By Rajashekara V Maiya, AVP & Principal, Product Strategy, Infosys Finacle

Download article

2015. The year when banking continued to unbundle at the hands of nimble, innovation, technology-led players big and small, taking away a share of the most profitable businesses. Analysts predict this unbundling will impact 32 percent of revenues and 7-9 percent of the industry’s profit by 2020; they also say that up to 73 percent of deposits and 29 percent of the payments and cards business will be under threat from non-banking providers. As we head into 2016, our view is that conventional banking institutions must direct their focus at protecting their turf from this onslaught. The only way they can win against their digital rivals is by playing the same game. This is the time for banks to evolve their selective digitization initiatives to a holistic strategy that will turn the enterprise fully, truly digital.

But what makes a truly digital bank? We believe it is the following five characteristics.

Customer experience above all

With digitally empowered customers taking active control of banking relationships and financial decisions, they clearly expect their banks to support them in their goals. The other expectation, of course, is a banking experience that is second to none. Truly digital banks, therefore, need to view every aspect of their business, from processes to products to strategies, through the customer and customer experience prism.

There’s a crying need to accelerate the embracement of customer-centricity as well as broaden its area of impact to cover the business model, products, processes, channels, etc. A truly digital bank will leverage technologies like gamification and virtual reality to drive experience, and will also collaborate with others to produce the most customer centric ideas. What’s more, these banks will look beyond their own customers, at even the needs of their customers’ customers.

Insight makes the difference

Banks’ treasure trove of data is now overflowing thanks to digital. What they do with this wealth of information will make the difference between being merely digitally-enabled and truly digital. The latter type of bank will employ advanced analytics technologies to turn the data lying both within and outside the enterprise into fine-grained, real-time insights into every aspect of the business. The truly digital bank will develop a deep understanding of customers (values, expectations and preferences), and not just their demographics, which it will use to personalize the banking experience and products and services for an individual customer, throughout his or her life stages.

Automation for experience

To ensure a frictionless experience amidst a constant increase in transaction volume, a truly digital bank will automate operations as far as possible. This will also enable it to beat costs, expand the business, and relieve the workforce of mundane repetitive tasks. But that’s not all.

The truly digital bank has to revisit its approach to automation considering that the world is rapidly tuning into the Internet of Everything, and there’s a parallel emergence of autonomous machines. When intelligent machines act autonomously, and even take decisions in certain cases – think robo-advisors – the digital bank will need to find ways to influence these devices. Last but not least, with technologies like Blockchain promising to automate financial transactions and usher in smart contracts, it is imperative that the truly digital bank build the necessary capabilities to sustain in this extremely digitized environment.

Ecosystem as universal bank

The truly digital bank has to operate in a significantly distributed, decentralized and disintermediated environment. In line with this trend, truly digital banking will also share the same characteristics, and come to be delivered not by individual universal banks, but by a diverse ecosystem of providers, who will together fulfill every financial need of the customer. This is already very evident in payments.

The ecosystem will allow the truly digital bank to interface with other networks and services to both extend the reach of its business and acquire new capabilities. This will mark the dawn of an era of open banking, reliant on APIs, apps and developer/partner ecosystems. The partner ecosystem will draw on the providers of financial and non-financial services both, and give rise to new collaborative, co-operative and co-creative alignments.

It is important to note that collaboration and openness, which are still optional today, will become mandatory in future as more and more regulators follow in the footsteps of the European PSD 2 to insist on the usage of APIs by banks.

Cyber-security at the fore

Customer experience, analytical insights, automation and collaboration – amidst all these digitally-driven opportunities lurks an equally digitally-driven threat. As transactions turn increasingly digital and banks more open to external partners and other stakeholders, banking systems will be highly vulnerable to the risks of digitization. The current level of preparedness has been proved inadequate time and again. The truly digital bank has to, therefore, improve defenses by a long margin, both against known threats and potential ones, such as payment fraud in distributed ledgers.

The vast majority of banks have already set out on the journey to digitization, although they may still be some distance away from being truly digital. We have tried to understand and categorize the various stages of evolution by adopting the five classifications of industries in BCG’s Strategy Palette, namely, Renewal (be viable), Classical (be big), Adaptive (be fast), Shaping (be the orchestrator) and Visionary (be first). Accordingly, we theoretically map the conventional, traditional bank to the Renewal stage of evolution at one extreme, and the truly digital bank to the Visionary stage at the other, with all the others being pegged somewhere along the continuum in between.

However, it is not so easy to classify banks in such absolute terms in practice because most banks have digitally evolved some parts of their business more than others. What we mean by this is that a largely conventional bank in Renewal mode might have upgraded its channels for agility with the latest digital technologies such that only that part of the bank would be in the Adaptive stage. Such limitations notwithstanding, we believe this classification would serve as a useful guide for banks on a journey destined towards a truly digital (Visionary) state. In our view, there are 18 important markers, which will indicate how far a bank has progressed in this journey. These are discussed briefly below:

1. Business model: The Renewal bank is focused on staying viable. It acts conventionally and incrementally. Most of its IT spending goes towards maintaining the status quo. Consistent with this, the Renewal bank’s business model is also conventional, and largely reliant on basic products and services. Customers are unlikely to get more sophisticated solutions from such banks. An Adaptive bank, on the other hand, is focused on reacting quickly to the changes around it. So, it will have an agile business model that includes owned products and services as well as outsourced offerings from external parties. When a customer comes asking for a specific solution that’s not on the menu, the Adaptive bank will make it available by tapping its partnerships and alliances. A Visionary bank – by which we mean “a truly digital bank” – will have a disruptive business model, and will possibly own no products and services, but instead aggregate a vast number of offerings from both financial and non-financial institutions, much like companies like AirBnb and Alibaba have done in the hospitality and retail businesses respectively.
2. User experience: User experience would be touchpoint-centric in a Renewal bank, whereas an Adaptive bank would have progressed ahead to an omnichannel strategy to offer a seamless experience across all touchpoints. The Visionary bank would be ahead of all, offering brand-centric differentiation, and a ubiquitous experience benchmarked against the best that any company from any industry – be it Apple, Tesla, Amazon or some other – has to offer.
3. Touchpoints: The Renewal bank is still largely dependent on physical touchpoints, but an Adaptive one believes in “virtual first and physical second” for transactions, and “anytime, anywhere” when it comes to the delivery of banking services. Fast forward to a truly digital Visionary bank and what you will get is a bank that is predominantly virtual, and available for business everywhere and every time.
4. Organization structure: Line of Business silos, with their own budgets and P&L targets, are a common sight in the Renewal bank, whose organization structure is not conducive to a holistic, unified, enterprise-wide approach to business. Adaptive banks have more agile structures, organized along customer segments so as to fulfill all their needs in one place. But the Visionary bank has its sights set on creating a simple, virtual organization that appears ubiquitous to every customer. It not only caters to a traditional banking need for deposits, loans etc. but also brings together many other financial and non-financial capabilities in a unified, seamless, and consistent manner.
5. Products and services: Customers of a bank in the Renewal stage are forced to buy what is available with the bank. Adaptive bank customers have it better because they are allowed to take what they need. Customers of the Visionary bank will have no constraints, because they will be allowed to make what they want, entirely digitally and independently, in a do-it-yourself mode.
6. Differentiation: The Renewal bank differentiates itself on core functionality, including pricing, because its focus is on retaining existing customers. The Adaptive bank looks slightly ahead, at increasing reach and convenience, at enhancing the experience through incentives and other means, and also at improving the basics like functionality, efficiency, etc. For the Visionary bank, everything boils down to customer convenience and experience. Hence, it will differentiate itself using a “right-selling index”, aiming to deliver the right product at the right place and time to the right customer.
7. Business processes: Legacy processes – semi-automated, silo-based, inflexible and expensive to change – rule in Renewal banks. The business processes of an Adaptive bank would be cross-functional, and somewhat automated and vertically integrated across the ecosystem. For a visionary bank, nothing short of highly agile, fully automated processes will do. The level of automation will be such as to eliminate the need for cash, paper and people in most transaction processes.
8. Marketing and sales: Who hasn’t been bombarded by an overload of largely irrelevant marketing offers by their banks? That’s what happens to the customers of a Renewal bank, which does not have the benefit of analytics to plan and target campaigns for maximum efficiency and effect. The Adaptive bank however, is able to run digital marketing campaigns in real or near-real time; it employs analytics to deliver contextual content in an integrated manner. Marketing at the visionary bank will be tailored to the likes, needs, and preferences of a segment of one. Massive data, including social, and advanced analytics will come into play to deliver messages and campaigns that reflect true customer understanding.
9. Advisory: Financial advice from the Renewal bank is more informational than insightful, localized, and reactive in nature. Adaptive banks will leverage their significant digital capabilities to provide proactive advice, backed by personal financial management tools of illustration. The truly digital Visionary bank will step it up to employ technologies including gamification and social, to provide proactive, contextualized advisory services, complete with a social component of what others with similar needs and profiles are going for.
10. Customer acquisition and fulfillment: The Renewal bank acquires customers the traditional way, and to some extent, online. Because manual processes are involved, there is a lag between request and fulfillment. A simpler online acquisition process takes care of most day-to-day requirements at the Adaptive bank. However, for more complex needs, a combination of traditional and digital methods may be employed. The Visionary bank is, but of course, fully digital in the way it acquires customers or meets their requests. User experience is the same at all touchpoints; services are provided proactively and often in real-time; and most requests, including for onboarding, are fulfilled in a matter of minutes.
11. Delivery of services: Because service requests, even those accepted online, are delivered via back-office/centralized processes in a Renewal bank, there is an inevitable time lag between the two events. Adaptive banks, by virtue of their automated and online services, are able to respond immediately with suggestions and solutions or voice/video/chat support to any request or complaint. Visionary banks, on the other hand, will obviate the need for external intervention to a large extent by enabling self-service in almost everything. Because processes will be built on a deep understanding of customer needs and behavior, even remote support will be required very rarely.
12. Leveraging of technology trends: Emerging technologies like the Internet of Things will probably not feature in the plans of the Renewal bank. Being the first to adopt new trends, the Adaptive bank will probably leverage the IoT in areas such as trade financing to automate transactions, tracking and decisioning. In contrast, the IoT will be integral to the Visionary bank, which will incorporate it seamlessly into business processes to enable automation and a great experience.
13. Payments: Where Renewal banks will deal with real currencies and traditional payment methods rife with silos and transactional cost and delay, Adaptive banks will switch to contactless payments, virtual currencies and digital methods of payment, wearable payment devices, automation and straight through processing to enable real-time payments at relatively low cost. The Visionary bank will do all this and more. It would enable the use of cryptographic currencies and purely device to device funding; it would employ biometric authentication; and it would bypass traditional payment networks and systems to provide services at really low cost.
14. Security: Because there is no access to real-time fraud data or cross-channel intelligence, the Renewal bank is forced to manage fraud by the line of business. Its response is invariably reactive, occurring after the event has passed. The Adaptive bank manages fraud across channels and business lines. It will have at least some analytics-driven fraud prevention capability, and should the worst happen, will try to make the remedial process as painless for the customer as possible. The Visionary bank will try to prevent fraud in the first place by employing very advanced analytics. This is critical because the Visionary bank is very open by nature and therefore greatly exposed to risk from its ecosystem. We believe this bank will resort to automation, advanced biometrics, pattern analysis and data sharing across the banking network, to reinforce security while protecting the quality of customer experience.
15. Architecture: Architecture in the Renewal bank is typically legacy – rigid, trapped in silos, and snarled like spaghetti. Information flows quickly and back and forth in the Adaptive bank, whose interfaces are adequate enough to eliminate the need for point-to-point integration. A truly digital Visionary bank will have a collaborative and open architecture based on APIs and industry standards, to draw the participation of an entire ecosystem of providers.
16. Service registry and composition: This is an important marker on the road to digitization. The service registry and composition of a Renewal bank will have coarse-grained services that are non-standard/ bank-specific, and only a few critical functions shall be available as APIs for testing. The Adaptive bank will have an established shared services technology layer, standardized APIs, and a combination of fine- and coarse-grained services. In the Visionary bank, all services, registries and compositions will be fine-grained and to industry standards, to support its intention to be part and parcel of the API economy and larger ecosystem.
17. Data and analytics: Data is a challenge for the Renewal bank, which has to deal with its fragmented nature, poor quality and the lack of standardized data models of analysis. Adaptive banks have data of better quality, a standardized data repository and model, and while they may continue to use data based on lines of business, they also employ social data to perform customer-oriented analytics. With insights being one of their defining characteristics, the Visionary, truly digital banks will access data from all sources, have data available in-memory, use cognitive and prescriptive analytics, and work with the ecosystem to make sure they have the right information across all customers.
18. Deployment and infrastructure: Most banks in the Renewal stage have on-premise, fixed stacks, and tightly coupled legacy infrastructure that is both hard and expensive to maintain. Adaptive banks leverage Software as a Service to some extent, as they do private and public clouds and flexible stacks. At the Visionary bank, everything is a service – be it software, infrastructure, process or platform. Nothing is owned and everything is on the cloud.

As mentioned at the beginning of this discussion, it is hard to pin a bank down to any one category in entirety. Most banks are on a journey where they’ve made more progress on some fronts than others. But they should all unite in their goal to become a Visionary, truly digital bank at the end.