The Crash of Cash: The Post-Pandemic Rise of Digital Financial Services

3 min read

May 23, 2023

When did you last withdraw cash from an ATM or fill out a deposit slip at your local bank?

In contrast, have you recently hit the pay button in an app or tapped your phone’s digital wallet at a kiosk?

If you can’t remember the answer to the first question but answered “today” to the second, you’re part of the shift away from physical banking to digital financial services.

While banking had been on a slow trajectory towards offering online services for years, the pandemic catalyzed a cashless “digital disruption” almost overnight. While the initial surge has slowed, consumers continue to embrace the convenience of contactless and online payments, forcing brick-and-mortar banks to rethink their traditional strategies.

More and more banks are pivoting to providing Banking-as-a-Service (BaaS), partnering with non-banking companies to embed financial technology (fintech) and payment capabilities into their offerings. Investments in these and other technologies like unified communications are key for banks to effectively meet their customers’ online needs and enable employees to continue to provide quality service.

brick and mortar bank atm

The Decline of the Brick-and-Mortar Street Bank

Over the past five years, in-person visits to banks fell drastically in the UK, with Lloyds Banking Group reporting a 60% decrease in foot traffic at some branches. Lloyds, Halifax, and HSBC have joined the many institutions shuttering branches and removing underused ATMs. The branch closure rate doubled in the US during the pandemic, with the FDIC recording record closures nationwide.

Clients prefer to access their accounts through online self-service portals, with many young people eschewing cash and cards altogether in favor of mobile payment platforms. They expect every financial experience to be convenient, personalized, and seamless across all channels.

Without teller counters, many financial institutions offer BaaS to meet customers on their preferred channels. Nonbanking partner companies can use BaaS technologies to provide their users with money management services such as payments, lending, or transfers.

Because this fintech is often distributed through APIs, the participating bank and partner must have robust risk management and compliance standards. The technology and regulations are still evolving for this new business model, which stands to benefit banks, their partner companies, and the end users.

pay by phone tap

The Rise of Embedded Finance

Embedded finance allows nonbanking companies to monetize their services while allowing traditional banks to pivot to the digital arena. Many commonly used apps, such as Revolut, Shopify, and Uber, incorporate embedded finance solutions to enable users to transmit payment at the tap of a button.

While e-commerce companies have been leading the adoption of embedded finance, allowing customers to make purchases seamlessly from any device, other industries are using fintech, too. Tech and software companies, car manufacturers, insurance providers, and small businesses are incorporating embedded finance into their products.

Embedded finance is a rapidly expanding sector: It accounted for $2.6 trillion, or 5%, of total US financial transactions in 2021 and is expected to exceed $7 trillion by 2026. Fintech companies have been the primary driver behind this growth, but the window of opportunity is closing for traditional financial institutions to get in on the game.

By investing in technical capabilities and carefully assessing vertical segments, incumbent banks can form intelligent partnerships to generate new growth opportunities and streamline the banking customer experience.

online banking

The Trade-Offs of Fintech

Fintech is central to the modern banking experience. Today’s consumers expect personalization and integration across every channel. Embedded finance weaves transactions into users’ digital lives by:

  • Removing the need for cash and cards
  • Making payment seamless
  • Tracking their purchases
  • Remembering their preferences

Virtual transactions are often much smoother than their analog counterparts. Using an app like Revolut for international transfers is more accessible than waiting in line at a traditional currency exchange. A customer hardly thinks before tapping to pay and tip their Uber driver.

This raises the question: With customers managing so much of their payments through third-party apps, will fintech replace traditional banks? The answer is two-fold, addressing financial and personal concerns.

First, banking institutions are subject to strict regulations and compliance laws. They also provide financial services like lending and accounts that fintech companies aren’t licensed to handle. Instead, the relationship between old and new financial institutions is symbiotic, with banks contributing decades of financial qualifications and customer trust while startups introduce technology and innovation.

Secondly, the automation and ease of embedded finance don’t replace the warmth and knowledge of an in-person teller. For many users, the trade-off is one they’re willing to take. They prefer their transactions to happen instantaneously, in-app.

But others miss the personal interactions from visiting their local bank branch. And still, who may have needs that a chatbot or self-service cannot resolve? Even the best fintech solution has limitations only a human can solve.

male customer service agent

Maintaining Engagement with Unified Communications

To survive the digital disruption and maintain user engagement, banks need to move their services online and partner with companies to offer embedded finance solutions while providing their customers with the personalized experiences they would get in a traditional setting.

Investments in unified communications (UC) solutions designed specifically for the finance industry and developing BaaS products give incumbent banks the edge to stand out among fintech competitors. Advantages of implementing high-quality UC include:

Enhanced User Experience

Omnichannel UC meets users in their preferred environment, supplementing self-service with personalized AI or human assistance. For example, AI can walk a customer through opening an account, bringing in a live agent to provide personalized guidance. The AI tracks the customer journey providing agents with context to make the customer experience as continuous as possible.

Better Resource Management

Finance-focused workforce optimization software streamlines back-end processes to minimize the risk of error, maintain regulatory compliance, and increase profitability. With low-cost AI managing basic tasks, human agents can focus on providing the quality interpersonal service customers expect from their banking experience.

Improved Customer Trust

Users will only use financial services from companies they know to be reliable, which is where established banks have the edge over start-up fintech companies. Customers are more likely to trust an app with their money if they see it partnered with a reputable bank. AI-assisted UC solutions provide prompt, reliable responses to customer questions, quickly connecting them to human agents for a more trustworthy and personalized experience.

While fintech is changing the banking landscape as we once knew it, traditional financial institutions can adapt and even thrive in the face of new technology. By developing their BaaS capabilities and raising their UC standards to ensure seamless customer service, banks can meet clients where they are – online.

Learn how Mitel can help your bank excel in the new digital era with UC solutions developed specifically for financial institutions.

Categories: Industries

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