How to Bridge Traditional Banking with Digital Finance

The financial services system is transforming at a faster rate than at any time over the last 50 years. It feels like just 10 years ago everything from instant cross-border payments to digital wallets and blockchain solutions seemed like the focus of a science fiction author, yet for millions of users, it is now simply part of daily life. Even with the traditional banking system relying on trust, regulatory stability, and processes that have evolved over many decades, the question does not appear to be whether the two systems need to come together, but rather what approach is most effective in making that happen.

The Challenge of Integrating Traditional and Digital Finance

Because traditional banking methods and digital finance methods are currently disconnected, both businesses and customers will continue to face challenges. For example, many businesses spend significant time exchanging assets, pay multiple layers of fees to third-party intermediaries, and are limited in the amount of business they can conduct in foreign markets. This is where technology can improve efficiency by simplifying and automating value transfers across different financial systems.

Modern infrastructure from companies like Inqud provides fiat onramp services that convert traditional currencies into digital assets without the complicated procedures that previously deterred many potential users. Thus, both parties can create more efficient processes for converting cash-based payments into cashless transactions, particularly in the context of international settlements and investment activities.

Payment Systems Evolution and Shifting Client Expectations

Tech development has long been a driving force for change in the world of banking, but online banking developed much more quickly than checkbooks and plastic cards were adopted. The future is speeding up again—users now expect fast transactions and see little distinction between ease of use and real-time transaction processing.

Gen Z and Millennials represent a rapidly growing segment of the working population that grew up with technology as an integral part of their lives. They find it strange that they must wait three days for a transfer (in the same way that the generation before them thought it was odd that they could not simply walk into a bank and request cash). These consumers compare their banking experience to using Uber, Amazon, or Netflix; all three companies have built their success on immediate access to services and products that are easy to use.

According to research conducted by McKinsey, users of digital banking products—including mobile banking, payment apps such as Revolut, investment platforms, and digital wallets—make up 75% of the consumer population in developed countries, and they consistently use one or more of these products weekly. Traditional banks are feeling pressure as their market share begins to shrink in the absence of new, integrated banking solutions.

Practical Cases of Successful Integration

Since its launch in 2018, Deutsche Bank has opened its dbAPI platform to external developers by allowing them access to its services, resulting in a 40% increase in digital transaction volume and helping to attract a much younger demographic than fintech startups typically attract.

Singapore’s DBS Bank has gone even further by transforming its entire business model, integrating digital asset trading capabilities directly into its platform, receiving regulatory approval to offer customers cryptocurrency services, and developing a digital exchange. However, DBS has not sacrificed any of the benefits that traditional banks provide, such as deposit insurance, regulatory oversight, or a secure and sound banking environment.

Meanwhile, Standard Chartered has teamed up with Ripple to enhance cross-border payment options for customers. The application of distributed ledger technology to cross-border transfers has greatly improved delivery times—from several days to just minutes—and reduced operating costs by 30% compared to previous processing methods.

Financial Inclusion Through Technological Bridges

Financial services have become an inclusive option for people who typically would be unable to access banking resources at all. According to the World Bank, more than one billion adults worldwide did not have a bank account as of October 2020, and they mostly reside in areas with poorly developed banking systems or where the costs of opening an account are high.

Mobile payment solutions like M-Pesa in Kenya have demonstrated the possibility of transforming entire economies through mobile payment solutions. Launched in 2007, M-Pesa has engaged more than 18 million active East Africans who utilize this service because they are unable to open traditional bank accounts. Therefore, M-Pesa has enabled these individuals to make payments, obtain loans, and save money using their mobile phones.

Nubank, a Brazilian digital bank, is the largest digital bank outside Asia, serving more than 90 million Brazilians without access to traditional banking options because of stringent minimum balance requirements and the absence of established credit histories. Through a combination of alternative methods of determining creditworthiness using data analytics techniques, Nubank has created access to a wide variety of bank-based products for millions of Brazilians who previously were excluded from the banking system.

Corporate Segment and B2B Solutions

Private users have a significant need for integration, but businesses with large operations such as multinational corporations tend to have an even higher degree of need for integration because they often deal with multiple banking relationships that span different jurisdictions, deal with currency risk, and put through thousands of payments every day. This can create operational inefficiencies and can also result in additional costs due to fragmentation of the financial system.

SWIFT, the international interbank messaging network, which processes more than 45 million transactions each day, has launched its SWIFT Go initiative to improve and reduce the cost of international payments. This has resulted in a considerable reduction in the processing time for small cross-border payments; previously, the process could take several days to complete, but now it is no longer than a few minutes.

As a result of experiencing this friction between the traditional banking industry and the new digital assets, corporate treasurers are using a variety of hybrid payment models; some of the corporate treasury liquidity is held in traditional banks whereas some of it is held in digital assets for near-immediate settlement. In 2021, for example, Tesla held part of its cash reserves in bitcoin; MicroStrategy also used digital assets as part of its business strategy. While these two examples are open to debate with respect to risk management, they provide examples of how corporations are willing to try new ways to operate.

Future of Integrated Financial Ecosystems

Practical Application Takeaways

The combination of traditional and digital banking is not just a passing trend, it is an economic imperative for businesses and individual consumers alike that want to harness the benefits of both types of banking systems to enhance their competitive advantages. In addition to improving the overall speed and cost of doing business, integrating traditional and digital banking will allow companies to leverage operational flexibility as well.

There are three primary factors that contribute to successful integration of the two banking systems: appropriate technology infrastructure; clear regulations; and user trust. The countries and businesses that are able to establish these foundational elements will drive the development of standard practices for the entire banking industry. Historical patterns have demonstrated that the best outcomes can be created through an incremental approach to implementation (i.e., using proven technologies to develop new capabilities over time).

Future financial developments will result from a collaborative relationship between traditional financial institutions (banks) and new technologies (digital platforms) rather than through a struggle between the two structures. Banks that achieve an effective combination of trust and reliability typically provided by traditional banking institutions while also being able to offer the speed and creative solutions typically associated with their online counterparts will be future leaders within the financial services industry.