What is digital banking?
Banking has changed significantly in recent years. The widespread availability of broadband from the early 2000s made online banking a viable option for many more people. This made it easy to pay bills or check your balance without having to visit a bank branch or ATM.
Recently, however, there is a further shift towards ‘digital banking’. So what exactly is digital banking? What makes a bank digital, and as a consumer or business, what benefits does it bring to you?
Benefits of digital
Banks have had digital front ends for a very long time, providing access to services, such as viewing business current accounts online, via websites or smartphones. Digital banking is about much more than that. It involves automating the back office processes and linking these seamlessly to the front end to automate every step of the process.
This transformation relies on technology, including big data, digital transformation and artificial intelligence. All of these can be used to enhance the customer experience. A bank isn’t truly ‘digital’ unless it has applied these technologies to all of its functions. So, from the bank’s point of view, what are the advantages of doing this?
- Lower costs – reducing dependence on legacy systems can cut costs and aid competitiveness
- Higher revenue – more efficient systems can lead to gaining and holding more market share
- Better customer experience – newcomers are shaking up the banking landscape by delivering systems that simplify everything from scheduling a payment to checking your balance
- Improved compliance – the financial sector is subject to stringent legislation and regulations, but these also bring opportunities that digital banking makes it easier to exploit
- Better technology – improved analytics, blockchain and cognitive systems all promise great benefits but need digitisation to exploit
Challenges of digital
Although digital banking has many real and potential benefits, it also presents some serious challenges. For established players, the biggest problem is legacy infrastructure. Big banks have a lot of money and expertise invested in their systems and are understandably reluctant to move away from them. But these systems also lead to information being siloed and challenging to access.
Digital banking mandates nimble, agile processes that can deliver information fast. The side benefit of this is that they are easier to maintain in the long term. Of course, the right people are needed to deliver digital transformation and finding them can be a challenge too. Banks need specialist expertise to be able to deliver on their digital goals.
Success at introducing digital banking is only possible if you bring consumers along with you. One of the issues for challenger banks is to win trust. Customers will only consider switching if they are assured that their data and identity will be kept private, that their payments are secure and that paperless contracts are as safe and valid as printed ones. There’s a trade-off here, of course. A digital bank needs data about customers to improve its service, but people will only be willing to give access to that data if they trust the bank.
Finally, digital banks must abide by the same regulations as more traditional ones. Also, they must ensure that their systems are secure and adequately protected from the threat of cyberattacks and fraud.
Digital nuts and bolts
To work effectively, a digital bank needs to deliver in three areas. Firstly it has to have at its core a technology platform that can provide the following:
- A presentation layer of information for customers and staff using the system
- An orchestration layer handling client processes and interfacing between front and back ends
- A product handling layer that should contain no client data
- An interface layer using APIs and other technology to widen access to services
The second thing that digital banks need to deliver on is to accept and act in a manner that acknowledges that they don’t exist in isolation. They need to establish relationships with other financial technology providers such as insurers and stockbrokers to deliver a seamless financial ecosystem and to be able to react quickly to changing market demands.
Finally, digital banks, as with more traditional banks, need trust. Customers – whether personal or business – will only use financial organisations that they trust with their data, and it’s this data that is key to digital success. Digital banks will increasingly be based around their customers and the database of knowledge that they have assimilated about them, rather than around their own products. Without trust surrounding the brand, this cannot happen.