The traditional banking sector has faced unprecedented changes and challenges in the wake of the digital revolution and the dawn of challenger banks, which led to a drastic shift in how people bank. This transformation was then further accelerated by the COVID-19 pandemic and the consequent surge in digital banking services.
However, 2023 has heralded a new challenge and perhaps unforeseen consequence of this rapid digitization, which contributed significantly to the downfall of prominent institutions like Silicon Valley Bank, Signature Bank and First Republic.
The domino effect of the digital run on banks
This downfall was essentially driven by a “run on banks“, a phenomenon characterized by a large number of customers withdrawing their deposits simultaneously. Such runs are not new, but what set this one apart was the speed at which it unfolded, fuelled by the ease of digital transactions.
This leads us to the bitter truth – the same digital capabilities that allowed banks to enhance their client experience and deposit growth have now exposed them to a significant risk.
The tale of explosive growth
In the race to adapt to the digital-first environment, many banks, both traditional and challenger ones, saw an explosion in the number of digital banking users. Over the past decade, digital banks have been at the forefront of innovation. Many of these digital banks feature multi-account dashboards, invoice creation and data sharing tools, all of which have given customers a seamless way to manage their finances. Technological advances such as e-signatures and digital ID are transforming the finance market, and new challenger banks that are born out of today’s technology, have been able to create systems for the digital-first generation.
Between 2019 and 2020, seven US challenger banks recorded a 39.3% growth in users. In 2022, they generated a revenue of $10 billion and are forecast to register a CAGR of 9% between 2019 and 2028. Nearly two-thirds of the US population are now using digital banking services because they are so convenient and flexible.
The growth of challenger banks shows just how much of an impact technology has had on modern banking. Mobile banking, for example, offers banks several opportunities for growth and increasing revenues. Most notably, Google partnered with Citibank to redesign Google Pay in the US to help attract more mobile customers. Thanks to AI-based technology, customers will be able to open and manage their no-fee Citi Plex account through Google Pay. Unlike traditional banks, challenger banks and apps can offer a seamless experience. To keep up with the competition, traditional banks will need to take advantage of the features popular in digital banking, such as chatbots, and create an omnichannel experience. Traditional banks are defined by their well-established infrastructure and systems, unlike challengers which are much more flexible.
Navigating the digital banking landscape
While digital banking services brought convenience and flexibility, they also posed unforeseen threats. In the cases of Silicon Valley Bank, Signature Bank, and First Republic, the speedy and hassle-free process of digital transactions played a critical role in their downfall. With the ease of digital banking, a significant number of customers were able to withdraw their deposits almost instantaneously, causing a severe drain on these banks’ resources.
The imperative of building trust in our digital age
While digital banks and services are growing, they haven’t completely overtaken traditional banks. Interestingly, 57% of modern banks still use their traditional account to receive their salaries and manage investments. This suggests that trust and customer confidence still lie predominantly with traditional banks. This factor can play a critical role as banks navigate the perils of the digital landscape.
It’s vital for banks to balance their drive for digitization with the necessity to build and maintain customer trust. While digital capabilities can indeed boost deposit growth rapidly, they can also lead to equally rapid withdrawal of these deposits. That means banks must strategize their digital offerings in a way that ensures stability and sustainability in the long run.
The journey of banking in the evolving digital market is a path strewn with both opportunities and challenges. Banks must navigate this path with a focus on striking the right balance between digitization and the essential tenets of banking – trust, reliability and customer satisfaction.
Are you looking to grow your banking firm?
There’s a range of great opportunities for banks within the digital landscape and the future looks promising for digital banking. At Hanover, we have an excellent team of consultants with a strong knowledge of the financial services and banking industries.
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