Digitalization in Banking: Enhancing Efficiency and Customer Experience Amid New Risks

### Digitalization in Banking: A Double-Edged Sword

In a comprehensive report by the Bank for International Settlements (BIS), titled “Digitalisation of Finance,” the impact of digital technologies on the banking sector has been closely examined. Released on May 29, 2024, and authored by the BIS’s Basel Committee on Banking Supervision, the report delves into the myriad ways through which digitalization is reshaping the banking industry, highlighting both its advantages and the risks involved.

#### Key Highlights:

– **Efficiency and Customer Experience:** The adoption of digital technologies such as APIs, AI/ML, and DLT is significantly enhancing bank efficiencies, cutting costs, and improving the customer experience. These technologies allow for real-time data sharing, predictive analytics, and streamlined operations.

– **APIs Driving Innovation:** The use of Application Programming Interfaces (APIs) is pivotal in enabling efficient data sharing and connectivity. This has facilitated the rise of open banking and finance, encouraging innovation and financial inclusion worldwide.

– **AI and ML’s Potential:** AI and machine learning are predicted to add up to US$1 trillion of additional value annually to the global banking industry through personalized services, cost reductions, and new opportunities. Banks are leveraging AI for a range of functions from credit underwriting to fraud detection.

– **DLT and Tokenization:** Distributed Ledger Technology (DLT) is opening new opportunities for banks, particularly through asset tokenization. This could potentially transform how financial assets are utilized, with the market for tokenized assets expected to reach at least US$10 trillion by 2030.

– **Cloud Computing:** The shift towards cloud computing is enabling banks and fintech startups to access scalable computing resources, fostering innovation and reducing barriers to entry.

#### Risks and Challenges:

While digitalization offers numerous benefits, it also introduces several risks. Operational, reputational, and strategic risks are a concern, along with the challenges posed by data security and cyber threats. Large-scale digital transformation projects, especially for smaller banks, can be risky due to legacy infrastructure issues and a lack of expertise. The increased interconnectivity and data sharing also heighten the risk of data breaches and cyber attacks.

#### Market Dynamics:

The emergence of digital-only banks, fintech startups, and bigtech firms has intensified competition in the banking sector. These new entrants often have regulatory advantages and leverage data and technology to offer enhanced user experiences. Furthermore, strategic partnerships between banks and non-bank entities are increasingly common, aiming to combine strengths for mutual benefit.

#### Conclusion:

Digitalization is profoundly transforming the banking landscape, offering opportunities for innovation and efficiency gains but also introducing new vulnerabilities. As the banking sector navigates this digital transformation, balancing the benefits with the risks will be crucial for sustainable growth and security.

*Featured image credit: edited from freepik*