The phygital future is now

Physical vs. digital: the best of both

This trend in consumer expectations and behaviors has been driven in part by the rise of neobanks, which have disrupted banking and payments with new digital models.

According to KPMG research, banks spend up to 75% of their technology budgets on maintaining and patching 20-year-old legacy technologies, which has contributed to a decline in profitability.¹ These inefficiencies are holding banks back and preventing them from capturing the demand for phygital payments.

One might think that physical bank branches and digital offerings are competing with each other – but far from it. In 2021, McKinsey & Company found that while the number of bank branches in developed markets had declined by 9%, activity in those branches had increased by 20% during the same period.² Clearly, the physical banking experience still has a place in an increasingly digital world.

This view is shared by neobanks, who also see the value of the physical banking experience, while the big banks are increasingly providing digital services. Of the neobanks surveyed in the GlobalData Banking Survey, 80% recognize the importance of a physical presence in building customer awareness and trust, which is why many digital-only players still offer physical cards.³ And some are even starting to open physical branches to complement their digital offerings.⁴

In the end, customers want the best of both worlds. This sweet spot, where digital and physical collide to create a phygital experience, is what banks need to find in order to stay competitive not just in the future, but in the present.

Understanding customer needs

Recognizing that each customer has different needs and expectations for how they bank and make payments is critical. It’s also important for banks to understand that digital-first doesn’t mean digital-only. While digital natives may gravitate toward app-based banking for its convenience, others may value the security assurance physical branches offer when it comes to significant financial transactions. In addition, we shouldn’t underestimate the value both can have in ensuring banking is inclusive for all customers.

Likewise, banks mustn’t fall into the trap of making assumptions about customers based on generational stereotypes. After all, many older customers are now well accustomed to online banking and paying for groceries with their smartphones, while many Gen Z and millennial customers are increasingly turning to bank branches for financial advice – especially when the digital offerings fall short.⁵

Banking transcends such stereotypes because every customer has their own unique set of needs and preferences. Phygital offers banks an opportunity to meet all those needs – and many are already seizing the opportunity. 

Phygital payments in action

The best example of this is the payment card. At a time when so many innovative new payment methods are flourishing, payment cards remain popular among consumers precisely because they have been augmented to complement digital solutions – rather than compete with them – and provide a seamless phygital experience.

This experience goes beyond simply offering popular features, such as digital wallets linked to physical cards and protected by biometric features – the whole journey, from onboarding and issuance through to activation and use of a payment card, is now phygital. For instance, when a customer requests a new card, they can use it immediately for purchases while they wait for the physical card to be delivered. Alternatively, they can go to a branch and print a new card instantly via a self-service terminal, which brings customers into the branch and creates a new point of interaction that can strengthen brand loyalty.

Application programming interfaces (APIs) are pivotal in facilitating these phygital interactions. They streamline the integration of digital and physical banking services, enabling banks to offer a cohesive customer experience.

Another interesting trend that illustrates phygital in action is the emergence of pre-paid or credit cards in the gaming world. These cards, popular among younger gamers, provide a means to manage spending on games and digital content responsibly. Meanwhile, both PlayStation and Xbox have released credit cards for adult gamers with attractive sign-up bonuses and loyalty points that can be redeemed for games, gadgets, and merchandise. These cards, which can be personalized with players’ favorite games, can be instantly integrated into digital wallets for immediate use.

In addition to providing a convenient digital payment experience, these cards also tap into the collector culture among gamers, building brand loyalty and reinforcing the idea that digital-first doesn’t mean digital-only, even for younger generations. 

Outlook: phygital is now

Phygital is not a trend – it is here to stay and will only become more relevant as future generations come of age. Consumer needs and preferences will continue to become more unique and diverse, and the only way to meet them is by bringing together as many physical and digital touchpoints as possible to create a seamless phygital banking experience.