Digital Banks will Dominate Financial Markets in the Next Decade

In this article, we selected some answers by Momchill Zarev, Chief Commercial Officer at Sirma Solutions JSC, given in his interview for Investor.BG and during the panel discussion at Investor Finance Forum, the leading event for the financial industry in Bulgaria, held on November 4, 2022, at the Hyatt Regency Sofia Hotel, Vasil Levski Hall.

The stock market boom of the last two years has given digital financial services a steady tailwind. Let’s name a few: myriad of shopping apps, smart investment assistants, and cryptocurrency trading platforms. So, everyone who invests or manages their finances or makes banking transactions today usually does so via computer or smartphone. Fintech solutions are on the rise. Which of them can stick in the market in the long run, even if part of the target group no longer trades as much or gives up on the stock market for the time being?

I want to modify my answer slightly. The focus should be on what kind of business benefits digital innovation brings and not so much on technology. Technologies are constantly in progress; they change rapidly and are not always stable. Therefore, our choice is among thousands of applications, but our favorites remain the only ones that create value. Those that deliver real value will survive and reign the market - and the value has many dimensions e.g., optimizing the process, creating new functionalities, increasing productivity or revenue, or increasing the number of active users ready to use paid services. The value they create is the key.

For the business model to be sustainable and drive growth, the innovation must also have a successful monetization model. In addition, monetization is accelerated by creating stable partnerships between innovative companies and traditional institutions to help fast adoption of digital innovation, ensure market penetration and increase active users of such digital services.

Analysts in the sector talk about exaggerations in valuations during the last boom years. It is much more difficult for fintech companies to get venture capital. And this crisis did not go unnoticed by consumers. We have seen some mind-boggling business models, and accordingly, people ask questions like whether it’s that much better to manage their money through a startup rather than through the digital offering of a conventional bank. A recent study conducted by consultancy Horváth stated that the big players have advantages even if they are late to digitize their offerings. What is your opinion?

Although digital banks provide their services extremely fast and conveniently, customers face situations where they need help to settle everything online. Here, traditional banks offer the convenience of solving problems at the nearest branch. The most crucial advantage of traditional institutions is the trust built over decades or centuries. Customer confidence in the physical presence and identification of the institution with its branch network is still huge.

Fintech companies will drive innovation in the financial sector in the coming years. Still, banks will not lose ground quickly because they will play a role in maintaining the traditional business that corporations need. Fintech startups aim more at younger users and try to make the younger generation’s life easier. But the corporate segment has other needs, and it will take time before that business stops turning to the services of traditional banks.

The best of both worlds is a collaboration between fintech companies and traditional banks, where customers can choose between traditional and digital services in a way that is convenient for them. In the next decade, digital banks will dominate the financial market. They will become the first choice for Gen Z and the following cohorts because these people are digitally native and are not afraid to use new technologies.

Fintechs such as Trade Republic and Scalable Capital have benefited disproportionately from digitization in the financial sector. Within a few years, homegrown startups have become multi-billion euro companies. However, there is cooling, it is evident. How will the fintech industry develop in the coming years?

Innovation in the financial sector has accelerated during the pandemic. The post-pandemic recovery has caused rising inflation. The looming economic recession is cooling investment to some extent, but we still cannot see significant changes in this trend. The macroeconomic environment pressures investors to be more demanding, even towards promising startups. The rational approach is returning, and ROIs are calculated much more carefully.

What is the most necessary for the successful digitization of a bank? Does digitalization itself end only with shifting offers to digital?

It is too early to say that digital transformation has reached its peak. The pandemic and the recovery period have accelerated and pushed forward banks to replace and modernize their legacy systems. This process will not settle for two or three years. Modern digital strategies consider maintaining competitiveness as a function of continuous technological improvement, constantly upgrading with innovative solutions in core banking systems and applications. The benefits are keeping digital competitiveness, achieving lower operating costs and improved efficiency, and the shift to customized deployment models.

Why does Sirma support the Investor Finance Forum for another year?

This forum is one of the most successful events for the financial industry in Bulgaria. For its more than 10-year history, it has established itself as a stage for professional debate. The event allows business leaders and investors to freely discuss ideas and share the challenges facing financial industry development. We see how good practices and high standards shared as experience help the sector strive to reach the level of European and global companies. Sirma supports the initiative because technology companies aim to fundamentally change industries by offering innovative software solutions for accelerated business growth, improved service quality, and increased customer satisfaction.

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