The Future of Digital Banks is not Banking

Ariadi Nugroho, EVP Group Head IT Strategy & Planning at Bank BTPN [IDX: BTPN]

Ariadi Nugroho, EVP Group Head IT Strategy & Planning at Bank BTPN [IDX: BTPN]

If you are skeptical that this article will just be another banking jargon, read on. Banks have been around for centuries, but the challenges facing our traditional business models are more severe than ever before. Competitions coming from both banks and non banks have driven the needs to redefine the future of digital banks beyond just banking.

Why do we even need to think about going beyond banking in the first place, one may ask. Does the financial industry now have limited growth potential? Actually, the reality is quite the opposite. The underlying premise of a digital bank is creating best-in-class financial services for the customers by leveraging latest technologies. Therefore, in essence a digital bank will be more concerned about the outside-in view of doing banking–creating the best customer experiences when interacting with banking services through bank’s digital touch points. The tech-savvy customers are highly demanding and this creates ample opportunities for the financial services industry to explore.

At heart, digital banks are focusing more on solving customer problems and needs. Hence, pushing traditional-but-digitized banking services to the customers will be considered mediocre at best. For example, straight through processing (STP) and real-time payments are internal banking process automations that are now already considered as a hygiene factor. Even mobile and internet banking services are becoming commodity services that are difficult to differentiate.

If we are simply relying on such achievements to claim our bank a digital bank, then we are missing the point.

In recent decade we have been witnessing the advancement of digital technologies such as mobility, cloud, artificial intelligence (AI), blockchain and internet of things (IoT). These technologies can create both challenges and opportunities for innovations in banking business models. Such innovations, as discussed earlier, must not only focus on cost-efficiency, but rather they should strive to improve existing products and services. Taking it further, the innovation should aim at creating new revenue models.

Let’s look at the internet of things. Internet of things is a network of smart devices that is connected to the internet. Nowadays the number of smart devices connected to the internet is massive. In 2015 there were roughly 6 billions IoT connections and by 2020 it is expected to grow more than double to 15 billion connections. Research from McKinsey and Company also estimates that cross industry potential impacts of IoT can reach $11.5 trillion per year by 2025, of which the retail sector impact is estimated up to $1.2 trillion per year. While investments in IoT are still dominated by internal business needs – largely made up of investments in the manufacturing, natural resources and utilities industries – we are now seeing growing IoT initiatives for the retail customers, including in the financial services.

In financial services, IoT has been used primarily to make retail transactions and cash in/ out more convenient. AmazonGo is probably one of the most recent example of how smart sensors with image recognition capabilities are used to track and validate purchases in Amazon’s unmanned groceries stores. In the banking context, IoT has been used to get customer fitness and health data through fitness trackers. The data can then be synced to the customer’s digital banking app to later determine their health score and the associated rewards. A similar approach has been introduced earlier in the insurance industry to create dynamic insurance policies based on customer behaviors and lifestyle. All the aforementioned examples are not hypothetical examples – they are all real examples from the industry.

Reflecting from the IoT implementation in banking, we should be optimistic that banks can do a lot more to reinvent its business models. With the help of technologies, we can do more than just automating and digitizing our internal processes and then exposing them to the internet. A digital bank must rethink and reconstruct its engagement models with the customers to make their financial life easier, faster and safer. When such a digital bank has become the norm, traditional banking services will be operating transparently and reliably in the background while the digital customer touch points will support seamless customers experiences either within banking or through its extended ecosystems (Fintechs, 3rd party apps) going beyond banking.