Moody’s: Technology Shaping Future of Banking

Digital innovation in financial services is placing a premium on efficiency and opening up competition that will continue to drive disruption across banking business segments, including payments, lending, capital markets and wealth management, Moody’s Investors Service stated in a new report.

According to the report obtained Monday, banks that consistently assert digital leadership, would thrive and prosper, while laggard banks that lack the vision or resources to develop competitive digital strategies would be disrupted.

It noted that aging legacy financial platforms had created opportunities for new nimble entrants to capture a portion of banks’ profits by offering more customer-focused, responsive and efficient channels.

Furthermore, Moody’s noted that bank of the future would cater to high and rapidly evolving customer expectations by harnessing key enabling technologies, leveraging increasingly mature and dependable digital distribution channels, and applying these tools across multiple businesses and product segments. “Customers will gravitate to providers that best meet their demands for convenience, personalisation and affordability, with privacy and data security a growing competitive differentiator.

“Amid the shifts in technology and consumer demand, competition will stiffen among banks, big technology companies and small fintechs.

“In the face of these threats, successful incumbent banks will be those that, either on their own or in collaboration with others, pursue aggressive digital transformation to become more efficient and responsive to evolving customer demands,” Moody’s analyst and co-author of the report, Fadi Abdel Massih said. Continuing, he added: “Disintermediation of the customer relationship would be a threat to this business model if it ends up reducing banks’ pricing power by transforming them into providers of a ‘back-office’ balance sheet for customer-facing apps/ businesses.”

Also, the report noted that digitisation would offer efficiency enhancement opportunities for incumbent banks through the optimisation of branch networks, data collection, analysis and reporting process but not without high initial investment.

“To date, regulatory requirements have been a moat protecting incumbents. The traditional, more regulated banking model -- reliant on cheap, sticky deposits -- retains a significant advantage for incumbents over nonbank platforms.