#37-Design a Winning Digital-Only-Bank Equation- Strategy to Full Stack Systems
Banking is not a single industry or a product.
By nature of the offering, it is a bouquet (read assorted collection) of multiple flowers (read financial products and services)
A simple and traditional way to classify is Retail (Individual focused), Wholesale, and Investment banks (Trade and Business/institution oriented). A part of this classification is how the MAS (Monetary Authority of Singapore) has been using to award the licenses ( Digital Full Bank (DFB) and Digital Wholesale Bank (DWB))
Who are the Winners? New Bankers are in Town, thanks to MAS (Monetary Authority of Singapore)
Digital Full Bank:
- A consortium comprising Grab Holding Inc. and Singapore Telecommunications Ltd.
- An entity wholly-owned by Sea Ltd.
Digital WholeSale Bank:
- A consortium comprising Greenland Financial Holdings Group Co. Ltd, Linklogis Hong Kong Ltd, and Beijing Co-operative Equity Investment Fund Management Co. Ltd.
- An entity wholly-owned by Ant Group Co. Ltd.
Adaptive/Incremental Banking Innovation to the First Principle Banking
Traditional Banking has been moving in a very linear way before the advent of Fintech
Branch >> Telephone>>ATM>>Internet>>Smart Phone/MobileApp >>API First, Platform and Ecosystem Banking
Fintech/ Neo Banks started with API first, Platform, and Digital Ecosystem Banking natives. DNA wise they have been digital-first players.
The Giant VC/PE funding ecosystem has come to the support of Fintech and Digital Banking startups. Over ~42 Billion USD in 2019 and ~40 billion USD in 2020 was invested in Fintech startup deals globally.
Yet, it will not be easy for the new age technology companies to compete with the INCUMBENT BANKS head-on. The customer trusts them, and they have been in banking for more than a few decades.
It will be over-optimistic for Digital Only Banks to believe that disruption will completely decimate traditional incumbent banks.
What matters in Banking: Value proposition and Strategic Systems — 10/10 KSF’s
Product design (especially lending, saving, and investments)- Ever had the experience of talking to a bank teller, customer service, branch executive, or an agency partner. You were trying to understand the product but somehow the returns/cost/% / ROI etc kept on eluding you. Most of the financial acronyms in this world come from the Banking industry. The “net, effective, yield, offset, discounted, marginalized” jargon will reduce when banking moves to technology companies. Financial Products (lending and investments) should be clear, simple, and de-complexed. Digital-only Bank’s willingness to simplify products/services will determine the customer experience and adoption. In Singapore, Grab+ Singtel, SEA (DFB), Ant Group, Greenland consortium (DWB)can redefine the banking experience by using this simple product strategy.
Value and margin sharing with no hidden charges- 20 years ago, the only alternative to banking was cash and it even controlled the cash. This is no longer true- social platforms, eWallets, payment players, vertical banks, e-commerce, mobility players, focused consumer banking companies have now started competing head-on with banks. For eg, the reason why China merchants shifted to Alipay payments because it passed a greater share of the transaction amount to the merchants. The credit card chain took MDR ~2%to 2.5% while Alipay charged only 0.3% to 0.5%. Likewise on the customer front, if we deep dive into credit card and bank statements we realize there are a host of unnecessary charges/late fees and other components that banks think is okay to bill to customers. Digital or Technology companies think a bit differently.
Payments and cards, lending, investment products are where the traditional banks have been reluctant to pass on the value to the customers (retail, merchants), but Fintech/Challenger banks will continue to focus on the customers.
Why does a customer still need to make a call to reverse late credit card fee, annual card fee- BANKS MUST CHANGE THE OLD “DELAY=PENALTY” BUSINESS MODELS?
One-stop solution and Personalisation: How many problems can you solve for the Millennial customers? Take a look at what a MOBILITY, TELCO, PAYMENTS, Ecommerce player can do — shopping experience, food delivery, reward systems, partner deals, eWallets, and full-fledged mobile-first experience. We are in the age of OPEN-BANKING systems and ONE-VIEW of money. The offers and credit products must be personalized to the needs of the customers.
AI enabled platforms can help define the ‘banking customer’ persona and then push personalized recommendations to the customers.
DIGITAL FULL BANKS WILL DESIGN PERSONALIZED e2e CUSTOMER JOURNEYS
Students, home makers, elders, entrepreneurs, and employees have different banking expectations and requirements.
Speed of Banking- How quickly can a bank process an account opening application, a loan application, or any other transaction/service requested by the customers? Uber, Amazon, SEA, Grab, Lazada have redefined customer experience in the ASEAN region. The traditional banks will have to compete with the technology-first platforms to ensure that all the ‘banking applications’ move fast.
Banking is a highly regulated and compliance-first industry but it needs to break a few rules and not the regulations.
Agile Operations and Talent systems: There are thousands of banking employees who joined a bank before the advent of digital platforms. They are still used to operating in branch banking models and legacy systems. Technology companies have been hiring seasoned bankers in top roles, but the middle and bottom of the pyramid has a lot of full-stack engineers, API experts, cybersecurity specialists, design thinkers, UI/UX specialists.
Digital-only banks have minimum reliance on outside IT vendors, software partners when it comes to core technology. Operational costs and dependencies need to be kept in check to succeed in digital-only banking. Arrive at the average cost of servicing a bank account (retail and corporate), also measure the optimal number of employees required to manage a certain level of service quality. Traditional banks will need a plan to reskill the non-technology employees pool.
A, B,C, B end to end banking Technology- China’s MYbank and WeBank have managed to reduce the cost of servicing an account to ~50 cents compared to ~15 dollars banking industry average (refer to Chris Skinner books on Digital Bank Strategies)
A (API+AI+Automation), B(Blockchain), C (Cloud+Cybersecurity+Chatbots)and D (Data-Analytics+ Digital KYC and Onboarding+Decision tech) will be the core technologies that Digital Bank Platforms will be using in the new age banking architecture.
Channels Strategy- Branches will be relevant for a few more years, they will not go irrelevant immediately. However, the automation of branches must start right away. Think about the right amount of employees needed to run a bank branch and how can office space /rentals be optimized.
Digital-only banks will use all channels- Socials, mobile apps, partner platforms, to optimize for a greater share of customer attention and transaction. The experience has to be mobile-first and that is why APIs and Digital communities matter a lot for the success of digital-only banks.
API Partners and Open banking platforms- Banks now need to think of themselves as a service provider or a platform-based ecosystem whose only goal is to give its customers- one-stop solution through a partner ecosystem, secure, frictionless, predictive, and personalized experience.
- Predictive- What the retail customer (individual or SME) must plan for to meet the desired budget or business goal
- Personalized — Personalized offers based on the transaction data
- Aggregator insights- Offering a comparative review of all services they may need so that they choose the best from the platform.
DBS has already built a very future proof API first banking platform, and is ahead of the challengers in the region.
The main thing for the banks to consider is to build a value-based and outcome-focused API strategy. Every partnership must contribute to revenue, cost optimization, or some competitive advantage. The cost of acquiring a new customer and to maintain them must come down drastically for them to compete in the world of open banking.
Read my other post(link below)-Open Banking and API’s
Digital Community (Hook or the Better MouseTrap): Content (SOCIAL), Credit, Commerce (online shopping), food-delivery, rewards, and gamification are the greatest attention holders and mousetraps for online consumers. Apps that have greater MIND and Transaction share.
How many times does a consumer use a traditional banking app compared to a Digital only banking app is the key question
CornerStone Business- Digital only banks will experience failure and buyouts too. Amex acquired Kabbage, Xinja (Australian challenger digital bank) is exiting the banking business.
Yet, the Digital first banks in Singapore are different. Grab+ Singtel have core established cornerstone businesses like mobility, food-delivery, telco that can fund the journey. They already own a digital community on their apps.
Likewise, SEA group has Shopee (e-commerce) and SEA Garena (gaming business), and SEA money. This is also true for Ant and Greenland Consortium, which are diversified and well-established business groups that can patiently create a winning banking proposition for the Singapore consumers through a well-executed operating model.
Kakao is one good example of ‘internet-only banks’ with a robust digital ecosystem supporting the bank.
The shift to Digital-only banking is the ‘UBER MOMENT” for Banking. It is an IRREVERSIBLE shift in consumer behavior and fintech business models. Therefore, both traditional and challenger banks must adapt well to the challenge.
This is a 4 part series on Digital Full Banks (DFB) and Digital Wholesale Banks (DWB)
In my next 3 series write-ups, I will talk about :
Digital Only Bank-Tech and Operating Model: Front End, Middle, and Back End (Part 2)
Creating a Winning Digital Wholesale Bank and Why SME’s and Trade matters? (Part-3)
How can traditional banks outsmart Digital Only and Challenger Banks? (Part-4)
About the Author: Join me on Linkedin/Twitter:
Sidhartha Sharma, The author has over ~15 years of consulting experience with BIG -4 marquee firms.
Fintech, Digital Ecosystem and Platform Expert
Views are personal
