Key Lessons for Next-Gen Digital Banks to Deliver Better Banking
Technological advances and progressive regulatory environments are encouraging banks to develop open, collaborative ecosystems. These market dynamics have led to the growth of new digital banks and the related issuance of virtual banking licenses across Asia. As Asian banking customers have grown in wealth and connectivity, their favorable sentiments towards new methods of banking have increased. These dynamics create the perfect conditions to support the growth of digital banks and a move towards better banking.
However, success is not guaranteed unless incumbent banks and new virtual bank entrants can transform into data-driven, high-performance, and profitable organizations. Traditional banks face increasing competition in service innovation, which reinforces the need to redesign conventional banking models. These new banking models need to be built on open, cloud-based technology. Virtual banks may be nimble compared to many incumbents, but they face three immediate challenges: the need to demonstrate to regulators their ability to comply with regulations; the need to monetize data; and the need to turn compliance into a competitive advantage.
This paper outlines a brief history of digital banks and discusses current examples of innovation Oracle has seen in the banking industry. We will also look at proprietary research from PwC which explores the digital banking consumer in three key Asian markets: Hong Kong, Singapore, and Malaysia.
The Digital Customer Journey Across the Financial Lifecycle
Banks often struggle with attracting and retaining customers. An Oracle survey found that customer satisfaction with traditional banks decreases as the customer relationship progresses across the financial lifecycle. Digital banking propositions globally have done a great job of the onboarding process. They now must prove themselves across the customer lifecycle with complex products such as small-and-medium enterprise banking, mortgages, investments and financial management—where satisfaction drops significantly.
A separate study by PwC also reveals that customers who experience pain points with their traditional, primary bank are most open to digital banking.
Opening an Account and Frictionless Onboarding
Cumbersome applications and complex account-opening processes with multiple handoffs spanning several days often leave customers frustrated, and banks end up losing business. Research shows that abandonment rates for online banking applications are 97.5%. Multiple clicks, multiple screens, or multiple visits to the branch in person to complete the process all contribute to these rates.
There is a shift towards customer-centricity owing to the rapid growth of digitally savvy customers who protected by data privacy regulations. Banks can no longer rely on their legacy onboarding process to serve their customers’ needs.
As data becomes one of the critical assets for the digital bank, it is paramount that important banking technology architectures are include a frictionless process layer. This foundational element serves to orchestrate and automate the entire customer onboarding process by tapping into existing available customer data. It also reduces the need for additional data inputs from the customer. The digital bank of tomorrow is adept at integrating existing customer datasets to bring about a seamless banking experience for the customer.
True customer-centric solutions have features to enable a 'frictionless' origination process:
- Single platform for multi-product origination: Offers the ability to originate multiple products and bundled product offerings as part of a single submission, ensuring complete reuse of customer information and removing application complexity
- Seamless multichannel experience: Enables customers to seamlessly transition from one channel to another, delivering a channel agnostic customer experience
- Centralized pricing: Allows banks to price the relationship rather than the product
- Third-party integration via Open APIs: Enables integration with third-party vendors for credit scoring and collateral valuation
- Process optimization: Maximizes automation with tailored workflows, automated document production, and automated account opening.
Underserved Customer Segments: Small and Medium Enterprises (SMEs)
The issuance of virtual banking licenses creates a more inclusive banking environment, especially for underserved market segments. These include SMEs, the unbanked, millennials, or those without a credit history. Traditional banks are also finding the sweet spot when it comes to cash management and other transaction banking services targeting SMEs who have regional ambitions.
A report by PwC and the Open Data Institute found that SMEs had a better grasp of the usage of open APIs and the benefits they can bring. 71% of SMEs are expected to adopt open banking by 2022 for services such as integrated accounting, tax services, and fast access to capital by giving providers real-time access to account information, instead of filing paperwork.
SMEs are demanding rapid funding from banks. While individuals can open a digital account within hours, businesses continue to face onerous regulatory hurdles in many markets for opening accounts. The average “time to decision” for SME onboarding within traditional banks ranges anywhere from five days to one month, depending on the loan size and complexity of the deal. In Hong Kong, it takes an average of 38 days to open a business account with a traditional bank (PDF). “Time to cash” can take between 25 and 55 days. These timeframes are a push factor to encourage SMEs towards quicker offerings from big techs or fintechs. Traditional banks must focus on how to reduce turnaround times and deliver a better end-to-end experience to their customers.
Leveraging data can drastically reduce origination turnaround times. It can also lower the cost to originate and improve credit quality across the end-to-end origination process—from application capture to assessment to fulfilment. When data is harnessed through analytics and enabled with the right APIs, banks become empowered with insights and agile processes to improve SME experiences.
API enablement goes beyond merely providing the customer with an online form to complete an application. It aims to enable customers and bank staff with secure and consistent access. Such access delivers transparency into the data and its related processes at every stage of the origination lifecycle, all the way to supply chain finance and executing payments. When implemented appropriately, this dramatically improves time to decision and time to cash for SME customers.
Building Data into the Blueprint of New Banks
A well-planned and executed data strategy is essential. Both digital and traditional banks need to leverage data insights via agile technology stacks (including cloud databases, middleware, and software as a service) to reshape their business models and achieve hyperpersonalization.
To ensure long-term profitability, banks should use data-driven tools from an agile technology stack to optimize capital allocation and mitigate risks. This applies to virtual banks with a growth trajectory to ensure that risk and profitability are aligned strategically. Data-driven tools enable the mastery of data, which is needed across all levels and departments to get a real-time picture of the bank’s business.
“66% of global banking executives consider aligning financial performance and risk data very important or critical to success.”
A common analytics platform allows for the alignment of finance, risk, and performance management strategies. Intelligent analytical applications can autonomously connect outcomes, deriving insights from data across business functions, platforms, and channels.
To build such a modern data infrastructure incorporating robust analytics and AI entails migrating data from silos to a streamlined ecosystem with robust data governance frameworks. Such a move towards a unified data foundation to manage, monetize, and mobilize data, along with the use of open APIs, can boost customer value by increasing choice. A unified data foundation enables cross-product and cross-function access to a “single source of truth” about clients.
Turning Risk and Regulatory Compliance into a Competitive Advantage
Digital banks will need to consider how they can ensure compliance with less headcount and no physical presence. One of the critical design considerations of a digital bank is how it can design and automate processes to achieve compliance by design.
Automation and straight-through processes must be enabled to ensure ongoing compliance. Scalability is also a critical factor: Without a scalable, robust infrastructure, digital banks will encounter problems, thus risking the trust of customers and regulators.
Towards Safer Societies: Fighting Financial Crime from Day 1
Money laundering and fraud are significant problems for the banking industry, and traditional banks have strict Know Your Customer (KYC) processes to ensure the identity of customers and curtail risks. With a new banking regulation required every twelve minutes somewhere in the world, there is an increasing requirement for banks to deliver continuous compliance. Continuous compliance places tremendous strain on banks, particularly virtual ones. They encounter a fundamental dilemma in trying to identify customers they may never see.
Anti-money laundering (AML) technologies such as graph analytics and machine learning applied to transaction histories can help digital banks curtail criminal flows of capital that threaten customers.
The business, technology, and regulatory landscape is ever-increasing in complexity. New digital banks need to make use of KYC, risk, or compliance data associated with running a new bank to gain business insight.
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