Special report: Digital banking—a bank branch in your pocket

What is the future of banking in the digital age?
June 18, 2014

“The convenience of using mobile banking on tablets and smartphones means that customers tend to access their bank far more frequently” © Kumar Sriskandan/Alamy

This piece is from our special report on digital banking. Click here to read the second piece in the series, "The end of cash."Click here to read the third piece in the series, "the digital race."

Until relatively recently, the inventors of Homelink, the UK’s first home banking service in 1983, would have felt very much at home with modern digital banking. While relying on a television set and a home phone, instead of a website or a mobile device, Homelink allowed customers to send transfers and pay bills, services at the heart of digital banking today.

Despite the subsequent launch of the first online banking websites in the mid-1990s and incremental improvements thereafter, not a lot changed for online banking customers in the intervening period. Banks continued to provide, to a greater or lesser degree and with varying levels of usability, the same types of online banking services to customers—viewing account balances, statements and transactions, and making payments or transfers between accounts. Some banks allowed their customers to apply for and even open a savings account online, but significant change was largely absent.

But the long period of inertia may be coming to an end. We may be heading into a period of sustained change for digital banking. What has changed?

The instant availability of information on the web over high-speed connections, the massive adoption of social networks, and the parallel rise of smartphones and the mobile internet, has changed how we interact with content, institutions and one another.

Our behaviour as consumers is different as a result: we’re better informed, with high expectations of the digital services we receive; we’re faced with a vast array of choices, and we look to our peers to help decide which to choose; above all, social media has given us all a voice that can be amplified many times, if we hit the right chord with our fellow consumers.

Away from the consumer, the wide availability of low cost cloud computing has helped drive a new golden age for start-ups, who haven’t had to worry about investing the capital and skills needed to establish expensive IT infrastructure, allowing them to get to market more quickly and cheaply. Crowd-funding platforms made possible by the internet have released floods of investment to start-ups on generous terms, supporting innovation.

Behind the scenes, vast databases and complicated analytical tools try to make sense of the huge amounts of data being generated by all this digital activity, seeking insights to drive commercial advantage.

Just as these changes became embedded in our lives, the next wave of innovations—smart wearable devices, sensor technology in everyday objects, and the availability of low cost 3D printing—has arrived to stir things up again. The net effect in many industries has been to change the basis of competition, lowering barriers to entry and shifting power to consumers. As famous names in technology, entertainment and the entire music industry have discovered, you ignore these trends at your peril. As well as destroying business models, digital innovation has given rise to new ones that could not otherwise exist, such as that of smart home innovators.

In banking, change has been supported and accelerated by the active participation of regulatory bodies; in September 2013, legislation came into force in the UK, designed to make the process of account switching quicker, simpler and risk-free, increasing the rate of switching by a factor of five. The earlier Retail Distribution Review increased investor transparency by banning commissions and forcing investment companies to charge explicitly for advice.

Despite the significant capital and regulatory barriers to entry in the industry, which provide strong protection to banks, the net effect of this technological, cultural and regulatory change has been renewed interest in innovation by banks, with digital programmes attracting a considerable portion of the investment that has followed.

One of the most notable recent digital banking advances has been the provision of mobile banking services. While in its basic form mobile banking simply provides the same services as a banking website, research indicates that the convenience of having a bank in your pocket means that mobile banking customers tend to access their bank far more frequently than the equivalent web banking service.

Smartphones also have clever features like location and motion sensors, built-in cameras, touch screens and always-on data connections. Some banks have taken advantage of these to expand their mobile offering, doing simple things like providing directions to the nearest branch or ATM, or integrating email. More interesting innovations like cheque deposit via your mobile have taken off in the US, where cheques are still an important payment mechanism. While extensive use of debit cards in the UK has acted as a dampener on the appeal of this idea locally, earlier this year a major bank announced plans to launch its own pilot service.

The more innovative side of mobile banking is proving to be mobile payments and wallets. Banks, online payment providers, credit scheme operators and others have established services that allow users to treat their phone as a digital wallet to store cash, debit and credit cards. Lack of point of sale infrastructure, competing offerings and concerns about security have all contributed to a slower than anticipated take up so far, but we shouldn’t rule out the possibility of widespread adoption in the near future.

Mobile technology has also allowed the development of digital person-to-person payments, a transfer between individuals using just a phone number. Within two years of launch, one UK bank claims to have secured 2.5m regular users. The government-sponsored Paym service now extends person-to-person payments to individuals and businesses across different banks.

The idea of consumers transacting directly with one another, without a bank as intermediary, extends to person-to-person lending, part of the burgeoning alternative lending market, a sector in which the UK has been a pioneer. The platform facilitates exchange between savers with money to lend, and borrowers, at what would be generous rates for savers and competitive lending rates. Last year, the leading provider in the UK extended this service to small businesses, with noted success.

Another area of digital banking innovation is that of personal financial management tools, which allow customers to set goals, budgets, plan and track their spending. The latest incarnations of these tools differ from their forebears by making it really easy for customers to set up and maintain, importing and categorising data automatically and providing highly visual representations of current and projected financial performance. When combined with real-time notifications, reminders and alerts, these tools start to become a powerful way to help customers better manage their money.

This has also proved to be an area of significant start-up innovation, with a number of financial aggregators offering services that relegate banks to the role of transaction provider. One such start-up in the US introduced the idea of a “safe spending limit” that assesses upcoming bills and payments to determine how much discretionary spend you really have left this month. Others have introduced social elements to their service, inviting the customer to compare their budgeting and spending with others in their neighbourhood.

In the world of wealth management, start ups are also taking advantage of similar goal-setting, planning and tracking tools to help customers visualise their investment options, their appetite for risk, and to track progress towards their goals. In future, depending on the support of the regulator, we could see such tools being combined with digital “recommendation engines,” to provide personal guidance to individual customers on the best way to achieve their investment goals.

Beneath the new digital services of all the leading banking providers lies an obsession with a simple phrase: “the user experience.” These organisations have realised that unless a service is simple and easy to use, and works first time, customers won’t use it.