Four years from now, just under 4 billion people will be using digital banking applications. That’s almost half of the world population. According to Juniper Research, the growth will be driven by the rise in digital-only banks and the ongoing focus on digital transformation by established bank brands. Banks are forced to become more digital but implementing a digital banking platform does not necessarily mean that a retail bank can call itself ‘digital’.
Read on to learn:
Can you imagine a bank not being digital? Just imagine that for any banking transaction, you would still need to go to a bank branch, taking out a wad of cash that you need to hand to someone else. And needing to put a ‘wet’ signature every time, to validate the transaction that you want to do? We don’t need to go back to the Middle Ages to live those times again, just the end of the last century is far off enough. Banking has gone digital, and anyone active in financial services has, by now, implemented one or other digital banking platform. Digital banking platforms came into being because of both technological and societal evolutions.
Had it not been for the invention of the internet, we might indeed still all be rushing to bank branches or writing checks for any payment we needed to make. Banks had already been using compute power to automate the back-end processes underlying financial transactions. The internet provided the outside world with a connection to these systems. When smartphones appeared, boasting internet connections and apps, digital banking took another leap.
Emboldened by the possibilities that technology offers them, consumers have become accustomed to do anything they want, anytime they want it, and on any device that happens to be in the vicinity: a PC, a tablet, a smartphone,… Performing financial transactions needs to be easy and convenient, safe and always available. This has prompted financial institutions to adopt a multi-channel strategy and move to an omni-channel strategy later.
Because of these evolutions, banking moved from the physical realm to the digital. To quote from Brett King’s book ‘Bank 4.0’: “Banking is no longer somewhere you go, but something you do.”
As banks have moved from the branch as the only channel for access to financial services, to digital omni-channel for customers who only perform digital transactions, they have implemented digital banking platforms. Authors that are critical of the digital efforts of retail banks argue that just digitizing existing processes does not make a bank `digital’. The processes and procedures have not changed. Becoming a customer at a bank still follows the same steps, the only difference being that applications are filled out online rather than on paper. Brett King contrasts that with new entrants in the market like m-Pesa, AliPay, WeChat and other FinTechs, who did not digitize traditional processes, but started out with technology and customer expectations in mind. In ‘Doing Digital’, Chris Skinner compares the evolution of banking to the invention of the car. In digitizing their traditional offering, banks are just making faster horses, argues Skinner. While FinTechs are inventing cars.
Over the last few years, traditional banks and FinTechs have been moving closer to each other. Some banks have even set up their own FinTech company, like Banco Santander did with PagoFX. Other banks are forging close relationships with FinTech players, taking up the FinTech services in their digital ecosystems.
When disruption happens, companies react differently. Some companies keep doing what they have always done (… and soon go under), others adopt the new paradigm while others go beyond the paradigm. Just consider how Blockbuster, Netflix and Amazon reacted differently in the dot-com era. Traditional video rental company Blockbuster never really adapted to the new reality of e-commerce and online consumption of content. The company folded. Netflix, which had already adopted a new model by offering mail order, took the Internet opportunity and set up a streaming platform to rent movies. Amazon also moved to becoming a platform. Not a platform that merely sold its own products and services, but a platform that allowed others to set up their own e-business using the infrastructure of Amazon. What Amazon did, was build an ecosystem.
And that is exactly what we see happening in the financial services world: retail banks are no longer merely offering their own portfolio of products, they are enriching that portfolio with third-party services, both in the financial services sphere, but also outside of it. The reason is clear: consumers demand convenience, buying a wide range of services from a one-stop-shop. For banks, building these ecosystems comes naturally. Retail banks were already offering insurance products when people took out a mortgage to buy a house, so it’s not too big of a leap to extend that range by also offering non-financial services.
The sky is the limit when it comes to the kinds of services that banks can offer through their tech-ecosystem. Just think of micropayments for local transportation tickets, or possibly even document storage in a secured vault. This goes a lot further than digitizing existing channels in a digital banking platform.
Implementing a digital ecosystem may seem like a daunting task, bringing all these different services and disparate systems together in a way that is customer-friendly and secure, but this need not be too difficult. Many companies have already left the path of building big monolithic systems and are now building lightweight microservices that are easy to connect to other microservices.
Bringing these services together is handled by Application Programming Interfaces, using standard protocols to interact with each other.
Key in delivering these ecosystems that combine financial and non-financial services through APIs, is making sure that all these connections are secure. An Identity and Access Management (IAM) system will ensure that only people who have the right privileges can access the different services. This IAM system will not only verify the credentials upon entering the digital platform, but also when the user moves from one service to another. Does this person have the right credentials for this app? If not, what extra attributes does the system need to check to grant access? The IAM system will also ensure that the third-party services receive user info that is validated by the bank. This ensures a controlled, checked and guaranteed process for the financial transactions (for instance renting a car, buying a ticket). These are the challenges that an IAM system like TrustBuilder Identity Hub meets to guarantee airtight security.
Digital banking platforms are a good start for a bank that wants to ride the wave of digital and digital customer experience. However, merely digitizing the existing processes will not suffice in the long run. To become truly digital, retail banks need to look beyond digital banking platforms. To claim their place in the financial services market, they will need to build out digital ecosystems and connect with third parties that help them provide a wide range of financial and non-financial services.
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