The banking industry is undergoing a profound transformation as consumers increasingly favor digital channels.

In response, banks are rapidly adapt by embracing platform-based strategies and embedding financial services into broader digital ecosystems, according to a new report by the IBM Institute for Business Value (IBM IBV), developed in collaboration with Banking Industry Architecture Network (BIAN) and Red Hat.

The report, based on 2023 surveys of 12,000 consumers in 12 countries and 1,000 banking executives across 32 countries, alongside in-depth interviews, highlights a clear digital shift among consumers. Over the past three years, 63% of respondents have started a loan application online, 69% have made investment decisions digitally, and 58% have purchased or renewed auto insurance through online platforms.

However, the study found that digital adoption varies significantly by region. For example, in Brazil, 29% of respondents have a primary account with a neobank, compared to just 7% in Japan, reflecting how emerging markets are leading digital banking.

When asked what might prompt consumers to change their primary banking provider, respondents cited better customer service (20%), the convenience of transferring money instantly (19%), and frictionless mobile access (11%) as the top three factors.

Online banking is now the preferred method for 80% of consumers when managing basic financial tasks, with 62% using mobile apps and 12% relying on websites.

Disconnect between banks and customers

Despite these clear preferences, the study found a disconnect between banks and their customers. In particular, it revealed a gap in bankers’ understand of their clients’ expectations, with many executives overvaluing the role of peer-to-peer (P2P) money transfers and buy now, pay later (BNPL).

Conversely, most underestimate the importance of mobile wallets and the draw of personalized rewards. Additionally, customers indicated good customer service as a priority for clients, though bankers see it as relatively less important compared to other factors.

These gaps underscore the need for banks to recalibrate their understanding of customer priorities.

Embedded finance gains traction

To address evolving consumer behaviors, banks are advancing on the platform economy. The research reveals that one in four executives believing that embedded finance is core to their institution’s strategy. 71% of executives said their institutions are already active in the embedded finance space, reflecting that implementation is well underway.

20% have already launched embedded finance solutions, with institutions in emerging economies being ahead of those in major developed economies and European Union (EU) member states (24% versus 18%).

Of those, 65% said they have seen intermediate results. An additional 10% stated that they’ve achieved the goals set at the start of the journey.

Despite growing interest, foundational challenges persist. Banking executives indicated insufficient modularity of core banking systems (53%), inadequate API standards (52%), and the lack of funding commitment for long-term strategies (40%) as the top obstacles.

Outlook on embedded finance

When asked where bankers anticipate the biggest boost, many executives agree that launching a non-banking platform-based business model would be the most advantageous path forward.

A majority of respondents (57%) see great value in orchestrating retail and SME ecosystems. By contrast, less promising opportunities include embedding finance in gaming platforms (33%), integrating small and medium-sized enterprise (SME) lending into merchant ecosystems (28%), and providing embedded treasury services to corporate clients (27%).

Currently, banks are focusing on implementing embedded finance within high-growth sectors. These include the consumer industry with embedded payments and lending in e-commerce, manufacturing with embedded trade-finance tools, and education by engaging young consumers early to promote long-term financial wellness.

The embedded finance market generated an estimated EUR 20 billion to EUR 30 billion in Europe in 2023, representing about 3% of total banking revenues, according to McKinsey. By 2030, that market could surpass EUR 100 billion and account for 10% to 15% of banking revenue pools, the consultancy estimates.

Featured image: Edited by Fintech News Switzerland, based on image by thanyakij-12 via Freepik