and control over their finances allows customers to make the most of their limited resources. Open banking can play a significant role in this. For example, it allows for Variable Recurring Payments (VRP), where customers can authorise payment providers to make payments on their behalf, within predefined limits. Customers will then have more flexibility in managing VRPs compared to Direct Debits and can monitor the status of their VRPs through a dashboard.
Open banking also allows consent management, by letting users to set clear parameters for their consent. This feature is valuable for small businesses looking to manage their cash effectively. Small businesses can use this to authorise Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) to allocate excess liquidity to external funds, resulting in higher returns.
However, the adoption of open banking in the UK is still fairly limited due to concerns regarding data privacy and security, as well as a lack of understanding among customers about the concept and its potential benefits. Banks can address these issues through education and include open banking awareness in their financial literacy programmes.
Banks can also benefit from open banking by forming ecosystem partnerships to provide a more comprehensive range of services to their customers, including non-banking services sourced from fintech companies. This approach not only makes certain that customers receive relevant and customised offers but also reduces the risk of them seeking financial services from competitors.
Personalisation is key to a banks’ success in an ecosystem play. By utilising data analytics, banks can deliver the right service to customers at the right moment, resulting in a frictionless experience. Again, this approach is essential for banks as it reduces the likelihood of customers seeking services from competitors.
Personalised offerings also helps banks to gain a deeper understanding of their customers, which is crucial for thriving in an ecosystem play. The future belongs to banks that offer competitive financial and non-financial offerings, both in-house and through third-party ecosystem partners. An example of this approach can be seen with Paytm, India’s first fintech unicorn, which expanded from a mobile wallet and bill payment platform to a comprehensive e-commerce marketplace and later acquired a banking license, leading to a substantial number of savings accounts.
In contrast to this, financial institutions that stick to traditional banking models may be relegated to utility status. To avoid this, they must invest in digital platforms that are capable of onboarding and supporting diverse partner ecosystems.
Ecosystem banking naturally leads to embedded finance, where banking products and services seamlessly integrate within the customer journeys, becoming nearly invisible. Embedded finance meets the demands of younger generations for an all-encompassing, personalised, frictionless, and entirely digital experience similar to what next-generation providers offer. For instance, Paytm provides a wide range of services, including banking, insurance, investments, ticket booking, food delivery, shopping, and seamless payments to finance these services.
To really compete, banks must enhance their apps beyond core banking processes. These evolving trends—ecosystem play, platform business models, embedded finance, and app-like capabilities—all necessitate comprehensive digital transformation, beginning with the banking core. However, as other banks embark on this digital journey, they must continue to create highly competitive products and services, especially since customers prioritise value for their money in challenging times.
