By Eric Disend, Partner

Digital technology is dramatically changing how banks interact with their customers. In just a few years, the financial services industry has evolved from traditional brick-and-mortar operations to online bill payment and deposits to the emerging world of mobile banking.

Two trends enabled by digital technology are at the heart of this transformation. One is the growing incursion of new, non-bank players into the industry. With digital banking, you don’t need a giant vault to offer financial services.

The second trend is the emergence of customer experience as a central consideration for banks as they create and execute their competitive strategies. Customers now evaluate their banking experience in the context of their interactions and relationships with retailers, travel companies and other service providers. They want digital banking to be as easy and seamless as ordering an item online or booking a flight with a mobile app.

Capitalizing on digital banking’s emergence

The ability to deliver services the way customers want, including through digital channels, is increasingly crucial to banks’ establishing and maintaining long-term relationships. At the same time, banks must address growing regulatory requirements and concerns over the security and privacy of information.

These trends point to a future of unprecedented convenience and exciting new services for consumers. They also suggest a period of enormous challenge for traditional banks, which must adapt to growing customer demands, new competitors and ceaseless technology innovation.

Capco believes banks can best position themselves to capitalize on digital banking’s emergence by taking a customer-centric view of their business. They can make the organizational and technology changes needed to execute a strategy focused on customer experience. And by using the growing troves of customer data available to them, they can identify and deliver the right products and services.

Growing expectations among consumers

Consumers are taking to the digital life with an enthusiasm that likely surprises even the strongest technology proponents. People are going online to buy products and services, conduct pre-purchase research, interact through social media, watch videos and listen to music, and yes, do their banking.

Recent and still-to-come innovations in mobile communications and commerce are further transforming how people live, work, play and shop, as anyone who’s fallen under the spell of a smartphone or tablet will testify.

Banks of nearly every size now offer customers online and mobile services, including balance viewing, statement downloading, funds transfers, investment transactions and bill payment. Online-only banks, while still only a small slice of the industry, have seen deposits rise 32 percent since 2010.[1] And banking via mobile devices has experienced explosive growth, with an estimated 530 million users globally in 2013, up from 300 million in 2011.[2]

Retailers of every stripe are providing mobile apps for customers to compare prices, get deals and make purchases. Target, Walmart, Shell and a dozen other market giants have joined forces to create the Merchant Customer Exchange (MCX), a new platform for smartphone-based transactions. Google Wallet, Square Wallet and Isis Mobile Wallet™ are competing for share in the mobile checkout market, offering payment solutions that allow customers to complete transactions by pushing a smartphone button, swiping a barcode or tapping a near-field-communication (NFC) reader.

These diverse initiatives have one thing in common: They all are taking place — and potentially taking share — in the banking value chain.

For their part, traditional banks understand both the growing customer demand for digital access and convenience along with the emergence of new competition within and outside the banking industry. They also recognize the need to expand their own digital services and capabilities, and many are innovating and investing heavily to do so. But are they doing enough, and are they doing the right things?

Coming in Part 2 of our Digital Banking series: The hard reality of consumer-driven digital banking.

Eric Disend is a Partner in Capco’s Digital practice