Digital Banking can offer the best of both worlds. On the one hand, digital banking allows for automation that helps banks save time and costs. On the other hand, it enables the anytime-anywhere banking experience that today’s customers require. Digital banking is no longer the future. It’s now happening across the banking landscape.
But what exactly is digital banking? Is it the same as online banking? And how about mobile banking?
This article provides you with an overview of digital banking: what it is, what it includes, and some other terms you will come across when exploring digital banking.
Digital banking is the digitizing — or moving online — of certain or all banking activities that traditionally happen only inside the banks’ branches.
For banks, digital banking is about applying:
Simply speaking, digital banking is the ability to access banking services and financial data through devices and platforms such as web portals and mobile apps.
It’s not uncommon for people to use digital banking interchangeably with mobile banking and online banking. But in fact:
Digital Banking = Online Banking + Mobile Banking
This equation perfectly captures digital banking and what it’s made of.
What is online banking? Online banking means providing banking services and products through the bank’s website. This kind of website — normally called an online banking portal — offers basic features like balance checks, pay bills, and loan applications, …
Online banking was first introduced in 1997 by Sumitomo Bank. And until 2010, almost all banks across the globe had some form of online banking in place.
What is mobile banking? Mobile banking, on the other hand, means providing banking services through the bank’s mobile applications, called mobile banking apps. This app is proprietary, which means it is developed and owned by the bank.
Mobile banking helps banks adapt to the growing penetration of smartphones, which is 78.05% in 2020, a 1.6 increase from 2016.
Nowadays, a typical mobile banking app can act as a service hub, offering most banking services. It also comes with high-security standards.
With mobile banking, banks can send customers banking alerts such as fraud detection and low balance notifications.
In short, digital banking is the combination of online banking and mobile banking.
There are two primary players in the digital banking arena: traditional banks and neobanks.
They are the earliest form of bank, relying majorly on physical establishments to do business. But this status quo is no longer working. Traditional banks are investing in digital banking to adapt to changing consumer preferences and keep up with their digital-only challengers. In a report by Backbase, 63% of customers in APAC say they are willing to switch to neo banks.
The good news is that traditional players have begun to realize the importance of digital banking. Deloitte’s findings revealed that 28% of banks consider “creating digital capability” as a top IT initiative, while 23% prioritize “modern legacy systems”.
Typically, there are two approaches for traditional banks to adopt digital banking:
Neobank, online bank, virtual bank, or internet-only banks are the same thing.
Unlike traditional banks, neobanks operate exclusively online without a physical branch network. Thanks to this, they can do away with most of the costs associated with renting and managing physical estates. At the same time, neobanks appeal to today’s customers with higher-than-average interest rates and a user-centric customer experience in exchange for no in-branch experience.
However, neobanks’ range of services is typically narrower than traditional banks.
Neobanks can affiliate with one or many traditional banks, working as their digital banking division. Or they can operate independently online.
As a joint venture or subsidiary of an existing bank, beta banks offer digital banking services and products through their parent’s license and reputation. A beta bank is intended as a venue for traditional banks to explore new markets. However, a beta bank is typically limited in terms of the services offered.
Nonbanks do not have a full banking license. However, they utilized their digital platforms and reputation to provide or facilitate financial services, mostly through partnerships with existing banks and other types of digital banks discussed so far.
Digital banking offers numerous benefits on two fronts: the bank itself and the customers using digital banking services.
1. Decisioning and Communication enabled by analytics
Not just limited to producing reports, analytics in digital banking must be able to identify opportunities, support decision-making, and enable personalization. Analytics will not replace humans but enhance and can be improved by humans.
Internally, advanced analytics algorithms can provide visibility into what’s happening across their organization. This helps employees take appropriate actions to improve operations, reduce costs, save time, and enhance customer service.
In digital banking, analytics is the foundation of personalization. Thanks to it, banks can design and provide products tailored to customers’ needs and preferences. Analytics also allows for proactive recommendations at scale and in real-time.
2. The adoption of Open Banking APIs
Every banking leader agrees that Open Banking is the key enabler of digital banking. It shapes technology investment, product development, fintech partnership, data modernization and centralization.
To prepare for the Open Banking evolution, banks must define an appropriate business model. Including the internal digital capabilities and external partnership with third-party providers to make that strategy a reality.
3. The Move to the Cloud
As per the IMB survey in 2020, among 91% of financial institutions that applied or planned to apply some form of cloud services, only 9% migrated their core banking systems to the cloud. This is quite understandable, given the complexity and concerns related to security and governance.
To meet the need for capacity and speed when scaled digital banking endeavors, banks need cloud solutions to store data and enable smart analytics. By doing so, they have deeper customer insights, better efficiency, faster agility, and reduced risk of security.
Cloud computing = flexibility + agility + scalability
Cloud solutions can arm banks with the flexibility, agility, and scalability to respond to market changes in a proactive manner. To achieve that, banks must replace outdated on-premise infrastructure with a cloud-enabled platform. Cloud – private, hybrid, or public – not only allows banks to be more agile but also helps reduce IT costs substantially.
4. Process Automation
Process automation tools, including robotic process automation (RPA) and digital process automation (DPA), will continue to be the driver of digital banking.
It should be highlighted that process automation is not just about improved efficiency. Without a digitized back-office enabled by automation, digital customer experience is just impossible. Customer-facing areas in which banks can apply process automation comprise account opening, customer onboarding, and digital loan application management.
5. The rise of embedded finance
To embed their apps with external financial features, leading banks are partnering with fintech and non-financial firms to expand their offerings.
While many still see embedded finance as a threat, it can have positive impacts if applied right. Not only can embedded finance pave the way for banks to enter new markets, but it also reduces acquisition and servicing costs.
According to Accenture research, 70% of respondents implemented embedded finance by partnering with 3rd-party providers, buying or licensing embedded finance technologies from them.
6. Increased Focus on Cybersecurity
Cybersecurity threats are not just costly. They can also damage a bank’s reputation. With the growing use of mobile technologies and digital data transfer, hackers have more ways to implement attacks.
An emerging trend in digital banking security is the elimination of passwords. On the one hand, people have so much on their minds nowadays and won’t have space for those combinations of characters. In addition, cases where hackers manipulate customers’ carelessness, are becoming more common. More banks are applying eKYC solutions, authenticator apps, and SSO solutions to decrease the need for passwords. While they cannot solve all cybercriminals, they can add layers of protection for banks.
To learn how Vietnam is embracing digital banking, read more on The key drivers of digital banking in Vietnam.
Wrapping Up
Digital Banking in Vietnam is now widespread. Thus, for your bank to stand out, it would need to stay ahead of the curve in adopting new technologies. One way to achieve this goal is by partnering with an all-weather and strategic technology company.
With 12+ years of experience in consulting and developing innovative digital banking solutions, you can rely on KMS Solutions to guide you through your digital transformation journey.