What is Digital Banking?
Digital banking can often be misinterpreted for being the same as online banking. However, for anything to be truly digital, it has to go far beyond that. Digital banking, at its core, implies embracing and leveraging technologies to deliver banking products across all its delivery channels.
From a consumer perspective, the existence of digital banking only appears on the front end of either mobile or online platforms, while all other functional areas are overlooked. Banks generally have hundreds of internal functions and controls such as systems, policies, procedures, and processes implemented to safeguard assets, limit or control risk, and achieve bank objectives. The digitisation of such functions is what truly transforms a bank to being digital.
Hence, digital banking can be defined as the digitisation of banking services that encompass the functional and operational ends of its entire platform, to reduce risk, improve efficiency, and better serve customers. For traditional banks, going digital is no longer an option, but rather, an imperative for them to survive and stay at the forefront of the financial market.
Key Features of Digital Banking
Creating Value for Customers
The consumer journey is rapidly evolving and with that, digital banks need to identify gaps beyond that journey and create new business models that address customers’ needs or pain points. With so much data on customers’ buying and spending habits, digital banks would be able to leverage on this data by developing some meaningful insights through predictive analytics. This would help banks develop personalised and tailored offers that would be crucial in maintaining a deepened relationship with customers. It would also allow them to continue to preserve and expand their digital security with which they are trusted. More importantly, it would significantly save the time and cost incurred by both banks and customers in dealing with one another.
Digital services offered by digital banks must be smart, responsive, and tailored to customer needs at all times. A prominent customer experience should always remain the main focus of digital banks, within their digital transformation strategy, to constantly achieve customer loyalty.
Embracing Open Banking
Open banking is gradually recognised as the means of redefining the financial landscape in a number of ways. Some of which include enhancing service offerings and improving overall customer engagement to increase revenue streams from new and broader channels.
“Open Banking helps firms create a more seamless and integrated customer experience which will be vital to retaining and satisfying customers…” – Rama Sridhar, Executive Vice President, MasterCard.
By embracing open banking initiatives, it would lead digital banks to a secure form of data exchange when collaborating with third-party organisations. This in turn would draw up an endless stream of possibilities of what digital banks can achieve in terms of the products and services they offer.
Data is seen as a crucial asset for digital banks in administering day-to-day operations. As this data continues to grow, it becomes important to include a frictionless process layer within the bank’s technology architectures. This would serve to mobilise and automate the entire customer onboarding process through utilising existing customer data. By integrating existing customer datasets, it would bring about a seamless banking experience for customers.
It is essential for both digital and traditional banks to orchestrate and execute a well-planned data strategy by leveraging on data insights through agile technology stacks. This would enable them to reshape their existing business models in order to achieve hyper-personalisation.
Through the utilisation of data-driven tools, it would ensure that the risk and long-term profitability are aligned strategically for digital banks in the long run.
Banks need to constantly be up-to-date with new market changes, technologies, and laws, which requires them to be adaptive and agile in order to do so. Agility would allow them to differentiate themselves from their competition in their approach in delivering services that are targeted, personalised, and unique. These differentiators would include, a scope focused on creating new value propositions that are integrated in customers’ day-to-day lives, consortiums allowing access and availability to a wider range of products and offerings, and technologies that would enhance the banking experience. It would also enable banks in increasing their operational efficiencies as well as decreasing their decision-making time. Digital agility is a crucial element that requires change at every facet of how banks are operated.
Innovation has always been a key component in embracing new technologies. For digital banks, it would mean driving digital transformation to open up new grounds in delivering products and services to customers.
With the introduction of AI-driven predictive banking, banks can consolidate all internal and external data from which predictive customer profiles can be built. The access to such rich data would allow banks to better know their customers together with providing future financial advice.
Payment has always been a dynamic area of innovation in the financial industry. In digital banking, the overall payment options for customers should be seamlessly integrated, removing friction, and adding value. By differentiating various payment gateways driven by data, technology, and how and where customers pay, the move towards innovating new payment trends would transpire. This would be in proximity with the Internet of Things (IoT), mobile wallets, point of sale (POS), blockchain, and cryptocurrencies.
With the advancement in technology, banks have made it possible to expand their operations beyond their physical locations and working hours, making it more efficient for customers to access and use their accounts remotely. The increasing number of mobile internet users has impacted greater adoption of digital banking. This is the result of the convenience, cost effectiveness, and user-friendly experience received by customers. However, such a seamless customer journey would call for vital security measures to prevent frauds and security breaches, as transactional volumes continue to grow.
It is integral for any bank to walk through customers on cybersecurity measures in every step of their digital transformation. The importance of integrating biometric and fingerprinting devices, end-to-end encryptions, and two-/multi-factor authentications is to avoid customers from exploitations by cybercriminals. Banks should continuously look into new means of security measures to triumph over external threats.
Digital Banking in Action (APAC)
Digital banks in Asia soon came to rise in 2015 after the People’s Bank of China (PCB) granted five internet-only banking licences (Figure 1). Over the years, many other countries followed in setting their own digital banking licences, including South Korea (two licences in 2017, one in 2019), Taiwan (three licences in 2019), and Hong Kong (eight licences in 2019). The Philippines recently introduced their licencing framework in December 2020 while Thailand is setting to launch a licencing programme in the near future.
In China, WeBank was the first digital-only bank established in late 2014 and has grown to become the largest digital bank. Among the eight banks who were issued the licence by the Hong Kong Monetary Authority (HKMA) in Hong Kong, some of them include Ant Bank, a subsidiary bank registered under Ant Financial; Airstar Bank, a joint venture between Xiaomi and AMTD Group; and Zhong An (ZA) International, a subsidiary of Chinese insurtech giant ZA International.
In Taiwan, Rakuten International Commercial Bank (RICB), operated by Japanese e-commerce giant Rakuten Inc, became the first operational digital bank, among the three digital banks, approved by Taiwan’s Financial Supervisory Commission (FSC) to go live. Next Bank and Line Bank, two of the other digital banks in Taiwan are currently pending approval from the FSC to go live. In South Korea, under the Korean government’s new policy framework for digital banks, K Bank and Kakao Bank were successfully launched in 2017 with the aim to bring a substantial impact on Korea’s banking sector by offering convenient and innovative products and services.
Singapore’s Monetary Authority (MAS) also recently announced granting digital banking licences to four successful applicants who will be issued two types of licences, the digital full bank licence (DFB) and the digital wholesale bank licence (DWB). The Grab-Singtel consortium and SEA Group were both awarded the digital full bank licence, while the digital wholesale bank licence was awarded to Ant Group and a consortium comprising Greenland Financial Holdings, Linklogis Hong Kong, and Beijing Co-operative Equity Investment Fund Management. MAS expects the new digital banks to commence operations from early 2022.
Digital Banking Licences in Malaysia
On the 27th of December 2019, Bank Negara Malaysia (BNM) released the Exposure Draft on the Licensing Framework for digital banks (Figure 2) which would set the scene for Malaysia’s future financial market. The framework was set out as a means for BNM to enable innovative integration of technology to the financial industry. The initiative in releasing the Exposure Draft was also a move to boost sustainable economic growth, aligned with achieving Malaysia’s Shared Prosperity Vision (SPV) 2030.
Thereafter, BNM issued the licencing framework for digital banks in December 2020. BNM stated the framework was created to “enable the innovative application of technology to uplift the financial well-being of individuals and businesses and foster sustainable growth” which includes expanding “meaningful access” and “promoting responsible usage of suitable financial solutions to unserved and underserved segments”.
Currently, several candidates including players like Axiata, Grab, Sunway, AMTD, MyMy, Razer Fintech, Paramount Group, and Green Packet, are in the process of submitting their applications for the digital banking licence until 31st June 2021. With that, BNM plans to grant five licences to successful applicants by the first quarter of 2022.
This movement is seen as a giant leap for the Malaysian financial market, and it would certainly foster a vibrant and highly accelerated technological infrastructure. As more digital banks emerge, financial organisations would be inclined to shift their focus to offering more friendly and flexible digital services. What would become of this digital transformation, in the ways consumers would quickly adopt this model, is yet to be seen as the digital banking industry matures in time.
This article was first published in February 2020 and has been updated for freshness, accuracy, and comprehensiveness.
JurisTech (Juris Technologies) is a leading Malaysian-based fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.
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