The term “digital bank” may sound familiar, although at present time there is no entity that has established itself as a fully digital banking operation. All banks employ a form of digital information handling, storage, and even automation. But digital banking is not equivalent to online banking, and goes beyond the tasks of an online payment platform. CTMfile recently ran a story on why corporate and investment banks must reinvent themselves and now Forbis Group has put out a report exploring what digital banking is and what it means to both banks and their customers.
Many businesses use the term “digital banking” in a loose manner, to make themselves stand out as cutting-edge institutions. Any payment app or banking tool can adopt the term, but lack the automatic processes and customer-facing interface to complete banking tasks with minimal human attention. Digital banking is the ultimate optimization in money-handling, doing away with many of the legacy roles and systems in a traditional bank.
Defining the modern digital bank can be confusing. According to Stanley Epstein, director of IT consultancy Citadel Advantage, the working definition of a truly digitised banking operation is as follows:
“Digital Banking is the application of technology to ensure seamless end-to-end (STP in the ‘old’ jargon) processing of banking transactions/operations; initiated by the client, ensuring maximum utility; to the client in terms of availability, usefulness and cost; to the bank in terms of reduced operating costs, zero errors and enhanced services,.”
The concept of a digital bank can end up revolutionising banking as we know it, by eliminating the need for human roles. A digital bank can operate with a small team, and make the same impact as older institutions.
A digital bank should dedicate its resources to essential procedures ensuring quality and security, while saving on obsolete banking roles.
“For example, people should check on all issues related to escalated legal concerns, advanced anti-money laundering or geographically specific regulatory concerns,” said Andrej Zujev, founder of Forbis Group. “This provides better quality assurance and security of large assets. Marketing and communications can be considered as well, but the rest should be automated.”
A brick-and-mortar bank works hard to present an aura of solidity and presentability. Customer service is first and foremost, employing tellers and ensuring human contact for all customers. A digital bank, on the other hand, aims to automate as many procedures as possible. In a world getting more accustomed to wholly electronic, mobile-based money operations, banking in-person is rare. For a digital bank, the process of meeting a person is still available, but it is a part of the VIP package, and not everyday business. Even traditional banks aim to limit in-person operations, but a digital bank also aims for excellence in automated customer service.
Mass layoffs suggest lower need for human involvement in banking
Full digital banking appears at a time when large-scale financial institutions lay off swathes of their work-force. The layoffs are partially due to internal struggles in some banks, but also brought about by technological possibilities not available in previous decades. The banking sector shed 80,000 employees in 2019 alone, and Bloomberg predicts another 200,000 positions would be made obsolete in the next decade.
With a dynamic global economy, keeping bank branches is becoming obsolete. In the UK, banks closed between 50 and 74% of their branches in just the first half of 2019, responding to new opportunities to switch to digital banking, while mitigating the risk of Brexit.
This trend opens the door for new banking institutions to start their business without the legacy of a bloated workforce, and offer the same experience with a small, dedicated, technically-savvy team. Launching a fully digital bank comes with benefits like immediate low costs and increased revenues. A smaller operation is more agile, and less exposed to risks, more viable in periods of volatility.
Digital transformation reshaping banking
Banking processes are also highly amenable to automation and data operations, utilising technological solutions for both back-end and front-end. Digital transformation, a trend among multiple businesses, brings specific challenges to banking.
A truly digital bank builds its services based on the latest trends in digital culture, and takes into account novel user habits in offering a seamless, intuitive experience. Gamification, or the introduction of game-like features, has grown as a tool to drive used engagement. A subset of the fintech industry, a digital bank with optimised branches must rely on its user engagement to drive loyalty. Much like a brick-and-mortar bank built its customer trust based on personnel and physical space, so a digital bank uses all the functionalities of a modern app to retain customers.
Digital banks also face unique compliance challenges, as finance and money transfer rules become stricter. Both purely financial regulations, and GDPR laws are essential in building a digital bank in 2020.
Replacing the legacy systems of banks would end up with savings of 20 to 40% in operating costs, the Forbis Group report notes. A digital bank can also have highly knowledgeable personnel in one location, ready to consult customers. But all other services, including payment, loans, and investments, can be accessed and used remotely, with failsafe mechanisms and modern-day security.
Digital transformation is possible in all modes of banking. Without mimicking modern-day apps, retail banking will face a loss of customers. But the trend is also reaching private wealth management, as well as corporate banking. A well-planned digital transformation will move banks away from legacy systems, and define the new trends in the sector in the coming decade.
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