#20-How to Build a Future-Proof Digital Bank or FinTech business?
The moment of truth in banking has arrived
For a long time, there was no alternative available, and hence inefficient processes like KYC, branch-banking, and legacy clearance systems prevailed. Bankers have also been able to privatize the gains and socialize the losses through seeking bail-outs from the taxpayer money.
Plus a lot of traditional banks, failed at the 100% financial inclusion (upto 80–90% seems achievable too thanks to smart phone and internet penetration in ASEAN region).
It is all set to change, as retain banking functions are now being disrupted by new-age fintech, telecoms, and internet companies that offer frictionless banking services. Regulations are easing up for big technology companies to enter and disrupt the banking sector by providing high-quality user experience.
Due to smartphone and internet access, up to 80-90% of financial inclusion is possible easily.
Unbundling of banking products will take place until the pricing becomes transparent, and the most agreeable pricing point is reached for the value of the product.
Digital Banks (Disruptors)are here already- Regulations are supporting them, consumers want to try them
For the first time in Banking history, the incumbents banks are being disrupted by outsiders who have no brick and mortar branches.
In most cases, they are e-wallets, platform companies (social, e-commerce), mobility players, telcos, insurance, and other consortiums applying for a license.
Singapore- Singapore has a population of only 5–6 million people and 98% of them are served by a bank, and yet there is so much interest in Digital Bank only licenses. Below is a snapshot of potential contenders for Digital Bank license
Here are few contenders and Ant Financial has applied for a wholesale banking license.
Europe’s Neo Banks- Though they are yet to become profitable, but they have been pioneers in revolutionizing the banking experience in Europe and few international markets they expanded to.
Hong Kong- Hong Kong Monetary Authority (HKMA) issued eight virtual banking licenses in the first half of 2019, and 4 out of the eight licensees have launched the operation.
Globally there are hundreds of neo/challenger banks trying to disrupt the traditional banking fort. Some of them are scaling up very fast
Digital Banks adoption- When will the customer tipping point come?
The platforms/super apps/digital communities in social, e-commerce, food-delivery, mobility, and fintech e-wallets are emerging and consolidating around the world. They will eventually become the gatekeepers and begin to offer all financial services that traditional banks can offer.
The customer experience is superior, personalized. The cost of banking with them is lower and hence banking becomes cheaper for the user
Consumers trust big names like Alibaba, WeChat, SEA Group, Singtel + Grab, Ping An, Facebook, Apple, and hence when the masses get an opportunity to bank with these big names, they will not hesitate.
Banking is a matter of account holder trust and value delivered.
Traditional Bank Model Inefficiencies: What are the Pain Points?
- Unethical practices: Banking is the only industry where over the last ten years alone, over ~370 billion USD was paid out for regulatory,
compliance-related violations, settlements. Regulators imposed USD 27 billion in penalties on European and North American banks in 2018, an increase of USD 5 billion from 2017. - Cost and legacy system pressures: Banks must stop thinking like banks; they must be willing to go back to the drawing board to challenge existing processes, paperwork, KYC (kill your customers).
- Incremental and slow pace of innovation-Revamping your mobile app after every few months is not going to make you the next “Alipay” or “WeChat.” Observe the innovations in the financial services and tech industry. The use of AI for customer centricity, super App design efficiency, and Transparency on charges will save the retail banking from being disrupted by Platform, consumer tech companies
- Lower returns to the customers: Branch banking model is expensive, and the agency model is also not efficient in the digital age. 3rd party sellers do not care about your brand much. Loan and insurance agency relationships need to be re-imagined, keeping in mind the quality of customer experience.
- User experience is full of friction: Fintech, and platform players do not take consumer behavior for granted. Fintech knows that we are moving to a world where customers only want to press a button (no forms, no branch visits, no calls, no waiting).
- Hidden charges: Banks can be much more transparent in their cost of offerings and commission charges. Most of the non-banking products/services customers buy from the banks; they get lost in the web of commissions, fees, and other expenses. Fintech platforms are ensuring “100% transparency” on charges or are making most of the traditional banking/non-banking products like trading, investing, currency exchange free.
What does a Future Proof Digital Only Bank Look like?
- Platform-based orchestrators- If you have the opportunity to build a bank from scratch- go branchless and think like platforms. The cost of serving customers goes exponentially down as the scale increases.
- Free model for Financial Inclusion but offer a subscription- Traditional banks have excluded over 1.7 billion unbanked people from the financial ecosystem. No minimum account balances for a basic account. You can offer a subscription-based Banking platform too if you plan to bring in some premium services.
- Think Partner Ecosystems — Sign up partners that add a lot of value to your banking ecosystem. How many relevant partner offers do you have on your banking platform and are they useful for the digital account holders? Remove the ones that are not being used.
- Open banking and API — Open banking is the future of banking. In the world of PSD2 guidelines, banks will be required to share data with 3rd parties platforms to enable better access to the financial services universe.
- One-stop solution and user stickiness and a banking marketplace- How many problems your banking app solves for the users? Build up 1 or 2 core propositions with high user stickiness. It could be payments integration, wallet, bill simplifications, predictive banking, personalized recommendations. Starling bank in the UK founded in 2014, is a mobile-only virtual bank in the UK Starling has more than 1.5 million customer accounts with over £3 billion in deposits. It has 150,000 business customers in SME customer accounts. It offers a range of accounts including chequing and savings accounts for retail customers and business accounts for partnerships and sole-proprietorships. The bank also maintains the “Starling Marketplace”, providing a range of solutions including wealth management products for retail customers and accounting software and tax advisory solutions for SMEs. Starling bank plans to further grow the marketplace with the inclusion of insurance and financing solutions for customer
- Paper-less, efficient, and personalized- Never make a user enter the same information twice. I recently called into the helpline of one of the world’s best banks and just to waive off my credit card late fees, I had to punch in my credit card number twice. There were over 7 minutes of wait time involved before I could get to the customer service.
- High mind-share and time-share- How much time the user spends on your banking platform app and why? What do you offer them- any integration with a financial education content platforms? Apps that have mind and timeshare, also get the transaction share when the right offer shows up.
- Lower cost, value banking, and transparency- Offer the most transparent banking platform to your users. Simplify the spend, statements, GST, taxation, remove late fee charges for them for petty delays. Compliance is important but fleecing customers through hidden T&C is never a good strategy if a Digital Bank wants to win.
- Global banking transfers and expenses- Revolut and transfers platforms allow users to move money globally at a lower cost compared to the SWIFT systems that traditional banks use. They also charge no or very limited mark up on international transactions done in other currencies. This is the reason why travelers are using ‘Revolut’ compared to traditional bank credit and forex cards.
- Banks to evolve as Business(SME) Incubators- The SME number is estimated to be at 42.50 million, registered & unregistered together. A staggering 95% of the total industrial units in the country. In India SME, Employs about 106 million, 40% of India’s workforce. Next only to the agricultural sector. SMEs are companies that have 250 or less and in ASEAN (Association of Southeast Asian Nations) countries, SMEs are estimated to be 70–80% of all existing enterprises. SMEs in Southeast Asia also account for over 70–90 %. It is no understatement to say that SMEs are the backbone of the economy and an integral part of the Southeast Asia startup scene. Banks have not been very friendly with the SME. Thus the platform banks that offer the most superior user experience to SME and the support they need will win. Think how can your banking platform solve SME problems- capital access, taxation, accounting, invoicing, trade lobby access.
- A,B,C,D, E, F of Bank-Tech- AI, Blockchain, Cloud and Data-Analytics, Ecosystem partnerships for open banking, and Firewalls of cybersecurity will be six-core meta technologies that will matter in a future bank. Banking frauds must be minimized through AI-powered compliances and AML processes.
According to fortune, Using real-time payments data and a risk-management system that analyzes more than 3,000 variables, Ma’s 5-year-old MYbank has lent 2 trillion yuan ($290 billion) to nearly 16 million small companies. Borrowers apply with a few taps on a smartphone and receive cash almost instantly if they’re approved. The whole process takes three minutes and involves zero human bankers. The default rate so far: about 1%.
According to Chris Skinner, We Bank has got down the cost of serving one account to ~50 cents a year using the 4 core tech- AI, Blockchain, Cloud and Big Data, while for traditional banks the cost hovers around 10–15 US dollars per account per annum.
12. In addition to the above points, it is critical to get the Digital-first talent to run your bank. The existing workforce must be upgraded and upskilled to understand the latest technologies and trends that are disrupting the banking world.
The future is branchless and also less-banking employees. The existing branches will be automated and employees must be absorbed in other banking functions beyond the current branch based customer facing roles.
Banks must think like Platform companies and transform themselves into one eventually.
If a digital bank can have will have following full-fledged features clubbed into one then it will surely win.
Few core propositions that Digital Banks must embed
- A winning Savings account — For its trial, Zhong An up to 6.8% three-month deposit of up to HK$100,000 for the first 2,000 clients. There is no way a traditional branch bank with high operational costs can offer those interest rates in savings account.
- Fast SME banking account- The SME banking process must be simplified. There are companies like Square capital which are disrupting lending by creating a PoS ecosystem. SMEs need support in operations like- invoice, accounting, inventory, CRM, taxation etc.
- Investment platforms- Users want platforms that allow them to trade in global stocks and even crypto assets. This is the reason why Robinhood and Coinbase are so popular
- Money market funds- Users are looking for banking platforms that enable them to participate in wealth creation. Yue Bao became the largest money market fund in the world as it allowed users to park small amounts of money in short-term investment products. Regulators came heavily onto it, but not before the model proved its worth and success.
- Vertical and personalized banking- Amazon understands it merchants working capital requirements and hence its Amazon lending model appeals a lot to E-commerce merchants. SoFi is offering students loans at a lower cost compared to traditional banks.
- Think Banking as a service and all in one too- How many needs of your account holder is the bank solving? Map the customer journeys and ensure the digital touchpoints are optimized and optimal needs are met. If the digital bank that controls the account relationship cannot serve the customer directly on a requirement, then its partners must through an API enabled open banking system.
As mentioned in my previous write up, not all digital-only bank startups will win, but they will transform banking forever. Traditional Banks must be ready and the time to act is now.
Platforms, Ecosystems, and Super-Apps form core of the future of all B2C companies.
Regards,
Digital Ecosystem and Fintech Expert
