Digital Transformation in Financial Services Industry

Digital transformation in the banking and finance sectors has been accelerated by the onset of the COVID-19 pandemic, which has reshaped business models and financial institutions globally. For many organizations, the impetus was clear – digital adoption and transformation were major enablers for them to survive and thrive. Executives and decision-makers in the banking and financial services industry believe the cloud will be the most important technology for the success of their organizations over the next few years. Also, the pandemic has definitely accelerated customers’ appetite for using digital channels, something they may not have done historically. The question for financial service providers keeps coming back to how much they can take advantage of this change in behavior.

Banking and financial services IT teams will need all the help they need to run this continuous development workload. One potential aid has proven to be robotic process automation (RPA), which is being used to help reduce the pressure of repetitive tasks in businesses, including software development processes. Application development is a resource-intensive activity, both in terms of personnel and costs. Thus, the cloud and automation can help these organizations standardize their business and bring their products to market in a secure, effective, and efficient manner.

Beyond regulations and compliance, banking players all across the globe are also increasingly beginning to look at ways in which they can integrate emerging technologies such as artificial intelligence (AI) to drive revenue and customer engagement. The readiness of digital banking has been the key factor in the resilience of financial institutions and their ability to recover from pandemic-related setbacks.

Digital Financial Products & Solutions

Detailed below are some of the most popular digital financial products that exist in the world today and real-life examples of their implementation.

  • Mobile Money

Mobile technology, coupled with high phone penetration, supported the first wave of digital financial services. Equally critical was the development of new business models for mobile money, including e-money issuance and agent networks, and the possible regulatory support for these models. For instance, M-Pesa in Kenya has enabled the poor without bank accounts to store, send and receive money digitally inexpensively via their mobile phones and using agents, such as a local store to “Cash In, Cash Out” (CICO), so they can participate in the local, still largely cash-based economy of many developing countries. There are over eight hundred million mobile money accounts registered in almost one hundred countries within a day. Sub-Saharan Africa is clearly in the lead, with nearly a quarter of the population having a mobile money account. Once mobile money systems reach scale, they can serve basic to more sophisticated financial services such as loans and digital insurance. For example, as it matured, M-Pesa made possible M-Shwari, a digital micro-savings and credit product that can be opened and used remotely.

  • Platform Ecosystems

Big tech platforms, such as social media, eCommerce, and ridesharing, have enabled new business models and sparked another wave of digital financial services by leveraging very large user bases and economies of scale. For example, Alibaba’s e-commerce portal in China provided the demand for its own payment service Alipay, which serves over a billion users. Similarly, ridesharing service Gojek in Indonesia paved the way for GoPay, initially to help customers pay their drivers. By leveraging cloud services and machine learning, consumer data generated on these platforms has enabled a new set of digital financial service innovations for credit, insurance, and savings, accessible through a “super application”. Ecommerce marketplaces, including Amazon, Alibaba, and Mercado Libre, provide credit to businesses that sell on their platforms based on analysis of merchant cash flow, inventory, customer performance, execution, and other measures.

  • Open Application Programming Interfaces (APIs)

APIs allow different systems to exchange consumer data and instructions. APIs can be particularly powerful for the poor when supported by a digital ID system and facilitate interactions between governments, businesses, and citizens. For example, in India, the Aadhaar biometric ID system that covers over a billion people forms the basis of an integrated set of APIs (“India Stack”), which, among other things, manages secure user consent to share data and enables identification and authentication at (e.g., eKYC for onboarding) for account opening and carrying out of diverse financial transactions. More generally, APIs can empower consumers and improve competition as market players no longer have a monopoly on the consumer data they hold.

  • Support For International Remittances

International remittance support has proven to be an important source of income for the poor. Prior to the COVID-19 pandemic, the volume of cross-border remittances to developing countries had exceeded foreign direct investment and was estimated to cross five hundred billion dollars by 2021. When sending money home when using payment cards or mobile money on the sender side, the average cost drops to around considerably lower than compared to global averages when using cash or when processed by a bank. Remittances fully processed by mobile money operators from sender to recipient cost even lower; however, this was only available in a few nations, and volumes for such transactions still remain low. New digital financial service models are emerging, which can further reduce cost and time. With employment in service industries in major remittance countries hit hard by the shutdowns, remittances have fallen sharply and weakened an important safety net for the poor in developing countries. The reduction in fees would offset at least a small portion of this drop.


  • Digital Wage Payment & Digital Tax Payment Facilitate Social Distancing

In addition to being cost-effective and safer, digital wage and tax payment measures also help governments regulate the spread of COVID-19 by making it easier to social distance. Compared to cash and check payments (to the extent these are physically delivered and cashed), the digital payment of salaries, taxes, and transfers to employees, government, and other businesses, respectively, benefits both payers and beneficiaries by ensuring better social support by distancing.

  • Facilitating Innovative Financing Models That Cater To The Poor

Major e-commerce platforms and telecom operators have leveraged the ability of digital financial services to facilitate payments to offer services such as solar power, insurance, and “pay as you go” loans. Innovations in technology and business models have driven the rise of digital financial services, which can reduce costs and increase the speed, transparency, security, and availability of more tailored financial services that are capable of serving the poor at scale. Digitization can reduce friction at every stage of the financial services lifecycle, from opening an account to customer due diligence, authenticating transactions, and automating other product-specific processes, for example, the assessment of solvency. Such products and services are therefore characterized by low marginal costs per account or per transaction and can bring scale gains and reduce costs. They also improve transparency since each transaction generates a data trail. This data track strengthens the ability of financial services to formally develop a credit scoring mechanism for informal market participants.

  • Enabling The Tracking Of Consumer Spending Habits

Fintech developments have given governments the ability to better track consumer spending habits in real-time. This may be the case once central banks issue digital currencies (CBDCs), whose transactions they can track, or if digital service providers are willing or required to share their data with the government. If so, it can help identify which sectors are experiencing the greatest declines in consumption, based on records of payment transactions, and therefore where best to target government assistance to businesses. Where granular payments data would allow a government to see not only transaction values but also a breakdown of transaction volumes and prices across different sectors, it could also help to quickly identify where bottlenecks are occurring. Such collection and disclosure of data, however, would depend on national information and privacy laws.

  • Faster Processing Of Remittances In Emergency Situations

Digital forms of payment such as mobile money and digital currencies, can serve in the easier and quicker processing of remittances during emergencies and times of crisis. This is especially the case when traditional forms of money transfer require a physical queue. For example, in the Pacific, the United Nations Capital Development Fund is working with mobile network operators to temporarily waive fees for mobile remittances to help maintain the flow of remittances, which is a source essential source of revenue for many Pacific island economies.