Stay Competitive in the Digital Age: The Future of Banks

IMF Working Papers, February 19, 2021

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The latest advancement in financial technology has posed unprecedented challenges for incumbent banks.
The paper analyzes implications of these challenges on bank competitveness and explores factors that could support digital advancement in banks.
The analysis shows that the traditionally leading role of banks in advancing financial technology has diminished in recent years.
Ongoing efforts to catch up to the digital frontier could lead to a more concentrated banking industry, as smaller and less tech-savvy banks struggle to survive.
Cross-country evidence suggests banks in high-income economies appear to have been the digital leaders, likely benefiting from:
- a sound digital infrastructure,
- a strong legal and business environment,
- healthy competition.
Nonetheless, some digital leaders may fall behind in the coming years in adopting newer technologies due to:
- entrenched consumer behavior favoring older technologies,
- less active fintech and bigtech companies,
- weak bank balance sheets.

Subject: Digitalization, Emerging technologies, Financial markets, Financial sector development, Financial services, Technology
Keywords: bank characteristic, bank competitiveness, bank concentration, bank condition, bank digitalization, bank firm, bank service digitalization, Banks, Digitalization, digitalization progress, Emerging technologies, Financial sector development, Global, WP

Digital leadership is correlated with institutional and infrastructural strengths (sound digital infrastructure; strong legal and business environments; competition).
Policymakers and bank managers should consider that catching up to the digital frontier may intensify industry concentration, potentially disadvantaging smaller and less tech-capable banks.
Risk factors that could slow adoption of newer technologies even among current leaders include consumer inertia, limited activity by fintech and bigtech firms, and weak bank balance sheets.
The paper implies a need to support digital advancement across banks to prevent excessive concentration and to sustain competitiveness.

Estelle X Liu. "Stay Competitive in the Digital Age: The Future of Banks", IMF Working Papers 2021, 046 (2021), February 19, 2021.