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How to make the leap from traditional bank to digital bank
To compete effectively in an increasingly digital financial landscape, conventional banks need to build greater efficiency, value and trust through technology
A world-class digital banking experience will be driven by more intuitive, empathic and intelligent delivery of products and services.
CIOs who aim to deliver this experience in 2018 and beyond need to understand the new business models, processes and technologies that will enable it.
A true digital bank is a bank that improves the customer experience, creates powerful new streams of revenue and value, delivers against aggressive cost-income ratios, and can support multiple non-traditional business models.
Ultimately, it needs to be agile enough from a technological, structural and cultural point of view to enable it to constantly adapt to rapidly changing business and technology environments.
Pursuing a business vision and strategy that enable the reorganisation of the bank’s resources, to both optimise costs and leverage the latest technologies, must be the CIO’s top priority. Open banking platforms, big data, artificial intelligence (AI) and blockchain are just a few of the new technologies that can be leveraged to mitigate the impact of deploying these vision and strategy changes in the “bank of tomorrow”.
The margins for payments, loans and deposits/investments – traditional income sources for banks – will continue to narrow. These lines of business will never disappear, but they will eventually need to be replaced or supplemented by new sources of revenue. These will include services that are data-centric, such as data vaults, tax services and advanced payment systems; protection-based, like digital ID and digital asset protection and management; and platform-based, such as access to peer-to-peer lending and payments. All these changes will present formidable challenges for bank CIOs.
IT’s role in the evolution of a bank’s business model
Gartner research shows that the business platform model is dramatically outperforming other organisational models.
Businesses as varied as Amazon, Facebook, Google and Alibaba are all platforms that provide trust in untrusted environments, operating as “trusted value brokers” that connect the supply and demand sides. This is critical, because in many markets, the financial crisis of 10 years ago has reduced trust in banks and their ability to combat new market entrants. Financial technology (fintech) companies, e‑commerce providers and telecoms carriers are cutting into banks’ traditional income sources, providing faster payments, more convenient money transfers, real-time lending facilities and automated investment advice. This is made possible by better technology and newer business models adopted by those new competitors, as well as by all-too-often lighter regulatory scrutiny.
Banks are struggling to keep up with this innovation race, especially with respect to intuitive customer-facing applications. Nonetheless, they need to adapt. Banks and other financial institutions that cannot keep up with this front-end innovation will struggle to remain competitive.
The “bank of today” needs to evolve and embrace the business platform model – internally and externally – to improve efficiencies, create new business value and, crucially, win back clients’ trust. They can regain trust by increasing business transparency, gathering more information and intelligence to better understand clients’ behaviour and wishes, and focusing more on security and identity management.
Best-in-class digital banking challenge
Banks’ high cost-income ratios, poor return on equity and shrinking IT budgets make maintaining a best-in-class customer experience while delivering the digital banking vision highly challenging. Face-to-face interactions are still foundational for the customer relationship, especially among ageing western populations.
But newer and smarter channels are gradually supplementing them in many regions, where young, tech-savvy populations and low-value transactions are making these interactions too expensive. In this environment, traditional channels need to become smarter, with the addition of AI and real-time analytics. And banks need to adapt to new smart channels that use AI and other emerging technologies, such as smart home digital assistants, TV consoles, connected vehicles and wearable devices that can trigger bank transactions.
The use of AI tools such as robo-advisors, more intelligent automation and advanced analytics can help banks achieve the tough goals of keeping loyalty levels high and ensuring a satisfactory customer experience. Simplifying front-end processes by making them more intuitive and natural, and reducing bottlenecks caused by human decision-making, can speed up front-end operations.
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This new digital banking experience will be critical to retaining and attracting customers in the increasingly competitive retail, transaction banking, and wealth and asset management markets. It will better align products and services with specific contexts and geographies by localising them, and also enable banks to manage a large increase in the number of customer interactions and transactions.
Using fintechs to improve digital transformation
In the past five years, the number of fintech startups has increased from a few hundred to many thousands, covering every sector of the financial industry. These market entrants usually leverage new technologies to deliver old processes in new, improved and more efficient ways, especially in the very visible front end. This is the secret of their success, but at the same time, it’s the main area of distress due to the difficulty in reaching the required economies of scale for those new models.
Nonetheless, fintechs represent a tremendous challenge for today’s traditional banks. They are still small, have a niche focus and are largely unregulated, but they are gaining traction and visibility, and their business models are starting to acquire clients by eroding the revenue of traditional players which are laggards in adopting innovation.
To become the “bank of tomorrow” and pursue innovation, banks need to leverage fintechs, while fintechs are looking for fresh investments to enable more global operations via collaborative business models.
Final thoughts: money
Money has no intrinsic value, per se, but the dynamics of traditional fiat currencies are mature enough that they are widely accepted in most environments.
Nonetheless, in the developing digital world, descriptors of value will become increasingly mobile in time and space as behavioural economics converge with new ways of managing and distributing money. Increasingly, money flows will be transformational in driving behaviour and business ecosystems.
Financial services providers’ core competency is to move money in time and space, while maximising returns and minimising risks. However, as concepts on value develop, banks should plan to move new types of money across multiple new types of ecosystems. This leads to two essential questions: “How are decisions made to create and manage money?” and “How will ecosystem/value chain components come together to create and manage money?”
This article is based on a Gartner research note entitled “Delivering the digital banking experience primer for 2018”, by Vittorio D’Orazio and Alistair Newton.
