How Established Banks Can Form Separate Digital-Only Banks by Leveraging Their Existing Resources to Stay Competitive

Is digital transformation a survival strategy for banks today? Retail banks in the United States are investing heavily in new technologies and staff as a part of a larger push for digital initiatives. US banking digital transformation spending is estimated to grow at an annual rate of 22.5% by 2020, with most of the established banks allocating nearly 40% of their IT budget to meet the goals of this digital transformation.

Modern banking is a far cry from the long queues and the headache-inducing paperwork of the past; the entire bank is available today through a couple taps on a smartphone – a study of US banking customers found that 56% prefer more of a digital than a personal relationship with their bank. Among millennials, the number is even higher – 70% prefer to interact with their banks online.

Incumbent banks are now responding to this shift in consumer behavior by forming a separate digital-only bank, where all the banking services are delivered through mobile devices and the web.

Operating banks with zero branches place digital-only banks on the upper end when it comes to offering better deals to customers/creating a customer experience which is uniquely differentiated; physical branches cost banks $4 per transaction on an average, while PC and mobile banking cost $0.09 and $0.019 per transaction respectively.

DBS Bank, for example, in 2017, has launched its digital-only bank called digibank by DBS (digibank) in Indonesia (following the successful rollout of digibank in India in April 2016, which has enabled DBS to penetrate India’s retail banking market with about 1.5 million new customers acquired by August 2017). The bank claimed to have the largest online banking and mobile banking customers. The bank offers digital bank accounts with zero balance requirements, 7% interest rate on savings and unlimited access to ATMs.

Forming a digital-only strategy

Creating a credible digital banking proposition requires aligning new technologies and solutions with the banks’ existing design, brand value, business model, and involving leaders who are tech-savvy and build technology with a customer-centric approach. Banks can also leverage the technical capabilities of FinTech startups to roll out digital-only banks.

A plethora of non-traditional banking choices is available to consumers today, which lead them to switch banks frequently for better-customized services and value proposition.

Implementing a digital-only bank requires pondering over the multiple factors that merit serious attention

  • Creating well-designed and standardized APIs, and developing an ecosystem to escalate the process of product manufacturing and distribution.

  • Real-time understanding of the behavior and pain points of customers. For example, a survey could reveal the underlying security/privacy concerns customers might have about signing in with their social media accounts. Estimates suggest that banks that use a real-time customer service layer can reduce the mainframe utilization by 50%, which reduces costs.

  • Creating a startup-like working environment to generate new ideas, foster innovations and expedite the process.

  • Ensuring seamless coordination of all the projects and identifies the bottlenecks in order to meet the deadline.

  • Consideration of local preferences to personalize products in order to meet customer needs.

  • Increased investment in data security to prevent data breaches and ensure a secure banking experience for customers.

  • Building on data analytics to assist in building real-time capabilities that can be leveraged not only in product manufacturing and pricing but also in providing micro-segmented offers to customers.

Organizational restructuring to enable the digital transformation

  • Digital transformation in banks also demands a workforce with different skill sets which can take the entire responsibility of designing the products to rolling out the same. Employees’ KRA should be modified towards customer-centricity.

  • Banks should invest in their existing pool of talent by enabling an innovative learning environment and providing them with customized learning and development framework to make them digitally savvy.

  • Inculcating the sense of ownership among the employees through various educational programs and enables them to work in alignment with the organization’s digital strategy. This will accelerate the decision-making process about the product development and avoid the lengthy back and forth process that usually happens between the departments.

What’s next for digital-only banks?

Digital natives are expected to drive 40% of total spending power across all generation in the near future, which means the number of digital transactions will increase in parallel. The drift certainly calls for reorientation in the delivery of products and services by banks, bringing the next wave in banking – speed, convenience, and enhanced customer experience. Millennials should be prioritized during this process, as they now stand as the nation’s largest living generation.

The future of the bank branch is an ongoing debate in light of digital transformation of the industry. Deploying new technologies will continue to be on the top of the priority list, while holistically embracing the fundamental changes is sure to a successful digital journey. Some estimates suggest that banks can remove around 20-25% of their cost base by leveraging this digital shift to transform how they process and service.

Defining banking propositions with traditional means like products savings, deposits, borrowing, and investment, will not be enough to differentiate next-generation banks from their competition. The new digital age calls for a retail approach to banking, offering customized financial products and services to generate higher customer lifetime value (CLV).