Banking Sector Transformation: Disruptions, Challenges and Opportunities

Abstract

Banking has evolved from ancient times of using grain banks and temple lending to modern banking practices. The transformation of the banking sector has ensured that banks play the crucial role of facilitating faster and efficient service delivery. This paper traced the evolution of banking and examined associated disruptions, opportunities, and challenges. With the specific objective of influencing policy-oriented discussions on the future of banking, this study adopted a literature review methodology of integrating various sources, such as scholarly journals, policy reports, and institutional publications. Public interest theory and disruptive innovation theory underpinned this study. Findings revealed that banking has evolved from Banking 1.0 to Banking 5.0 due to disruptive factors which have been pivotal to the significant structural sector changes: Banking 1.0 (pre-1960s); Banking 2.0 (1960s to 1980s); Banking 3.0 (1980s–2000s); Banking 4.0 (2000s–2020s); and Banking 5.0 (2020s to the future). Despite the existence of opportunities in the transformation, challenges include regulations, skills shortages, legacy systems, and cybersecurity that must be addressed. This calls for a coordinated response from stakeholders, with banking’s future requiring collaborations as cashless economies, digital economies, and digital currencies take centre stage.

1. Introduction

In a digitalized world, the financial intermediation role of banks is heightened and remains pivotal. To ensure the provision of safe and secure customer-centric financial services, digital technologies play a crucial role in facilitating faster and efficient delivery. Notably, banking is evolving from traditional to digital banking. Characteristically, traditional banking has been associated with conventional banking methods and banking services provided mainly in bricks-and-mortar structures. On the other hand, digital banking driven by technological innovations introduces digital access in the execution of banking services.

Ref. [1] concurs with [2] that digital banking has transformed and reshaped the traditional financial services landscape through operational efficiencies, improved service delivery, and customer experiences among others. For instance, instant bank transfer options are now available, whereas they previously took longer. Also, there is now an easier online customer onboarding process, which previously required customers to physically visit the bank. Indeed, these developments have been influenced primarily by a tech-savvy generation, improved internet penetration rates, and increased availability of affordable mobile gadgets which have spurred the integration of fintech and banking [3,4]. All these have disrupted the approaches and services associated with traditional banking. Noticeably, the integration of financial technologies (fintech) and banking has seen an increase in the development of digital banking platforms, usage of banking cards in transactions, and a shift toward a cashless society.

Fintech players provide innovation and creative solutions, while financial institutions provide a regulatory compliance framework and a customer base. For the fintech to scale up and ensure long-term success, they require the regulatory expertise and customer base possessed by the banking sector. Meanwhile, the banking sector requires adaptive innovations to meet the demands of a dynamic operating environment. In fact, a mutually reinforcing relationship exists between fintech and financial institutions. Hence, the development of regulatory sandboxes in most countries, with the United Kingdom through the Financial Conduct Authority (FCA) being the first in its attempt to accommodate technological innovations [5]. For sustainable success, collaboration is key in the coexistence of fintech and financial institutions. Thus, through collaboration, synergistic benefits accrue to the economy and industry by capitalizing on the strengths of both parties [2]. The synergistic benefits drive innovation and growth in the financial services sector [6,7,8].

Originally, the emergence of fintech companies in the financial services sector was viewed as disruptive, with the potential to eliminate traditional bank dominance [9,10]. This view was dominant especially after the 2007/8 Global Financial Crisis (GFC). By contrast, ref. [11] observed inconsistences associated with disruptive innovation theory’s suggested strategies for disruptors. Furthermore, they revealed strategies adopted by incumbents as collaborative. Progressively, the disruptive nature is evolving into collaborative partnerships.

Ref. [6] observed that fintech solutions bridged the infrastructure gap within the traditional banking system by capitalizing on digital innovations to provide crucial financial services such as savings, credit, and insurance. For example, digital microcredit facilities accessed on smartphones via app-based lenders have recorded growth in Kenya [12]. Not only have fintech solutions addressed financial inclusion, but they have also stimulated economic growth and transformed banking. According to the hypothesis of [13], banking will become more focused and connected to technology, customers, products, and life. The four pillars of [13] summarise the future of banking as “Bank = technology,” “Bank = client,” “Bank = product,” and “Bank = life.” It is further postulated that a human being is Homo financial in the digital age, which means they possess financial literacy and financial thinking.

In terms of prior studies, ref. [14] conducted an exploratory qualitative study to identify and analyse the challenges associated with digital transformation in the retail and commercial banking in Germany. The study revealed that the barriers were mainly in product market knowledge, participation of employees and customers, and public benefits. These barriers contributed varied magnitudes to the digital transformation process of banks. On the same subject of digital transformation, ref. [15] focused on India with [16], focusing on Indonesia. They both revealed that banks should address the challenges for them to remain competitive. Thus, a research gap exists, in that these three studies [14,15,16] were country-specific, meaning that the outcomes cannot be generalized to other countries. Additionally, they highlighted the opportunities and challenges without identifying the disruptive forces behind.

Another study by [17] focused on the way employee skill sets have to evolve to keep up with the banking sector’s changing digital landscape. To remain competitive and innovative, ref. [17] concluded that financial institutions should invest in workforce upskilling. Alternatively, ref. [18] conducted a systematic literature review on the digital transformation in banking. The study highlighted that stakeholders should strike a balanced approach in encouraging innovation and promoting financial inclusion.

From the digital transformation journey of the banking sector, scant studies have traced the transformation and highlighting the existing challenges, opportunities, and disruptive forces. Hence, this study aims to fill that gap by tracing the evolution from Banking 1.0 to Banking 5.0.

Accordingly, this paper traces the transformation of the banking sector from the ancient times of barter trade to the modern banking practices. Also, this paper examines the associated disruptions, opportunities, and challenges. Significantly, the paper’s findings aim to inform and influence policy-oriented discussions on the future of banking. This paper is organised into six sections. Firstly, Section 1 is the introduction on the subject under study. Secondly, Section 2 outlines the research approach adopted. Thirdly, Section 3 is the literature review in which the evolution of banking sector and theories are discussed. Fourthly, Section 4 discusses the disruptions, opportunities, and challenges in the banking transformation. Fifthly, Section 5 highlights this study’s policy implications. Finally, Section 6 provides the conclusion and proffers future directions of study.

2. Research Approach

With the specific objective of influencing strategic policy discussions in the banking sector, this study adopted a literature review methodology as its primary research technique. This study traced both historical and current change drivers alongside assessing the strategic policy implications to the banking sector. The approach enabled the integration of various sources, such as scholarly journals, policy reports, and institutional publications. Additionally, this study allowed flexibility in interpreting emerging themes across multi-disciplinary domains [19,20].

This review fosters thematic exploration, historical contextualization, and policy-relevant synthesis, which are essential to comprehending multi-faceted disruptions like technological innovation, regulatory change, and organizational structure shifts, in contrast to systematic reviews that prioritize thorough coverage and stringent inclusion criteria [21]. This approach was relevant for generating insights that promote evidence-based decision-making and has been confirmed through effective application in similar research focused on digital finance and regulatory innovation among others [22,23,24,25]. This strategy was consistent with this study’s objective of stimulating policy-oriented discussion on the opportunities and challenges influencing banking’s future.

3. Literature Review

This paper’s literature review is organised into two areas, the theoretical underpinnings and evolution of banking.

3.1. Theoretical Framework

Two theories underpinned this study, namely public interest theory and disruptive innovation theory. The first to be discussed is public interest theory.

3.1.1. Public Interest Theory

This theory was advanced in 1920 by Pigou. Pigou was of the view that regulations were designed with the regulatory aim of correcting market imperfections [26,27,28]. This was based on the implied assumption that businesses do not operate to serve public interests. Hence, regulations are usually induced by public crises or discontent. For example, The Dodd-Frank Act of 2010 in USA was enforced to address banks’ risk-taking behaviour after the 2007/8 GFC. Additionally, the European Union (EU) enforced the General Data Protection Regulations (GDPR) in 2018 to address data security issues associated with the digital operating environment requirements.

Critique of this theory has centred on the capture of regulations by industry players as well as failure to adapt in an evolving environment [26,29]. Applying the theory to this study, regulations are designed and developed with the overall objective of aiding attainment of regulatory mandates such as financial stability and integrity. Failure to address these mandates results in a contagion effect in the economy [30], leading to the inclusion of consumer protection and financial inclusion mandates to the traditional regulatory mandates [31,32]. In the era of modern banking with evolving technologies, failure to have adaptative regulations results in regulatory arbitrage. Regulatory arbitrage can be viewed as market failure.

To overcome public interest theory criticisms and minimise risks of capture by industry players, regulators need a balanced approach to regulating banking in the evolving fintech era. The balanced approach should promote innovation and be sustainable without stifling competition. To broaden understanding on the subject, the disruptive innovation theory is discussed in the next section.

3.1.2. Disruptive Innovation Theory

The theory was developed by Christensen in 1997. The theory explains how new entities enter existing markets using innovative technologies as a competitive edge to disrupt or reshape existing markets. As a result, new services and products are on offer, new consumer segments are created, and new approaches to business are introduced into an existing market among others. By leveraging on innovative technologies, this ensures efficient and cheaper service delivery. However, these innovative approaches disrupt the traditional market players (incumbents). Hence, disruptive innovation.

Ref. [33] revealed that in Indonesia, branchless banking has transformed the financial services sector by leveraging on innovative technologies to provide service access to the unbanked population. Furthermore, with fintech innovations, customised financial products and services have been developed targeting the underbanked and unbanked population [6]. In [34], the smart mobile phone technology was identified as a disruptor to incumbent banks’ models. For instance, mobile network service providers such as MTN, Airtel, and Glo have transformed by integrating the traditional banking system and mobile banking [35,36].

Applying the theory to this study, technologies continue to play a key factor in transforming the banking sector. This has resulted in new products, services, and players. However, some view technology as a disruptor while others view it as requiring collaborative partnerships.

Having discussed the two theories applicable to this study, the evolution of banking is reviewed in the next section. As part of the literature review, combining the two theories and evolution of banking provides an enriched foundation to understand the drivers which can influence policy-oriented discussions.

3.2. Evolution of Banking (Banking 1.0 to Banking 5.0)

The historical developments of banking assist in having better perspectives on the factors that have been pivotal to the significant structural sector changes. In this respect, previous studies on the evolution of banking, industry and Information Communication Technologies (ICTs) have served as the basis for the categorisations [37,38,39,40].

The categorisations to be discussed are Banking 1.0 (pre–1960s); Banking 2.0 (1960s to 1980s); Banking 3.0 (1980s–2000s); Banking 4.0 (2000s–2020s); and Banking 5.0 (2020s to the future):

3.2.1. Banking 1.0 (Pre–1960s)

Banking began thousands of years ago with its origins dating back to roughly 2000 BC in Assyria and India, when traders lent money to purchase grain [41]. During the same period, temples in ancient Greece and Rome started taking deposits, making loans, and even trading money. With time, these Italian banking practices spread throughout the rest of Europe. In 1926, Italy enacted regulatory supervision legislation for deposit-taking institutions [42,43]. Notably, advancements occurred in Amsterdam under the Dutch Republic during the 17th century while in London, these commenced in the 18th century. These advancements laid the foundation for Europe’s modern banking systems.

Ref. [39] observed that Banking 1.0 referred to the conventional banking model that existed prior to 1960, when branches operated at scheduled times and banking services were customised. Characteristically, during this period, money was physically transferred, records were kept on paper, and bank managers then knew the clients facially, by name, and every aspect of a client’s life [37]. The decision to lend was based on the reputation and character. Regulations were not stringent with banking transactions, mostly performed in good faith and followed by a handshake.

Historically, incorporation of technological innovations in the financial services sector began in 1945 when cheques were first accepted as a form of payment [37,40]. This was followed by the first credit card in 1957 in the United States of America (USA), the Diners credit card which was mass marketed [44,45]. However, with the manual system in operation, there was slow service, alteration in cheque payments, and the system was prone to human error [41].

In general, operations during this era created the backbone of today’s financial system with core principles of trust and customer service. According to modern banking theory, commercial banks play a crucial role in the economy’s wealth distribution when combined with other financial intermediaries [39,46,47].

3.2.2. Banking 2.0 (1960s–1980s)

In this era, showing progression from Banking 1.0 to Banking 2.0, banks’ branch operations and networks expanded [37]. Due to the inefficiencies associated with manual systems under Banking 1.0, mainframe computers for data storage and accounting were introduced [40]. For instance, bank transactions were bulk processed at the end of the day.

In the 1960s, Barclays Bank was the first bank globally to introduce Automated Teller Machines (ATMs) which eased financial transactions [48,49]. Later, debit cards were released as a means of conducting transactions. This advancement unlocked the global network of automation in the banking sector, which benefited both banks and clients.

The 1970s saw the creation of the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a global, automated financial messaging service which eventually harmonized worldwide cross-border foreign transactions [50,51]. To participate in the SWIFT platforms, banks have a unique ID known as SWIFT or Bank Identifier Code (BIC) universally accepted by the central banks [52].

Various technologies were introduced within the banking system during Banking 2.0. Consequently, there were advancements due to electricity being incorporated into the industrial functions in line with Industrial Revolution 2.0 [46]. Thus, [40] referred to this period as the data processing years.

3.2.3. Banking 3.0 (1980s–2000s)

The client server period stretched from the 1980s to 2000s, also known as Banking 3.0. Ref. [40] revealed that during this period, banks facilitated information technology-based infrastructures to enable bank clients to interact with the bank. Consequently, banks offered new services. Furthermore, ref. [48] concurred with [53] who opined that new service offerings such as internet banking were popularised in the 1990s with the advent of banks having world-wide websites. For instance, ref. [54] revealed that in 1997, Singapore had five banks with customized websites for internet banking namely [48] Post Office Savings Bank (Postbank), Overseas Union Bank (OUB), Development Bank of Singapore (DBS Bank), United Overseas Bank (UOB), and Overseas-Chinese Banking Corporation (OCBC).

Services which came along with internet banking included paying bills, transferring funds, printing statements, and account balance inquiries. The availability of these technologies enabled faster speed and data flow exchange within the banking sector. Thus, electronic business was performed at a faster rate than the previous analogue period, with millions of bank transactions taking place every day. Internet banking represented one of the evolutionary stages of banking [55]. This resonated with the industrial automation associated with Industrial Revolution 3.0 [56].

In response, banks began using data warehouses to store a record of all transactions [57]. This enabled data mining in the creation of customized marketing strategies based on historical consumer interactions data. Even though the warehouses represented the commencement of data analysis in the banking sector, the branches’ one-day processing lag was still restricting the delivery of real-time data [40,56,58].

3.2.4. Banking 4.0 (2000s–2020s)

According to [40], the predictive period is the period when banks started processing real-time transactions. For instance, the bank responds promptly and maintains customer’s satisfaction if a customer lodges a complaint with the call centre [40]. Accordingly, the Banking 4.0 era enabled banks to utilise forecasting or prediction models based on historical transactions. During this era, financial and non-financial firms retained data virtually and limitlessly due to the cheap cost of data storage [59]. Banking 4.0 embraced the innovative solutions offered through financial technology companies and specialized in providing customized customer-oriented experiences through digital channels [56].

Banking operations are crucial to banks performing and executing customer transactions seamlessly. In [60], it was discovered that over the last two decades of the 20th century and the first part of the 21st century, banking operations had changed. They changed from traditional ledgers to automated ledger posting machines (ALPMs) to current core banking systems (CBSs).

The predictive period known as Banking 4.0 encouraged collaboration and innovation in the financial services ecosystem. Ref. [39] emphasized that Banking 4.0 was premised on promoting collaboration between customers and financial institutions. Collaboration remains key as evidenced by the products and service offering being driven by customers in need of convenience. So, this resonates with Industrial 4.0 which is based on the development of smart products and services that rely on the integration of internet of things [37] and application of big data analysis [61].

3.2.5. Banking 5.0 (2020s to the Future)

Banking 5.0 is going to be characterised by exchange-traded funds (ETFs), cryptocurrencies, high-frequency trading, intelligent banking, robo-advisors and cobots, embedded banking, and responsible banking. The emphasis is going to be placed on sustainability issues. Thus, Banking 5.0 will require greater collaboration between human and intelligent systems [37,62].

To improve client experiences, Banking 5.0 emphasizes the seamless integration of technology with human interfaces, with a particular emphasis on sustainable banking. In Banking 5.0, banks would serve as platforms that collaborate with different partners in the ecosystem to offer a wide range of financial and non-financial services.

The emergence of technologies like voice recognition, virtual and augmented reality, and artificial intelligence, which together provide a powerful combination for improving banking services and addressing current banking issues, is more responsible for the transition towards Banking 5.0 rather than solely new inventions [63].

When comparing Banking 4.0 and Banking 5.0, collaboration in Banking 4.0 centred on financial institutions with fintechs while Banking 5.0 is centred on human and intelligent systems. This shows significant advances in the interactions which require traditional banks to move away from legacy systems.

Traditional banks are anticipated to undergo major transformation and create alliances with fintech start-up businesses [37,64]. Therefore, there is little chance that traditional banks would cease operating. However, it is anticipated that the spread of fifth-generation technology would facilitate easier innovative banking models to be adopted and shared. So, the model includes digital banks with a different approach to service offering.

In terms of the banking evolution, Banking 1.0 to 5.0’s key features are summarized as follows. Firstly, Banking 1.0’s key features were the reliance on manual banking systems with physical record keeping. Furthermore, the traditional banking concept of relationship banking was established. Also, during this era, cheques and credit cards were introduced. Secondly, Banking 2.0 had growth in branch networks and bulk transaction processing associated with analogue systems. Main frame computers, debit cards, and the SWIFT international platform were introduced into the banking system. Thirdly, Banking 3.0 had internet banking, accessing banking services 24/7, and batch transaction processing. In addition, relationship banking continued to drive banking. Fourthly, Banking 4.0’s features included instant and real-time transaction processing, digital record keeping, reduced branch networks, mobile banking, banking apps, and digital wallets. Lastly, Banking 5.0’s features include customer-driven banking, usage of robots, application of quick response (QR) codes to access banking services, licensing of digital banks, and mobile wallets.

The next section highlights the disruptions, challenges, and opportunities associated with the banking evolution.

4. Disruptions, Challenges, and Opportunities

Banking has evolved from the barter system used in ancient times, the industrial revolution propelling trade and commerce, and embracing digital solutions in the financial intermediary role [2,13,65]. The changes reflect technological advancements, evolving customer behaviour, and regulatory developments. Nevertheless, [13] pointed out that banking sector changes were revolutionary not evolutionary. This indicates radical and significant structural changes within the banking sector.

Ref. [2] argued that the future of bank success was hinged on overcoming regulatory, ethical, and technological challenges. Ref. [46] identified technology, together with political and economic factors, as the drivers of future banking. Meanwhile, ref. [13] highlighted innovation and competition as the drivers of banking transformation. Globalization, capital concentration, the creation of new banking models, and a new banking culture are some of the unique drivers of the banking sector’s evolution. Notably, these factors have significantly changed the competitive and highly regulated banking sector.

The transformation has disrupted the banking sector and created opportunities and challenges for the stakeholders which are summarised in

Table 1. Summary of each banking era’s characteristics, disruptions, challenges, and opportunities.

Banking Era	Characteristics	Disruptions	Challenges	Opportunities
Banking 1.0 (pre-(1960s)	Traditional relationship banking Physical cash transportation Manual system and physical record keeping	Credit card Cheque Mass banking	Limited banking services Slow service delivery Cheque fraud Regulations	Foundational banking principles
Banking 2.0 (1960s–1980s)	Expanding branch networks Analogue system; bulk transaction processing; relationship banking	Debit and credit card SWIFT international payment platform Mainframe computers	Regulations Risk management Limited banking access	More customers and development of more products Development of risk management strategies and credit scoring models
Banking 3.0 (1980s–2000s)	Data warehouse; internet banking; Banking access 24/7; relationship banking; batch transaction processing; expanding branch networks	Electronic banking Financial liberalisation Globalisation ICT-based infrastructure	Regulations Financial instability	ATM cash access outside banking hours Increased automation
Banking 4.0 (2000s–2020s)	Instant and real-time transaction processing; digital record keeping; reducing branch networks; mobile banking; banking apps and digital wallets	Financial innovation Regulation arbitrage and competition between fintech and traditional financial institutions 2007/8 Global Financial Crisis Artificial Intelligence Blockchain Big data	Cybersecurity Compliance Data ethics and privacy Reduced traditional earnings Customer behaviour	Data Analytics Collaboration between banks and non-banks Digital banking Ancillary earnings
Banking 5.0 (2020s–future)	Customer-driven banking; electronic fund transferring; robots; application programming interface (APIs); and bots; instant and real-time transaction processing; mobile banking apps—digital payments, online deliveries, and mobile wallets; use of QR codes to access banking services; digital banks; digital currency	Cloud computing Artificial Intelligence Blockchain ESG and Sustainable Finance Lifestyle banking	Risk Management Data ethics Regulations	Collaboration between human and intelligent systems Ancillary earnings

Source: Researcher’s synthesis.

. The disruptions, challenges, and opportunities are discussed and analysed hereafter.

4.1. Disruption Factors

These are the factors that resulted in structural sector change. Disruptions have been identified in four areas—regulations, technology, human capital, and customer behaviour.

4.1.1. Technology

The banking sector has and continues to witness an unparalleled wave of technological disruptions due to the emergence of fintech, blockchain, and artificial intelligence (AI). By providing quicker, easier, and more user-friendly services through digital-only platforms, these innovations have placed traditional banks’ dominance to the test [53,66,67]. In offering real-time, customized financial services, fintech companies and non-banking startups have applied agile development models and client data, prompting traditional banks to reorganize their digital strategies and IT infrastructure. Modern banking operations nowadays heavily rely on technologies like chatbots driven by artificial intelligence, biometric authentication, and smartphone apps.

Traditional banking practices have been severely reshaped by technological developments, mostly because of the emergence of fintech businesses that provide modern financial services. Agility and customer-focused strategies serve as key characteristics, with platforms such as Revolut challenging traditional banks by offering a range of services through user-friendly mobile applications, currency exchange, international money transfers, and cryptocurrency support [68,69,70]. Revolut and Monzo are among the digital banks that have brought competition to the traditional banks in the UK [69]. In a similar vein, Stripe has revolutionized online payments by providing developers with simple application programming interfaces (APIs) to incorporate payment processing, which aids organizations in streamlining intricate financial processes [71,72].

In reaction to these technology disruptions, traditional banks are adopting open banking initiatives and forming strategic partnerships with fintech companies. For example, Goldman Sachs and Apple collaborated to produce the Apple Card, integrating technical innovation with financial knowledge to provide smooth user experience [73]. A more competitive and customer-focused financial environment is promoted by open banking, which is made possible via APIs and enables third-party developers to create new financial products. As an example, Deutsche Bank made the decision to capitalize on the prospects presented by open banking in 2015 by developing an API programme [74]. Through the Deutsche API programme, Deutsche Bank enabled its partners and customers to integrate banking data as well as financial products and services into their own applications and products. As a result, partners can provide their clients with financial services right when they need them. In the long run, these big tech and fintech players would be dominant players in the financial services sector and competitive edge. Technology as a competitive edge has been identified as a disruptor by the disruption innovation theory.

Cloud computing, blockchain, and artificial intelligence (AI) have all been incorporated into banking, further accelerating technological disruption. While blockchain technology guarantees safe and transparent transactions, AI-powered chatbots and robo-advisors improve customer service by offering immediate, individualised responses [75]. Because cloud computing provides scalable infrastructure, banks may quickly and effectively roll out services to satisfy the changing needs of tech-savvy customers.

Progressively, from Banking 1.0 to Banking 5.0, technology has been the greatest driver in the transformation of the banking sector and ultimately reconfiguration of banking models [76]. For instance, the adoption of the internet under Banking 3.0 prompted the development of electronic banking and accessing banking services 24/7 which was not possible under Banking 2.0 and Banking 1.0.

These developments challenge established revenue sources including fees from intermediary providers and reduce dependency on physical branches. While banks that embrace transformation are reinventing business models to include innovation as an essential competence, those that do not face the risk of losing market share. However, all these technological developments present new challenges in the areas of cybersecurity, data security, and system compatibility, putting pressure on banks to innovate while safeguarding consumer trust.

4.1.2. Regulations

The presence of fintech has forced countries to design guidelines which either foster innovation or enforce stringent control [77]. The main reason for regulatory restrictions includes cybersecurity concerns such as fraud, money laundering, and data breaches. In addition to promoting fintech innovation, financial regulators have an enormous duty of striking a balance on the regulatory mandates such as consumer protection, competition, and financial stability [31,78].

To oversee fintechs in the USA, a market-driven approach is applied. Regulators enforcing this are the Security Exchange Commission (SEC) and Office of Comptroller Currency (OCC). In the UK, through the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), the country has an approach that fosters innovation through the regulatory sandboxes, whereas China enforces stringent government-led oversight. The enforcements are carried out by the People’s Bank of China (PBOC) and the China Banking and Regulatory Insurance Commission (CBRIC). In the EU, using the revised Payment Services Directive (PSD2), they have promoted open banking, giving fintechs access to banking information. This is carried out through European Central Banking (ECB) and European Banking Authority (EBA). This is similar to South Africa, where the South Africa Reserve Bank (SARB) advances the fintech innovation agenda in collaboration with banks.

Regulatory disruption has significantly improved banking operations. The emergence of data-driven compliance mechanisms and regulatory technology (RegTech) offers banks another chance to improve their governance and risk management frameworks. Banks are being forced to update compliance systems and reporting procedures because of the introduction of frameworks like open banking, data privacy regulations such as the General Data Protection Regulation (GDPR), and more stringent anti-money laundering (AML) regulations. Regulatory technology, or RegTech, is becoming an essential investment, according to [79], as it enables institutions to automate compliance and adjust to changing legal requirements. Also, it streamlines compliance tasks including fraud detection, anti-money laundering (AML) monitoring, and reporting obligations, which not only improves regulatory responsiveness but also lowers administrative burdens and human error.

Failure of the Silicon Valley Bank (SVB) in March 2023 shows that regulatory control has been a challenge despite regulatory technology developments. This was viewed as the third largest bank failure in USA [73]. Regulatory enforcement deficiencies were highlighted by the San Francisco Federal Reserve’s reluctance to take meaningful action despite identifying problems in prior years with SVB’s risk management methods [80]. In order to avert systemic risks, such occurrences highlight the necessity for more proactive and coordinated regulatory actions. For example, customer onboarding processes have now been automated by banks which allows ongoing client risk assessment. Incorporation of AI into the banking service provision provides personalised and predictive services. AI algorithms analyse service users to offer customised services [81].

To drive institutions toward accessibility and seamless integration, regulators now encourage banks to securely exchange consumer data with approved third parties using standardized APIs. In particular, in the EU, with the PSD2 which allows information sharing with prior consent, a credit scoring model has been developed which allows customer evaluation in the absence of established data sets [82]. Failure to address the regulatory approaches on data sharing in the digital operating environment can threaten the stability of the sector. In South Africa, Discovery Bank has made a significant investment in behavioural banking, drawing on its knowledge of the Vitality program and Discovery Health to leverage behavioural data to support improved financial health [83]. Regulations should not be used as a deterrent but to encourage and promote competition within the confines of consumer protection. On the other hand, these transformations place an enormous load on legacy infrastructure and make operations more difficult, even as they encourage innovation. To ensure that bank systems can adapt to changing requirements without negating performance or user experience, traditional banks must find a balance between innovation and regulatory compliance.

Within the transformation landscape, banks’ operational expenses and capacity for innovation have also been hampered by the growing regulatory constraints. Adhering to conflicting legislation frequently results in high operating costs, while reducing innovation expenses and possibly impeding the creation of new financial services and products [77]. In line with the digital operating environment, banks are spending money on regulatory technology (RegTech) solutions that automate compliance procedures, thereby reducing operational expenses and increasing productivity. After all, the financial regulatory landscape has grown deeper, with new frameworks designed to improve consumer protection and transparency among others.

4.1.3. Human Capital

The banking sector is changing due to artificial intelligence (AI) technology such as chatbots, robotic process automation (RPA), and machine learning algorithms [84]. Employees with expertise in data analysis, cybersecurity, and digital product development are in greater demand as conventional operations are replaced by automation and artificial intelligence. To stay relevant in the changing banking landscape, banks fund reskilling initiatives to perform more sophisticated and strategic tasks. For instance, BankCo’s FORWARD project [85]. As a result, banks are being forced to change from being product-focused entities to becoming experience-driven, adaptable ecosystems.

Organizational structures and employment approaches must be rethought considering the banking sector’s digital transformation. The banking sector has two major obstacles, overcoming a shortage of digital skills in the workforce and adjusting to a demographic of digitally native consumers that anticipate multi-channel, seamless experiences [84,85]. On the other hand, [86] posits that though bank operational efficiencies are expected to improve, job security and skills extinction concerns arise. Thus, to manage tech-driven operations, HR must upskill staff in analytics and innovation and encourage agile mindsets.

The banking sector’s digital transformation demands an adjustment to more flexible and agile work environments. Cross-functional teams are replacing traditional hierarchical organizations because they can react quickly to changes in the market and in technology. The shift necessitates a cultural shift that values cooperation, ongoing education, and flexibility [85,87]. Agile, digitally enabled approaches that prioritize employee empowerment, data analytics, and collaboration are displacing traditional HRM approaches. Banks are investing more effort into creating agile work cultures that allow teams to employ design thinking and provide customer-focused solutions.

Adjustment to more flexible and agile work environments in the digital world requires competent employees and the development of appropriate working culture. This concurs with digital innovation theory which implies that a competitive edge relates to competent and organisationally fit employees. In Ref. [88], it was argued that failure to adapt and remain rigid with resistance to change results in underutilisation of technology. However, the organisational culture transition process requires a customised approach that is not costly and leaves the organisation vulnerable. Employee errors can be devastating for the organisation which could result in regulatory sanction and penalties, which undermines corporate compliance culture. For example, in 2009, Lehman Brothers and Royal Bank of Scotland (RBS) were closed due to employee errors which eventually caused lapses in the systems [89].

From the employee’s perspective, the digital transformation can be viewed as a threat or opportunity. Task automation, such as cash-depositing automated teller machines that reduced the job tasks for bank tellers, can be seen as a threat, although from an organisation and customer perspective, this is viewed as an opportunity for efficient financial service delivery. Clearly bank tellers would need to focus on other strategic and operational activities and might require upskilling. These developments show the transition from Banking 1.0 when the ATM was introduced by Barclays Bank to the Banking 5.0 era of cash-depositing ATMs.

In a study of Jordanian SMEs, the findings revealed that organisational culture played a dual role of being a moderator and driver in the digital transformation process [90]. Further innovation and learning remained critical. Therefore, positive attitudes, continuous learning, and innovation are prerequisites in managing the transition to digital environment. The author of [91] posited that to maximize the full benefits of digital transformation the culture should align with technology adoption and organisational goals.

The COVID-19 pandemic hastened the adoption of digital technologies for collaboration and remote work and also the shift to a hybrid work model that blends in-person and remote labour [92]. Establishing secure communication platforms and remote access systems was necessary as institutions swiftly adjusted to virtual work settings. Many banks are now considering long-term hybrid work models because of this change, which not only guaranteed company continuity during the crisis but also showed the viability and advantages of flexible work arrangements. Although, organisations ought to encourage hybrid models that incorporate mental health initiatives, flexible work schedules, and individualized well-being programs [93]. Maximizing the advantages of hybrid work arrangements and maintaining a resilient and balanced labour market require addressing the support mechanisms and updating labour regulations [94].

HR leaders must take a proactive and strategic approach to successfully integrate AI and automation in the workforce. Adopting AI-driven innovations requires a workforce that is both literate and flexible, which calls for the development of new career pathways and positions focused on AI, creative employment models, and extensive upskilling initiatives. In the era of AI, HR must serve as a mediator between people and machines [87]. In addition, it must ensure a smooth transition by addressing skill transitions, job insecurity, and changes in workplace culture [84]. To maintain a motivated workforce, organizations must assist employees through engagement, training, and having open communication channels.

4.1.4. Customers Behaviour

The banking sector is facing significant disruption because of shifting consumer expectations. Consumers of modern banking prefer fast, simple, and customized experiences on a variety of channels [95]. Ref. [71] concurred with [20] that banks have been forced to redesign their digital engagements and provide more value through personalization. This was as a result of competition with tech giants that provide quick satisfaction and user-friendly interfaces [71]. To sustain engagement and loyalty, customers now need real-time information, integrated digital wallets, and AI-driven recommendations.

Modern consumers demand seamless, customized digital banking experiences. They are seeking services that can be accessed on any device, at any time, and from any location. In response to customer demands for ease and personalization, banks such as JPMorgan Chase have created mobile applications that provide real-time transaction alerts and customized budgeting tools [65]. The rise in digital-only banks, like Ally Bank, which has no physical branches and provides affordable fees and competitive interest rates, is a result of consumers’ preference for the convenience of online banking. These banks challenge established banks to improve their digital offerings by appealing to tech-savvy customers who value time and efficiency [65,68,69].

Banks are customizing their products using customer journey mapping and big data to match expectations. This change in design from a product-centric to a customer-centric approach represents a profound cultural shift in bank operations [73]. However, it takes a significant investment in infrastructure, data management, and cybersecurity to achieve these objectives. Banks must constantly reinvent their platforms while maintaining privacy and trust since customer loyalty is becoming more and more linked to digital experiences. Failure to do so faces the risk of losing clients to agile competitors.

Banks are using AI-driven virtual assistants in their customer service operations with the goal of fulfilling changing customer demands. For example, Bank of America’s Erica enhances client engagement and satisfaction by offering swift responses to questions, proactive financial guidance, and tailored insights [65]. These developments highlight how crucial it is to leverage technology to fulfil the ever-changing demands of customers.

4.2. Opportunities

The ability of institutions leveraging on technological innovations in utilizing data analytics, designing flexible business models to boost customer interaction, and improving financial service delivery in promoting equitable and sustainable economic growth constitutes a few of the opportunities in the banking sector transformation.

4.2.1. Efficiency and Cost Reductions

Cloud computing, AI-driven analytics, and robotic process automation (RPA) are examples of digital solutions which provide opportunities to reduce administrative costs and streamline processes. Banks can increase efficiency and decrease human error by digitizing internal procedures and automating repetitive tasks [20]. For instance, robotic process automation (RPA) has proved to significantly reduce costs for compliance reporting and loan processing time at India’s ICICI Bank. Thus, banks’ total agility is increased by this resource reallocation, which allows them to concentrate on strategic innovation and client engagement.

Digital transformation has enhanced the development of banking agency models and integrating mobile technologies contributing to financial inclusion. In low- and middle-income nations, mobile financial services have been helpful in reducing the disparity in financial access [96]. Low-cost banking has been made possible in South Africa by mobile platforms such as ABSA’s cashsend and Standard Bank’s Instant Money, especially for those living in rural areas. By doing away with the requirement for physical infrastructure, these services enable banks to lower overhead expenses while reaching a wider audience.

Banks can provide individualized goods and services and gain a deeper understanding of consumer behaviour by utilizing big data analytics [97]. Utilizing customer retention tactics, cross-selling, and targeted marketing, this generates new revenue potential. AI-driven platforms that personalize financial suggestions and identify early indicators of financial stress were first introduced by banks such as DBS in Singapore. These programs raise lifetime value, promote digital engagement, and enhance consumer experience.

With technological innovation driving the transformation of the banking sector, stakeholders in the sector placed emphasis on efficiency as demanded by consumers. Notably, the COVID-19 pandemic decimated the presence of the physical bank branches. In the United Kingdom, HSBC Bank and Barclays Bank closed one hundred and fourteen (114) branches and one hundred and sixty-five (165) branches, respectively, in 2023, due to increased customer migration from physical banking to digital banking [98] Customer demand for convenience has forced traditional banks to introduce digital banking services. However, will this trend continue in Banking 5.0 as some customers prefer banks with physical branches for security reasons?

4.2.2. Digital Financial Solutions

Information technology-induced financial services are also promoting accessibility, efficiency, and innovation [99]. To promote financial inclusion and reduce barriers for marginalized people, banks are using digital technologies to offer secure transactions, effective payment systems, and individualized financial advice. Additionally, emerging opportunities for improved decision-making and fraud prevention are being made possible by technologies such as blockchain and artificial intelligence [100].

As mobile phones and the internet become more widely used, the use of digital payment methods has increased dramatically on a global scale [101]. By eliminating the presence of middlemen and reducing transaction costs, these technologies enable smooth cross-border transactions. Therefore, digital payments have become widely used due to their speed and convenience, which has substantial implications for both businesses and consumers. Global payment providers such as PayPal and Alipay have drastically reduced transaction costs and processing times while enabling real-time financial tracking and management for consumers [6,102].

Cybersecurity concerns continue to increase in the modern world, and these threaten customers’ access to financial services [103]. For example, fraud, phishing, identity theft, and ransomware are some concerns that affect the utilization of digital banking platforms. With the increase in technological developments, some innovative solutions have been developed which strengthen financial security. These include multi-factor authentication (MFA), blockchain-based secure transactions, and artificial intelligence (AI)-driven fraud detection. Real-time transaction analysis and flagging by AI models enable prompt action, including transaction red flagging or suspending accounts [104]. This preventative strategy minimizes the adverse effects of fraud on consumers and financial institutions. Likewise, the decentralized and irreversible ledger of blockchain technology has raised security and transparency in financial transactions, lowering the possibility of fraud and boosting confidence in financial systems [6,105].

Ref. [106] observed that mobile money is transformative in nature by making use of mobile phones to conduct financial transactions. In Africa, the mobile money technology transfer platform gained prominence in Kenya through M-PESA which was launched by Safaricom in 2007. Safaricom, the licenced cellular network, initiated the mobile money transfer services with support from development-oriented stakeholders [107,108]. These included the Commercial Bank of Africa which provided traditional banking infrastructure. In [109], it was posited that M-PESA has evolved with registered users now able to send and receive money globally. Indeed, this has contributed significantly to increasing financial service access to marginalised members of society.

4.2.3. Innovative Collaborative Partnerships

The financial landscape is transforming primarily due to the convergence of fintech and traditional banking approaches [110]. As a result, traditional banks have been compelled to reconsider strategies and adjust to remain competitive. Through these partnerships, by embracing the fintech revolution, traditional banks can leverage the use of digital innovations and provide a seamless digital banking experience [111] (Sunitha & Madhav, 2020). Financial and non-financial players, including BigTech such as Facebook, PayPal, Google, and Apple, fintech firms, telecommunications companies, and retailers are making inroads into the mobile banking market [112,113]. Undoubtedly, the growing demand for mobile banking services has been brought about by the growing adoption of smartphones.

Mobile banking has evolved by integrating mobile technologies with the financial services system [114]. Nevertheless, integration has been more prevalent in developed countries such as the USA and European Union while in developing countries, the focus was on using mobile technologies to bridge the financial inclusion gap. The mobile money services were evident in Ghana with MTN Mobile Money, Kenya with M-PESA, and Zimbabwe with Ecocash. Admittedly, in the late 2000s, banks were the key users of SMS-based banking, which changed to app-based banking as smartphones became more widely used [115,116].

Innovative offerings like m-wallets, which enable users to maintain and utilize bank cards as well as merchant loyalty cards, and mobile payments utilizing near-field communication (NFC) technology have been made possible with the adoption of mobile banking [113,117]. NFC enables contactless payments such as Apple Pay, Google Pay, and Samsung Pay. Mobile banking utilizes portable devices that includes smartphones, tablets, or other mobile devices to conduct transactions and access banking services. Mobile banking apps allow users to pay bills, deposit, transfer money, and check account balances. Though mobile banking provides easier accessibility and convenience, which are essential, this underscores the drivers of a growing and interconnected global financial ecosystem.

Risks arise with the increasing adoption of mobile banking and expansion of payment systems [118,119]. The risks include but are not limited to cyber security, data breaches, and fraud and require concerted efforts to protect consumers and ensure financial system integrity. Thus, stakeholders should prioritize enhancing regulatory frameworks, incorporating advanced security technologies, and educating consumers.

Ref. [120] opined that as digital banking adoption continues to grow, digital banks face the threats of gaining customer acceptance and trust, which traditional banks have built over time. Despite the threats to the bank model, significant opportunities for collaboration exists both for traditional and digital banks. Crucially, collaboration remain key in shaping future of the banking sector.

Comparing Banking 4.0 and Banking 5.0, collaboration in Banking 4.0 centred on financial institutions with fintechs while Banking 5.0 is centred on human and intelligent systems. Banking 4.0 had regulatory sandboxes with Banking 5.0 having robots and cobots. This shows great advancement in the interaction, requiring traditional banks to move away from legacy systems.

4.2.4. Explore Additional Revenue

Ref. [2] observed that the disruptive nature has not only affected the traditional revenue streams but forced the institutions to focus on earning through offering value-added services and fee-based earning models. Revenue for banks is earned from a range of banking activities they offer. Traditionally, banks’ earnings are in the form of commissions, fees, and net interest income. So, to operate profitably and sustainably in the future, banks should explore a new and innovative approach to reconnect with their traditional customers and connect with new customers. Notably, the new category of customers is tech savvy, young, and enterprising.

The changing customer demographic requires banks to be strategic in market positioning by aligning with the expected future environment. These include earning income from ancillary services being offered such as cross-selling, that is, offering additional products to existing customers [37,39]. For instance, offering legal and insurance services to an existing customer. This entails additional income and enhancing customer satisfaction. Similarly, in the fintech era, banks collaborating with fintech have additional sources of income.

4.2.5. Customer Engagement Channels

Delivery channels refer to the vehicles or ways in which bank customer interacts or engages with the bank. Significantly, interaction to access banking services such as cash withdrawals, payment processing, account opening, debit order activation, and funds transfer. Traditionally, customers have interacted with the bank using the single channel, either face to face or physical visits to the branch [37,39]. Another is multi-channels which are independent channels aimed at satisfying several market segments [121]. Various channels that have gained traction and transformed interactions are through electronic channels such as ATMs, mobile phones, and computers. These channels operate independently with no interface between these channels.

Ref. [122] identified cross channel as an attempt to partially integrate traditional and online channels. Omni channel refers to a channel integrating physical and digital channels which includes digital assistants, online, mobile, and in-person, to give clients an efficient banking experience [37]. In particular, through omni channel, customers can initiate a service request online via apps and complete by physically visiting a branch. So, customers can utilize a variety of methods in accessing bank accounts to perform transactions. Additionally, this channel facilitates communication and allows accessibility from any location at any time and across all devices. Under Banking 1.0, delivery channels were through physically visiting the bank during specified times and has evolved to 24/7 engagement through various apps in Banking 5.0.

In fact, the financial services sector has evolved from the Banking 1.0 era and continues to evolve. This has been precipitated by the technological innovations and customer preferences among others. Banks now operate in a customer-centric environment, where clients select financial service providers according to preferences for speed, flexibility, and personalized banking [123,124]. Generally, banking services and delivery channels have gone through an enormous shift from traditional processes supported by bank employees, to fully automated and self-service. In the process, this has limited usage of physical branches to more complicated transactions. Admittedly, [125] observed the significant digitalisation of banking services in the last two decades. This shift encourages efficiency and promotes financial accessibility.

4.3. Challenges

Even though there are many potential benefits to the banking sector’s transformation, there are also numerous challenges to overcome. These call for a coordinated response.

4.3.1. Data Privacy and Cybersecurity Threats

The banking sector’s digital transformation, which has been facilitated by the adoption of technologies such as cloud computing, big data analytics, and artificial intelligence, has greatly increased vulnerability to cybersecurity risks and data privacy issues [126]. According to [127], cyber risks cost global banks an estimated USD 2.5 billion a year, with over 20,000 cyberattack incidents recorded. This has resulted in financial liabilities valued at more than USD 12 billion during the past two decades. These figures highlight the importance of cybersecurity in ensuring institutional resilience and financial stability. As digital platforms manage ever-increasing amounts of private client data, protecting data against ransomware, fraud, and breaches becomes not only a technical issue but also an inherent business necessity [128].

Identity theft, phishing, malware, and ransomware are just some of the risks related to cybersecurity that have greatly impacted digital banking. According to [118], these threats were cited as the most significant barriers to the implementation of digital banking in South Africa. The gross losses increased by 45% to approximately ZAR 438 million in 2021, despite an overall 18% decrease in digital banking fraud incidences. This underscores the growing sophistication of cyberattacks [129]. Common strategies that undermine customer confidence and discourage wider utilization of digital services include social engineering, ATM card skimming, malware-injected platforms, and phony banking websites [126,130].

The willingness of individuals to utilize digital banking systems is significantly affected by how they perceive associated risks [131,132]. Risks are made worse by limited bank communication and the absence of customer awareness of online security procedures. Additional systemic risks are brought about through using untrustworthy third-party vendors and unencrypted data transmission [133]. Research conducted in developing nations reveals a significant gap in public cybersecurity education and technical infrastructure, thereby exposing consumers and institutions to frequent attacks [134]. Such constraints undermine banks’ reputations and compromise the credibility of digital financial systems.

Ref. [135] posited that cybersecurity is becoming increasingly complex and complicated with the push for AI and data standards. In [118], some important ways of mitigating these threats were outlined. These consist of client education initiatives, antiviral software, intrusion detection systems, secure application development, and strong password standards. Enhancing regulatory compliance, encouraging information-sharing cultures, and upholding current security procedures are crucial to boosting user confidence and the robustness of digital banking.

Technology lowers the compliance costs while information privacy and security concerns remain a threat [136]. Personal information can be misused and stolen by third-party agents. There is a need to minimise this downside of technology with the economy deriving greater benefits. Reliance on third parties is now a threat to the transformation of the banking sector and is growing. Ref. [137] envisioned a convergence of regulation, technology, and ethical practices to address the security and trust issues.

4.3.2. Legacy Systems

Over the past 20 years, financial services have been the major users and purchasers of ICT services globally [20,138,139]. Legacy systems refer to information systems that have been in existence for some time and are used by traditional banks in service delivery. Crucially, these systems have been the core of traditional bank’s profitability and hold substantial value [37].

Ref. [140] argued that traditional bank legacy systems contribute to failure to innovate and adopt new technologies. Furthermore, legacy systems result in compliance being expensive and it being very slow to obtain requested information or data [141,142]. For example, an online customer onboarding process using legacy systems costs at least USD 10 million and is implemented over a two-year period [143]. However, the same process carried out using modern technologies, costs USD 0.3 million and is implemented over a three-month period.

Likewise, fintechs can acquire modern systems without huge capital outlay and be the competitive edge. Essentially, with the current environment of big data, banks can have better insights by making data-driven decisions in real time. The decisions are derived from analysis of current and historical data. Compliance-based data requires data extraction from different sets within the banking system; integration, algorithm-based data aggregation and automation can only be achieved using modern technologies. Notably, modern customers prefer a better customer experience which can be offered by fintechs rather than traditional banks.

When integrating new digital technologies with legacy systems, banks encounter significant organizational and technological challenges. Security shortcomings and operational inefficiencies are frequently brought about by incompatibility between outdated and modern systems [98]. Furthermore, the ability to integrate operations and risk functions is based on access to high-quality data which is consistent across the organisation [144]. Challenges associated with legacy systems’ modernisation include regulatory compliance, legacy data migration, disruption risk, and organisational resistance. As a result, this affects agility and scalability.

Legacy systems dominated the transition from Banking 1.0 to Banking 3.0. Post 2007/8 global financial crisis (GFC), banks invested in new technologies with compatible digital systems than analogue-based systems used before. So pre-2007/8 GFC, ICT systems were designed and developed when the banking system technologies were not integrated while post-2007/8 GFC which is current, future banking systems have integrated systems. Whilst the integrated systems are good, these advancements have introduced ethical challenges, algorithmic bias, and data privacy concerns [145].

4.3.3. Systemic Risk

Ref. [6] argued that the rise in unregulated or minimally regulated fintech companies, which might function beyond the authority of traditional financial regulators, further increases the possibility of market disruption. Because such entities might engage in unethical activities without being subject to the same level of surveillance as traditional financial institutions, this might result in systemic risk. Furthermore, the financial system may be affected if a key fintech company fails, especially if it is linked to other financial institutions [146].

Digital innovation can result in financial disruptions due to unidentified weaknesses during the trial stages of new innovations. Strategies to reduce the risks associated with fintech while promoting innovation include regulatory sandboxes, mentorship programs, and improved collaboration between regulators and fintech companies. In addition to having appropriate safeguards in place to protect customers and maintain financial stability, these strategies seek to create an atmosphere that is more conducive to fintech innovation [147,148].

4.3.4. Changing Customer Demographics

The financial services sector is undergoing transformation which has largely been attributed to technological innovations. Furthermore, [149] noted that the financial services sector continues to evolve due to technological innovations, changing regulatory mandates, growing customer preferences, and changes in demographics. These have compelled service providers to adjust the way they offer services in conformity to changing customer segments.

In line with the demographic transition theory, consumer decision-making is influenced by demographic factors [150,151]. The theory further argues that as people grow so do preferences. For example, in consumer purchasing decision-making, men, children, and women interpret information differently resulting in different decisions. Hence, the role of demographic factors in consumer decision-making cannot be ignored.

There are five categories of generation, namely baby boomers, gen X, gen Y, gen Z, and gen A [152,153,154]. Baby boomers were born between 1946 and 1964. Gen X was born between 1965 and 1980. Gen Y, also known as Millennials, was born between 1981 and 1996. Gen Z was born between 1997 and 2012. Gen Alpha (A) was born in 2012 to date. The most important thing in identifying the generation categories is to customise marketing messages and strategies based on the group preferences. Notably, baby boomers prefer cash transactions and physically visiting the bank.

Generation Z is a significant consumer generation born between the mid-1990s and the early 2010s [152]. Ref. [153] referred to this group as post-millennials or centennials. In [154], this group was also identified as the iGeneration. In making purchase decisions, they place reliance on digital channels and social media influences. Also, they prefer a highly personalised tech experience. As the Gen Z population grows, notable shifts in customer preferences are expected. To remain competitive with this generation, customized marketing strategies should be adopted. For instance, millennials and Gen Z, as digital natives, are leading the shift towards digital banking, and their preferences and behaviours play a crucial role in shaping next generation-centric banking.

Some of the banking services are now being provided online with a few requiring physical branch visits. Services available online include bank transfers, statement requests, balance enquiries, and loan applications. Ref. [155] claimed that although internet banking and mobile bank apps were previously exclusive and optional, the banks of today cannot compete as long as they do not offer convenient online services.

In Tanzania, [4] revealed that geographic, demographic, and psychographic constructs of market segmentation had a positive influence on the bank’s profitability. Based on the results, the authors recommended that markets should be segmented based on these three constructs. Therefore, banks should customize marketing strategies in line with the unique requirements of each market segment. This study by [4] highlighted how crucial customer demographics are in the development of marketing strategies as they affect profitability.

A study was conducted by [150] to determine the criteria used by Indian bank customers in selecting banks and how these affect demographic subgroups. The factors identified in bank selection were convenience and service delivery. However, these factors differed significantly based on demographic attributes such as gender, age, income level, education level, and occupation. These results indicate the practical implications in the development and design of customized demographic-driven marketing strategies.

Ref. [156] conducted an analysis study on psychographic segmentation in Canada’s banking sector. The study identified three different customer groups namely conservatives, sceptics, and visionaries. These groups approached digital banking differently; hence, marketing approaches should be customized. The most important finding is not to focus solely on demographic constructs but incorporate psychographic constructs as well.

The studies by [4,156] concur with [150] as they all stressed the importance of customized demographic-driven marketing strategies especially in a digital-driven evolving landscape. However, [156] further identified the psychographic element in designing the marketing strategies.

4.3.5. Skills Shortages and Upskilling

Significant gaps in employee readiness have been revealed by the banking sector’s rapid digital transformation, especially in the areas of data analytics, digital literacy, and flexible working arrangements. Ref. [135] highlighted that the cyber skills gap has widened in 2024 with 67% of the companies reporting a moderate to critical skills gap. Only 14% of the organisations were confident that they had the requisite people and skills.

Ref. [19] revealed that employee deficiencies in technological skills to effectively utilize the latest technology adds to the challenges of legacy systems and antiquated infrastructure. To remain relevant in a changing workplace, employees are constantly required to renew their skill sets. Thus, to maintain long-term competitiveness in digital banking environments, the importance was highlighted of moving from simply technical competence to broader digital skill sets [19,157].

Ref. [149] posited that HR transformation processes must rethink the HR department as a business partner and co-creator of digital strategy, going beyond simple upskilling. This includes building tech-enabled, human-centred solutions that require cross-departmental collaboration, especially with marketing and finance. Further, paradigm shifts in the way banks manage people and performance should move toward design thinking, human-centred design, and agile techniques. Upskilling initiatives run the risk of becoming dispersed and inadequate in the face of continuous digital disruption.

5. Policy Implications

From a policy perspective, the findings of this study revealed that digital technologies are transforming the financial services sector by placing reliance on third parties. For example, Bigtech, which is the data-driven firms that are driving the payment platforms with Apple and Google taking a share of the banking. Also, Regtech, which is the technology-based companies aiming to provide regulatory compliance solutions to banks. Interestingly, when relying on third parties, the delegated authority remains with the banks. However, these give rise to risks such as cybersecurity, ethical, and information risks.

A pragmatic approach is required to ensure that technological outcomes are met without compromising regulatory mandates outcomes. To minimise conflicting objectives, a balance should be struck among regulators, customers, financial institutions, and technology players. These conflicting objectives might result in financial instability, unfair competition, and consumer protection issues. But who will play that oversight role of ensuring a balance of stakeholders’ objectives given that the unregulated technology companies continue to transform the banking sector?

In the Asian Pacific (APAC) region, financial regulators have been criticised for trying to regulate or control new areas which they do not know or appreciate [158]. Digital innovations have entailed different regulatory approaches in understanding and application. Accordingly, with the new world order of technology-driven solutions to problems there is need to guide future policy direction by accommodating technological innovations effectively.

6. Conclusions and Future Directions

This study has highlighted the evolution of banking from ancient times to modern times. Banking has evolved through five eras, Banking 1.0 to Banking 5.0. Banking 1.0 being the period pre-1960s while Banking 2.0 was the period from 1960s to 1980s, Banking 3.0 was from 1980s to 2000s, Banking 4.0 started from 2000s to 2020s, and Banking 5.0 represents the 2020s to the future. Admittedly, the exact timelines are difficult to establish, hence using indicative periods. Despite using indicative periods, these provide a representative timeframe to understand key transformations that occurred within the banking sector. The evolution followed the industrial evolution that occurred during the almost similar indicative periods. As a result, significant structural sector changes were observed. These changes were induced by factors such as regulations, technology, human resources, and customer behaviour.

Theories assisted in enhancing knowledge of banking. Public interest theory revealed regulation development considerations and evolving operating environments. Hence, requiring careful thoughts to minimize regulatory capture and regulatory arbitrages among others. On the other hand, disruptive innovation theory highlighted how new entities enter existing markets using innovative technologies as a competitive edge to disrupt or reshape existing markets. These two theories indicated that the modern banking sector requires greater collaboration to understand the operating environment dynamics and how regulation should be designed by balancing the interest of stakeholders.

In this study, the significant findings were that opportunities and challenges exist in the banking sector’s transformation which are associated with a dynamic banking operating environment. Opportunities include development of new business models such as digital banks and integration with non-banking providers which improve service delivery and performance of data analytics among others. Despite the existence of opportunities, challenges include regulations, skills shortages, legacy, and cybersecurity that must be addressed.

The findings suggest a multi-disciplinary stakeholder-coordinated response on the future of banking both at a micro and macro level. Thus, at a micro level, the institutions should conduct an internal review assessment to identify strengths and weaknesses. This should inform the strategic positioning of the institution in the new operating environment. Also, at a national, regional, and global level, policy-oriented discussions and regulatory formulation should be given priority in the dynamic banking operating environment. Importantly, the future of banking requires collaborations as digital economies, digital currencies, cashless society, customer-centric banking institutions, and artificial intelligence take centre stage. These findings add to the growing body of research on the future of banking-related areas such as cybersecurity disclosures, integration of artificial intelligence, and data standards sharing, regulatory uncertainty, and collaborative models of banking.