The State of Digital Transformation - A Global Perspective

Financial institutions around the world continue to feel the impactful change of digital transformation.  Despite the regional differences in the financial landscape globally, common themes and standards in innovation have developed in the last 5 years.  Multiple trends in FinTech are driving the next generation of services, with various area-specific challenges being tackled in unique ways globally.

The disruption of financial systems in Sub-Saharian Africa, Japan, and Europe have shown considerable industry transformation driven by dynamic changes in technology and business models. Despite remarkable success and growth in these locations, there are still many challenges ahead for all market players.


  • Penetration of mobile phones has created a path to financial inclusion and a new revenue source for financial services providers;

  • The existing pattern of regional banks to outsource solutions has unlocked a “modular” system for frictionless experience and targeted product specialization;

  • Regulation that enables open platform and data collection (i.e. Payment Services Directive) has spurred further FinTech expansion.

Technology-driven innovation (Region - Sub-Saharan Africa)

Traditional banking models have been disrupted by the digitalization of everyday financial services. Consumers expect access to banking anytime, anywhere, and on any device in a user-friendly way. FinTech and e-commerce firms are capturing market share by providing the enhanced experience that customers now demand from technology; affordable mobile devices have further evolved the ways customers interact with financial service providers.

In the Sub-Saharan region of Africa, a growing population with access to mobile phones has made business opportunities for financial inclusion extremely attractive. According to GSMA Intelligence, three-quarters of the population have a SIM connection (about 747 million). Around a third of these mobile users, have a smartphone. By 2025, it's projected to be 690 million active smartphones. This vast mobile channel enables outreach to a tremendous audience that was underbanked before.

In addition to providing a customer-centric experience, financial institutions take advantage of savings and efficiency benefits in the transition towards digital transactions.  Estimated revenue from digital financial services (DFS) for banks together with cost-efficiency of digital transactions leads to higher profitability.

Mobile phone-based money transfer, financing, and microfinancing service M-Pesa was launched by Vodafone in 2007. in Kenya. This FinTech company now represents 27% of total mobile network operator’s (MNO) revenue. For other telcos, the share of mobile money is somewhere between 5-15% of total gross revenue. It reduces clients churn and increases customer satisfaction. For banks, opportunities for DFS revenue are far beyond that of fee revenue by optimizing cost to income ratios and cost of revenue through leveraging digital channels.

Despite the numbers being attractive, financial institutions in this region have faced many challenges in implementing DFS. International Finance Corporation (IFC) and the Mastercard Foundation conducted a four-year study (2014 - 2018) of seven markets in Sub-Saharan region [Source: “Aligning Expectations: The Business Case for Digital Financial Services: By Christian Rodriguez and Julia Conrad] with the goal to understand the adoption cycle, results, and opportunities of the business case for DFS (setting a benchmark that will help with projections new players). Study shows that MNO’s business model can’t be applied to bank solutions without tailoring business models to their specific market contexts, operating expenses, and unique capabilities:

“Business models for mobile money agent networks call for a mass-market approach whereas financial institutions look to serve specific market niches through their agent banking channels”.

Wrong assumptions were made about the outreach, and customer transaction patterns such as transaction size and frequency, service offering, and revenue generation.

The key elements financial institutions need to consider when putting together a financial model for a digital channel, including detailing the main items related to capital investments and operating expense of the channel. To understand how to reach self-sustainability of digital banking service, some key recommendations should be implemented such as: adjusting DFS usage forecasts to the reality on the ground; not overcomplicating financial models; generating solutions that address specific market challenges rather than blindly adopting processes used by other DFS providers. As an example, digitalization of savings through mobile wallets can reduce cost of serving people in branch to 25%.  

IFC and Mastercard Foundation study also observed that some financial institutions were driven by the ambitions and excitement of digital transformation instead of a clear understanding of industry complexity when developing assumptions. Because of internal conservatism and difficulty in gaining buy-in, digital transformation leaders tend to oversell an innovative solution and underestimate the cost of implementation.

Collaboration with MNO partners partially solved those issues. Companies came up with products that allow customers to transfer money between their bank accounts and mobile wallets. This approach is helping banks to “mock-up” a solution without painful investment. A downside is that the chain of partnership generates higher interest fee (as bargaining power is limited) and requires long negotiation beforehand.

Many FIs followed “conventional wisdom” in believing that digital channels – mainly agent and mobile banking - are cheap to implement and inherently cost-effective because they lack the physical and human infrastructure required to expand through traditional bank branches. However, many of the participating institutions came to realize that although upfront investments for digital channels are not as large as for branches, other recurring operational expenses, such as commissions, technology platform maintenance, and channel management, can represent significant ongoing costs for the institution. Unlike first movers, current players have a much better understanding of benchmarks to choose financial modeling carefully and data-based.

Mass-market fintech is booming in Sub-Saharan Africa because the use of DFS promises to expand banking outreach in a cost-effective manner. Digital channels and 24/7 service access are also expected to improve customer experience, driving usage and offering cross-selling opportunities. Customer experience and acquisition are key challenges for financial institutions now.

Changing consumer behavior (REGION - JAPAN)

The increase in convenient tech-savvy solutions from outside the banking sector has dramatically  changed consumer behavior. Pressure in being out-of-date and losing market share is enhanced by open access to global technological solutions and shifts in demographics in developing countries. Companies across the globe have started to digitize all transactions (apart from those that require the handling of cash) to offer mobile apps.  The repositioning of branches and staff while implementing flexible management to reduce cost, is a response to the growing e-commerce trend. The use of contact centers for outreach to improve customers’ financial literacy is an indicator that companies need to be customer-centered and socially responsible to remain competitive.

A unique economic situation that the financial services industry is facing is in Japan, where the population is dramatically declining and expected to drop by 16% from 2010 - 2040, creating multiple industry challenges. A smaller and older population means reduced economies of scale, which means a reduced banking market and difficult lending environment with a lack of borrowers. Moreover, interest rate competition among lenders and a shortfall of potential borrowers has made negative interest rates the new norm [Source: “Digital transformation in Japan’s banking industry” by Eiichiro Yanagawa, 2018]. In such awful economic conditions, banks had no choice but to stick with the same strategy. Banks started to think about how to differentiate themselves besides the interest rate by improving branding strategy, customer experience, and loyalty programs.


Some of the critical opportunities facing regionals bank struggling with cash flow shortage were digitalization of all transactions, more flexible management and exploiting contact centers for improving customers’ financial literacy.  Customers were seeking an omnichannel and frictionless experience from banks, similar to hotels, airlines, and restaurants.

“Frictionless processes require that banks be frictionless organizations. At present, bank structures are geared to be ‘product-out’ organizations based on generating product services”, - states Eiichiro Yanagawa in “Digital transformation in Japan’s banking industry” report.

To secure transformational requirements, regional banks in Japan leveraged unique historical backgrounds of establishing joint systems with similar institutions. Outsourcing of the development, operation, and maintenance of the core system seemed a modern solution. However, that’s the approach of how these tiny financial institutions had survived in resource limitations and lack of in-house expertise circumstances before the FinTech era.

Core systems of a bank or vendor-developed became a “module” that regional banks can use to optimize development and maintenance cost. All banks individually connect with the same protocols and processes to the industry networks including the Zengin System, BOJ-NET, integrated ATM networks, and insurance industry and securities industry networks.

Digital transformation has changed the relationship between financial institutions and clients.  In B2C markets, the change has resulted in an ongoing experience based on financial needs along a customer‘s lifecycle. For B2B, the role of a bank expands to business consulting and support according to the company’s business cycle.

To be more relevant banks established a client-oriented strategy of highly specialized services for dedicated customer groups (ultra-personalization). “Modular” system of financial products increased revenue through engaging new customer segments and creating a new value chain by collaborating with digital operators and FinTechs.

Figure 3: The new financial services paradigm. Source: Oliver Wyman, Celent.

Figure 3: The new financial services paradigm. Source: Oliver Wyman, Celent.

Regulatory Intervention (REGION - EU)

Disruption of the traditional banking business model can’t take place without policy changes. After the financial crisis, most European banks got in a difficult situation of a multi-year debt crisis. The most promising source of profitability was rooted in the payments industry, generating impactful revenue with estimates for retail payments, a quarter of total European retail banking revenues (€128 billion). Following a successful e-commerce experience, companies invested in accelerating digital payments that helped to capture correlated personal data information through channels (location, behavioral data, and customer preferences). Privacy and GDPR compliance updates that came out last year are making benefits from data more controversial because the new regulation empowers individuals to exercise and control their right to privacy, and require companies be accountable for gathering and holding data. However, it provides better budgeting, forecasting, and overall customization as a valuable offering for service providers.

Because of outdated organizational structures and complex regulation, banks had a gap between technology and adaptation, in comparison with aggressive FinTech companies and their ability for quick market penetration. European experience also shows the benefits of a collaborative model where startups are working on improving specific parts of the traditional model by using innovative technology. While traditional organizations’ focus their portfolio in retail, private, commercial, investment, transaction banking, wealth, asset management, and insurance — FinTech players focus on data and customer-driven design towards executing specific parts of the banking experience. Data-driven approaches enable fintechs to take risks that financial institutions cannot. Examples of companies that disrupt the status quo of trust would be PayPal, Venmo, Mint, Square, Stripe, Coin, etc.

Regulatory intervention plays a huge importance in acceleration payments in Europe [Source: “PSD2: The digital transformation accelerator for banks” by Mounaim Cortet, Tom Rijks and Shikko Nijland]. The first Payment Services Directive (PSD1) provided for the framework of an integrated European payments market. Because banks can’t leverage industry with innovations, more active players (tech giants, fintech, retailers, and MNOs) pushed it from services and processing infrastructures side. Together with cross-border foundation (SEPA) PSD1 introduced a specific category of non-bank payment service providers, ie, payment institutions.


  • Allowed new non-bank companies to carry out financial transactions (starting as payment service providers). In the past, only banks and central banks or government agencies provided payment services.

  • Banks and other payment service providers are required to be transparent about their services and fees, including maximum payment execution times, fees and exchange rates.

  • Provided the legal platform for the Single Euro Payments Area (SEPA) and accelerated the development of it.

Revised PSD (PSD2) promoted competition and innovation by ‘non-bank’ providers. It made a major impact on banks, which had to provide open access to relevant core legacy systems through APIs. Enabling such open access in a secure manner and maintaining the integrity of systems, data, and customer confidence brought complexity to the process. For example, an important element of the directive is the demand for common and secure communication (CSC) and a specific authentication process for payments. Since this March all financial institutions that offer an API have been providing it for external testing by customer consent handling organizations. September 14, 2019, is the final deadline for all companies within the EU to comply with PSD2’s Regulatory Technical Standard (RTS).


  • Allowed status of "Account Information Service Provider" (AISP) that granted access to account information, including balances and transactions, for one or more accounts and one or more banks. A customer can view all of her multi-bank details in 1 portal.

  • Created the status of "Payment Initiation Service Provider" (PISP) that gives new actors the possibility to initiate payments on behalf of the payer. It means retailers can ‘ask’ consumers for permission to use their bank details. Once you give permission, the retailer will receive the payment directly from your bank – no intermediaries.

  • Harmonized pricing and improved security of payment processing across the European Union including right to refund and better consumer protection against fraud.

However, Digital Identity as a Service provides a new revenue source for banks by monetizing existing customers together when tuned to specific audience services. It becomes the common trend that banks step into a positioning of  ‘bank as a platform’, enabling safe and effective open access to customer data and/or services through open APIs. This requires banks to prepare their internal organization to effectively work together and enable such services. PSD2 was an accelerator of API-driven digital business strategies for banks to develop innovative payment and information services for consumers across the EU.

Understanding of processes that galvanized digital transformation of financial services in specific regions enables recognition of its drivers and challenges. Consumer behavior and technology adoption will constantly shape the future of FinTech. Examples of Sub-Saharan Africa, Japan, and the European Union show effective strategies of industry developing with a local context.