The world has undergone significant changes since the onset of the pandemic, especially in the financial industry's journey towards digitalisation. The pandemic expedited the transformation of customer interactions by three years and pushed banks' digital offerings ahead by seven years. However, as the pandemic-induced digitalisation boom subsides, the global economy braces for a recession, accompanied by a looming banking crisis triggered by the collapse of regional banks like SVB. In light of these developments, it is crucial to assess the progress made and the challenges that lie ahead in the digital transformation of financial services.

Not all recessions are the same. The wave of fintech innovations that reshaped the financial system in 2008 resulted from the introduction of smartphones and the great recession. As we approach the next recession, we must understand the impact of the crisis, combined with technological advancements.

Although there may be some parallels between the 2008 financial crisis and the current crisis as catalysts for fintech innovation and adoption, there are a few key differences. Unlike the credit-driven recession in 2008, the industry now faces an excess of liquidity rather than debt. Additionally, the current crisis does not originate from the financial system but is shaped by economic decoupling, the Ukraine war's commodity shock, and global inflation's impact on macroeconomic stability. Despite these differences, fintech innovation is expected to play a vital role in governments' and companies' response to the current turmoil.

As the COVID-19 boom subsides, digitalisation is not coming to a halt but rather shifting its focus. Executives are increasing their spending on digital business initiatives in response to the economic turmoil, with global IT spending projected to reach $4.6 trillion in 2023, a 5.5% increase. However, inflation is impacting consumers' purchasing power, leading to a decrease in demand for digital products. Consequently, businesses may invest more in back-end infrastructures, which have lagged behind front-end digitisation initiatives. This shift could provide an opportunity for integrating front and back-end infrastructures, yielding cost and efficiency savings.

Technological developments further support the acceleration of back-end transformation. Edge computing, for example, allows financial institutions to process data at the location of its creation, enabling faster insights, improved response times, and better bandwidth availability. Real-time insights are particularly crucial in the banking industry, where every second counts and low-latency applications can enhance operations, trade execution, fraud detection, cybersecurity, and more.

The rapid development of emerging technologies like 5G, AI, and VR is creating opportunities for the establishment of digital ecosystems. Banks can integrate their services into these ecosystems, contributing to the development of immersive digital experiences. While the exact shape of these ecosystems depends on nascent technologies, BigTech companies are investing heavily in AI and cloud computing, spurring a wave of innovation that will benefit various industries.

Central banks, historically pivotal in stabilising the global economy during crises, are increasingly embracing technology like Central Bank Digital Currencies (CBDCs). The success of CBDCs could potentially position central banks as digital competitors to traditional banks, with digital cash from commercial banks vying against CBDCs. In such a scenario, retail banks' focus would shift to offering innovative and user-friendly electronic wallets, while entry barriers for new players in retail banking would diminish.

While the upcoming recession differs from the 2008 financial crisis in its causes, its lasting impact on the financial services industry may be similar. Fintech's rise and fall will depend not only on the merits of specific technologies but also on banks' ability to support their customers in navigating challenges. The path towards digitalisation will continue to unfold, inviting new players into the industry and leveraging innovative technologies to transform the provision of financial services.

Read the full article Fintech’s new wave: Exploring the impact of recession and the banking crisis on the path towards digitalisation.