As transactions continue to leave the bank branch and the cost structure of supporting physical facilities places legacy organizations at a disadvantage, more banks and credit unions are considering a digital-only delivery alternative. Is this a viable strategy for the future?
Digital transformation a survival strategy for banks today. Retail banks in the United States are investing heavily on new technologies and staff as a part of a larger push for digital initiatives. U.S. 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 queue lines and the headache-inducing paperwork of the past. Entire banking relationships are available today through a couple taps on a smartphone. In fact, a recent PwC report revealed that 46% of consumers now prefer to interact with banks though digital channels, a significant surge from 27% as recently as 2012.
Incumbent banks are now responding to this shift in consumer behavior by increasing the investment in digital channels and digitizing back office operations. Some traditional banks are also forming separate digital-only banking units, 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 and creating a customer experience which is uniquely differentiated. Physical branches, on an average, cost banks $4 per transaction, while PC and mobile banking cost $0.09 and $0.019 per transaction respectively.
DBS Bank has launched its digital-only bank last year named ‘DBS Digibank,’ and the bank claims to have the largest online banking and mobile banking customer bases. 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 legacy bank’s existing design, brand value and business model while involving leaders who are tech-savvy and building technology with customer-centric approach. Banks can also leverage the technical capabilities of fintech startups to roll out digital-only banks.
Having a digital-only proposition may become increasingly important as a plethora of non-traditional banking choices are available to consumers today, enticing consumers to switch banks for better customized services and value propositions. According to an Accenture report, “banking consumers in North America want it all – deals and discounts, convenience, relevance and banking customer experiences that combine the latest in digital banking with human interaction. Consumers will share personal data to get what they want and switch banks if they do not.”
The good news is that there are global fintech digital, banking and payments solution providers who can enable banks to form separate digital-only banks where they can offer these customized products and deliver personalized services. With agility and flexibility at their core, these platforms are built to bring financial innovation within the reach of any institution. These innovative platforms empower banks to quickly launch new cost effective solutions in record time frames.
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Factors To Be Considered Before Developing a Digital-Only Bank
Implementing a digital-only bank requires pondering over the multiple factors that merit serious attention. It is not as easy as simply offering the same products to consumers without branches. Some of these considerations include:
- 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 consumers. For example, a survey could reveal the underlying security/privacy concerns consumers might have about signing in with their social media accounts.
- Creating a startup-like working environment to generate new ideas, foster innovations and expedite the process.
- Ensuring seamless coordination of all the projects and identifying the bottlenecks in order to meet deadlines.
- Consideration of local preferences to personalize products in order to meet consumer needs.
- Increased investment in data security to prevent data breaches and ensure a secure banking experience for consumers.
- Building a strong data analytics functionality to assist in delivering real-time capabilities that can be leveraged not only in product manufacturing and pricing, but also in providing micros-segmented offers to consumers.
Organizational Restructuring Considerations
Running a digital-only bank is different in many ways to running a traditional bank. Either a complete restructuring will be required of the development of a completely new team to run the new unit. Some of the considerations include:
- The new workforce with different skill sets that can take the entire responsibility of designing the products to rolling out the same. Employees’ KRA should be modified towards a more of consumer-centric design.
- 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 digital-savvy.
- Inculcating the sense of ownership among the employees through various educational programs and enable 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.
Is a Digital-Only Strategy Right for Your Organization?
Digital natives are expected to drive 40% of total spending power across all generations in the near future, which means the number of digital transactions will increase in a parallel manner. 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. Millennial should be prioritized during this process, as they now stand as the nation’s largest living generation.
Each organization need to reconsider the future of the bank branch in their organization in light of the digital transformation of the industry as a whole. Deploying new technologies will continue to be on the top of the priority lists, while holistically embracing the fundamental changes is sure to a successful digital journey. According to a McKinsey report, banks can remove 20 to 25% of their cost base by leveraging this digital shift to transform how they process and service transactions and relationships.
Defining banking propositions with traditional means like products savings, deposits, borrowing, and investment, will not be enough to differentiate next gen banks from the 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).