How Digital Transformation is Shaping Transaction Banking
August 2023
By Simone Satan
Digital transformation in transaction banking continues to be a major theme within the financial industry and financial institutions (FIs) are always working to fine-tune the key essentials for successfully employing digital capabilities to improve profitability, either by enhancing the customer experience or improving operational efficiencies.
The effort involved should not be underestimated. To successfully implement a digitalization strategy, a bank’s individual operations, products and processes are not the only areas that need to be transformed – the bank’s entire business model needs to be assessed to undergo a true transformation. To achieve this, the transaction banking industry is currently exploring opportunities afforded by the latest digital banking trends, including open banking, APIs and artificial intelligence (AI).
Leveraging these modern technologies to upgrade systems and processes plays a major role in enabling such a transformation. Regional banks, however, generally struggle to isolate and quantify the cost and revenue impact of their digital transformation strategies. For example, the transformation budget can easily be consumed by updates to legacy systems, leaving a limited available budget for innovation, which is critical to maintaining a competitive edge.
The rise of open banking has led to an increased competitive environment in the financial markets and competitive markets are the perfect environment for innovation.
The effort involved should not be underestimated. To successfully implement a digitalization strategy, a bank’s individual operations, products and processes are not the only areas that need to be transformed – the bank’s entire business model needs to be assessed to undergo a true transformation. To achieve this, the transaction banking industry is currently exploring opportunities afforded by the latest digital banking trends, including open banking, APIs and artificial intelligence (AI).
To meet this challenge – and keep pace with ongoing technological advancements – smaller FIs are increasingly leveraging the capabilities of larger FIs that have already made and scaled investments in technology.
Open Banking and APIs
The rise of open banking has led to an increased competitive environment in the financial markets and competitive markets are the perfect environment for innovation. Whether driven by regulation, such as the Payment Services Directive (PSD2) in Europe or by market-led initiatives, like in the U.S., open banking is also fostering greater collaboration among FIs.
Banks focused on delivering an effective and seamless customer experience should consider leveraging open banking and application programming interfaces (APIs) as a connectivity channel that enable real-time, embedded, and automated data flows between institutions. APIs can integrate seamlessly into existing treasury infrastructure and interfaces.
Some examples of how APIs are revolutionizing the payment industry, helping to facilitate faster, more secure and convenient transactions across various platforms include:
- Integration of businesses’ applications with payment processors to offer clients new payment solutions such as real-time visibility into FX rates and greater visibility and transparency into the payment status.
- Embedding transaction and reporting capabilities directly into proprietary or third-party applications.
- Fraud detection investigations, payment message repairs, compliance screening and account validation use cases.
Open banking has promising potential for early adopters and industry pioneers. With the global open banking market size projected to reach $128.12 billion by 20301, banks are establishing strategic partnerships and requesting government support to help scale their open banking efforts. This is expected to deliver more payment options and account visibility to consumers and further enhance the digital banking experience.
AI in Banking
AI presents a great opportunity for banks to deliver enhanced outcomes for their clients and shareholders. For example, AI can be used to support a host of different use cases, including identifying potential outliers in data, summarizing and extracting data from complex documents and predicting the likelihood of certain outcomes.
Delivering on Customer-Centric Digitalization
The key behind a successful digitalization journey is to keep the improvements to the user experience and operational efficiencies front and center but achieving that requires a two-pronged approach.
First, having the right team in place to explore the full array of opportunities that emerging technologies and trends present is an important piece of the puzzle. This means investing in the right talent – teams comprised of diverse backgrounds, experiences and expertise – that can help meet the challenges of tomorrow.
Additionally, collaboration with trusted partners – such as global FIs – is also essential in taking any digitalization journey to the next stage to keep up with increasing client demands and an ever-changing technology landscape.
1 Polaris Market Research
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