We have contributed to the Digital Banking Framework white paper for Institute for Development and Research in Banking Technology. Read the complete white paper that highlights Digital Banking: Goals, Maps and Signposts at IDRBT’s website – www.idrbt.ac.in/assets/pdf/20
In the world of banking, digitization is primarily about two things:
- The changes technology can bring to banking businesses and to financial institutions
- A preparedness-enabler for the fast-approaching, all-pervasive digital environment of the future
Whether the goal is to maximize revenues or to meet regulatory requirements, or to respond to trends in the market and industry as a whole, digitization has the potential to transform every aspect of banking. That said, realizing this potential will require firms to adopt long term strategic thinking and initiatives around various functions of these banks and financial institutions. This paper outlines one such digital banking strategy and a framework to implement it.
DISTINCT FEATURES OF DIGITAL BANKING
World over, the following trends have been very clear and consistent:
- Customers are becoming increasingly comfortable with transacting on digital channels, whether for product purchases or services
- Fintech platforms and services have responded to e-commerce and mobility with disruptions across the board – resulting in loss of opportunities and value for the traditional banks
- The cost of meeting tough regulations has eaten into the allocations for investment in business and IT, which then makes Banks less competitive, eventually affecting their bottom-line even more
Established firms in the banking and financial services industries face the following challenges:
- Their own relevance in the modern financial services landscape, given shifting consumer behavior and changing business models in several industries
- Many firm executives question their organization’s ability to tap into increasing digital awareness, and leverage the huge amounts of digital information available about their customers via social networks
- Banks find the management of customer expectations, such as personalized banking services and the integration of information across channels, challenging
- There is the ever growing challenge of competition from less regulated and more agile Fintech startup companies
- Finally, the operating environment is characterised by increasing costs and complexity in regulations and reporting
Digitization can, in many ways, allow firms with these aforementioned challenges to meet and face them more confidently.
DIGITAL BANKING BUSINESS STRATEGY
Digital Banking as an overarching strategy impacts all major areas of business: products, services, processes, operations and decision making. Any implementation of digital strategy needs to focus on initiatives around the following key issues:
- The development of customer centric business models
- Simplifying business and operating models
- Leveraging a steady information advantage
- Enabling innovation across departments, teams and hierarchies
- Proactively managing risk and regulation
Figure 1: Digital as an interconnected and mutually reinforcing set of 5 elements
Customer centric business models are based on a holistic understanding of the customer, and are used to achieve a strong digital engagement, eventually leading to highly personalized, co-created products and services using data and algorithms (along the Digital Maturity Continuum). Such a model requires strategic focus on:
- Developing omni-channel integrated platform – to enable consistent user experience across all the channels (online, mobile and social)
- Developing capability to acquire, integrate and analyze multiple sources of internal and external data – to understand the customer and her context better
- Understanding and defining relevance and timeliness for the customer – to tailor processes from the point of view of the customer
Simpler business and operating models utilize optimized, lean, simple architectures to deliver better functionality at lower costs. Complex and costly legacy operating models, with separate operations, technology and risk teams and processes for each product give way to integrated and optimized platforms, processes and teams.
Steady information advantage allows businesses to continuously develop their own ability to extract meaningful insights from large datasets, and use this as a competitive advantage. Key to achieving this is an enterprise-wide data management strategy, that works to develop and maintain the data assets for bank or financial institution, while ensuring data quality and proper management of metadata. Such a strategy provides a platform for building analytics capabilities, vertically and/or horizontally, that can then permeate throughout the organization and impact decision making across the enterprise.
The ability to proactively manage risk (financial, operational, strategic and reputational) and regulation in a demanding business environment, with exposure to constantly evolving technology platforms, is the most important benefit to be achieved from digitization. From being based on customer or regulatory complaints, the integration of risk and compliance within digital channels will become embedded in the lifecycle/digital strategy for products and services. For this to happen in large banks and financial institutions, they need to develop the capability to allow the underlying business processes to seamlessly exchange information. Further, this information exchange should balance the two-fold and contrasting requirements of providing data in a secure way to its organizational consumers, and at the same time, enabling teams to benefit from data that may not be immediately relevant to them, but relevant in a regulatory or risk context. Fundamental to this capability is the handling of huge volumes of data at scale, sometimes generated as a byproduct of the core function itself.
Innovation is fundamental to long term growth of the bank. Depending on the digital maturity of the bank, innovation can be at the foundational capabilities level, competition capabilities level or market leadership capabilities level. Fostering innovation requires alignment between business goals and digital strategy, thereby reflecting a high degree of leadership engagement. Also critical for optimal outcomes from the investments made in evolution of digital banking is the ability of IT to communicate and collaborate with other arms of the organization on various aspects such as Security, Risk, Marketing, Strategy, Business, etc.
DATA STRATEGY FOR BUILDING DATA ASSETS
Data forms the fundamental underpinnings that power the elements in the digital strategy. To realize its strategy, a digital bank will not only capture significantly higher volumes of data but will also have to store, consume and generate unprecedented amounts of information in turn.
The key differentiator would be the capability to be data-driven, to extract value from data for a wide range of business needs – from cost-reduction in solutions for fraud detection and sanctions management to revenue opportunities using insights about processes, people, products and portfolio – each of which in equal part motivates, guides and drives the digital strategy. As such, the two are intertwined.
Implementing a coherent data strategy will entail:
- Instrumentation: Each element of digital strategy is instrumented with data collection points. The ability to capture data precedes discovery of any use case for that data.
- Collection: Data collection is viewed as asset building for present and future (yet unknown) use cases. In that, the context is considered part of the data and the extraction of value is deferred for later.
- Integration: Customer and his/her interactions across multiple channels are integrated. Likewise, bank’s services and offerings have high degree of consistency and clarity.
- Rationalization: Entire bank’s customer and business data is consolidated into a set of master representations in the business domain. Compliance and Reporting with lineage and traceability is serviced as a regular function.
- Analytics: Insights into customer’s behavior as well as reflection on banks own business and functions.
- Business Intelligence: Feedback loop into the strategy and decision making for future course of action.
A FRAMEWORK FOR DIGITAL BANKING
A holistic framework for digital banking that includes foundational, differentiating and leading capabilities has been proposed by PwC and is reproduced below:
Figure 2 Digital Banking Framework by PwC: Capability Pyramid
Foundational capabilities are a set of behaviors and capabilities that banks should develop to lay a strong foundation for digital banking:
- Digital IT strategy: Internalize and prioritize digital banking as a top goal from the board on down
- CIO collaboration: Build a CIO-centric culture of collaboration and consistency from the top down
- Robust security: Assess, design and implement security assessment programs, processes and controls
- Data quality management: Test security mechanisms with real-world exercises to understand weaknesses in the network and application infrastructure, prior to a hack attack or attempt
- Integrated risk and compliance: Use a comprehensive, structured data quality framework to limit technical risk, produce improved data output, and support business and IT alignment
Differentiating capabilities, building on top of the foundations, will allow a bank to break from the traditional constraints of the past. To get there, banks should focus on:
- Talent management: Use a talent assessment framework to identify skills gaps and transform the bank, such that learning, recruiting, and culture enable innovation and collaboration. Expand the human capital strategy to recruit from think-tanks and tech-savvy RMs. Facilitate focused, on-the-job training, mentoring and peer coaching, and promote a culture of collaboration and innovation. Develop an innovation center of excellence to impress the importance of imagination, creative thinking and inventiveness more deeply into the bank’s culture.
- An integrated multi-digital channel platform: Target and overcome legacy system challenges with streamlined, future-state IT approaches. Build and deploy secure customer-facing applications to reap the benefits of a digital presence. Build the data assets as platforms and enterprise services to enable deeper and wider access to information throughout the bank.
- Customer analytics: Use communities-of-interest and voice-of-the-customer opportunities to promote information sharing. Use sophisticated data analytics to build an understanding of customer behaviors, needs and trends.
Leading Capabilities help the banks focus on their core business values. To evolve as market leaders in their areas, banks should seek out and cultivate employees with more sophisticated digital skills and a strong co-creation agenda
- Co-creation of products and services: Develop a co-creation strategy to pave a path for program implementation and to illustrate how value will be delivered and communicate this roadmap across the enterprise.
- Develop a platform and alleviate gaps between the current state and the future state of the architecture needed to support a robust customer engagement and Omni-channel ecosystem. Build communities through customer workshops and engage key internal and external stakeholder communities to drive growth.
- Govern the process by facilitating engagement among key stakeholders to establish a culture of innovation and coach teams towards meeting objectives on time and within budget
CASE STUDIES AND SUCCESS STORIES:
- ING Direct was one of the earliest in the digital-centric model and successful (including the ING Direct USA sale for USD $9 Billion to CapitalOne).
- Movenbank is a good international example of how mobile-first approaches are bringing about disruptive change to the process of retail banking and payments. Numerous fin-tech startups closer home are disrupting all traditional financial services arms in some way or the other (some examples are provided here, a comprehensive overview of how Blockchain technology is going to displace banks from its intermediary position).
- Disruptions in India are already happening in the credit sector like for instance servicing the needs of the ‘unbanked’ retail borrowers (e.g. CreditMantri), commercial loans for digital-based SMEs (e.g. CapitaFloat) etc. Disruptions in the payments industry is already well-known as witnessed by the large PE inflow into companies like PayTM and MobiKwik.
- McKinsey – Digital Banking in Asia 2014 Report
- PwC’s Global Digital Banking Survey:Eyes wide shut Global insights and actions for banks in the digital age