According to Forrester, there's a new cohort of customers using digital banking for the first time, an acceleration of contactless and mobile payments, and a growing range of QR-code, order-at-table apps.

"The past two years of the pandemic have fast-tracked digital behaviours and redefined how customers engage with their banks," says Forrester senior analyst, Aurelie L'Hostis. "Still, the 'death of cash' has once again been exaggerated. One thing for sure is that digital channels now dominate."

According to Forrester analytics data, in 2021, 76% of Spanish banking customers used their mobile banking app at least monthly, and 34% of UK online adults who applied for a loan in the past 12 months did their research on a smartphone. While digital (online and mobile) is now the top channel for US borrowers to purchase home loans.

Innovative entrants are changing the industry landscape

"Although some of the worst pandemic forecasts haven't materialised, banks continue to face long-term revenue pressure and tighter competition," says L'Hostis.

"They're also feeling pressure to act on sustainability. And while high street banks speed up their plans to close branches, digitise their experiences, and launch new ESG (environmental, social, and governance-focused) products and experiences, new entrants are doubling down on innovation to put their business in customers' pockets, creating new business models, and driving the next wave of transformation."

Some trends outlined in Forrester's The State Of Digital Banking, 2022 report include:

Challenger banks are again all the rage: After some disruption during the pandemic, current account switching has returned to normal levels in the UK. According to the Financial Conduct Authority, 8% of current personal accounts are now held with a digital 'challenger' bank, up from just 1% in 2018. Forrester Analytics data shows that 40% of UK online adults would consider banking with a provider that does not have any branches. Digital banks are also making deep inroads into the small and medium-size business (SMB) banking market, forcing banks and lenders to up their game.

At the start of 2022, four SMB-focused digital banks, US-based Brex and Novo, Indonesia-based KoinWorks, and France-based Qonto, raised more than $1 billion in total to build out lending platforms that complement credit cards, business accounts, and expense management tools.

Inclusive finance has become a hotbed of innovation: Forrester says a new breed of fintech has emerged, leveraging mobile technology, open access to data, AI and machine learning to drive innovative business models that target underserved consumers. In 2021, Nubank, one of the world's largest digital banks, which targets the underbanked in Latin America, grew its customer base by 62%, taking the total to 48 million in Brazil, Mexico, and Colombia. In Africa, digitally savvy unbanked and underbanked consumers, who traditional lenders have largely ignored, are turning to fintech startups such as Chipper Cash, Flutterwave, OPay, and Wave.

Fintechs are riding the green wave: Sustainability is a new reality, according to Forrester. Various environmental, social, governance-focused and sustainable-investing fintechs have entered the market to cater to values-based customers. In the US, digital bank Aspiration lets customers measure their impact with a personal sustainability score based on where they spend their money. In addition to its banking products, Aspiration offers managed IRAs and taxable accounts that invest in 100% fossil-fuel-free companies.

Banks are improving their IT to deliver innovation

In its latest report, Forrester asked how banks, credit unions, card issuers, and lenders are responding to the seismic shifts affecting the industry. After surveying decision-makers worldwide financial institutions, the company found that COVID-19 has brought a greater focus on product innovation and customer experience. It says while growing revenue is once again dominating business priorities, financial services firms are also prioritising improving their products and services, the experience of their customers, and their ability to innovate.

It says improving IT has replaced operational efficiency as the top digital transformation driver. "As COVID-19 reshapes customer expectations and competition heats, a growing number of banks have embraced end-to-end transformation, focusing more on improving their IT to promote agility and innovation," the company says. Banks also focus on improving the customer experience, product and service innovation, and operational efficiency.

Forrester found that technology strategies and lack of resources impede banks' efforts, with 25% of decision-makers at banks saying their company's technology strategy is among the most significant challenges to executing digital transformation. Twenty-five percent also say that employee time devoted to digital transformation execution around their other job responsibilities is also a challenge.

"To meet the needs of the future customer and the rapidly changing financial landscape, banks must pivot and reboot their strategy," says L'Hostis. "The economics of the next decade will challenge banks to adopt a future-fit technology strategy, rooted in customer obsession and enabling an unprecedented level of adaptivity, creativity, and resilience, or fail."

She says banks must capitalise on the pace of change and innovation and set their course for the next decade.