Chapter 1 Introduction to Digital Banking

Certificate in Digital Banking

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Certificate in Digital Banking TCS Business Domain Academy

Contents
Introduction to Digital Banking ................................................................................................. 4
1.1 The Changing Face of Personal Banking................................................................... 5
1.2 Planning the Digital Banking Strategy .................................................................... 10
Summary .............................................................................................................................. 16

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Certificate in Digital Banking TCS Business Domain Academy

Introduction to Digital Banking

Introduction
Digital technologies have taken the world of business by storm. They have and are continuing
to impact all types of industries across the world. Banking is no exception. In this course we
are going to understand what these technologies are, the impact of these technologies on
banking and the way forward for banks. In this chapter we are going to get an introduction to
what is digital banking, what are the trends and future of personal banking and what is and
how a digital bank should function.

Learning Objective
After reading this chapter, you will be able to understand:
The trends in digital technologies and resulting impact on banking and its consumers
What is a digital bank?

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Certificate in Digital Banking TCS Business Domain Academy

1.1 The Changing Face of Personal Banking

Banking traditionally was done in branches as the main interaction point between the bank
and the customer. Banks worldwide made capital intensive investments in Branches to attract
the customers to the bank. Branches were the main channels for both the Bank and the
customers for transactions, interactions, experience and sales.

With the advent of technology, the initial channels to come up were the ATM (Automated
Teller Machines) and Internet banking. These enabled the customers to transact outside the
banking hours and without having to visit the bank branches. ATMs allowed for small value
cash withdrawals and provided customers the benefits of anytime, anywhere banking. Internet
banking enabled desktop banking for the customers who could log into their account and view
their transactions and balances.

The next biggest change agent in the Banking industry was the introduction of Contact
Centres and IVR Banking. All these changes ensured that the Banks had alternate channels to
cater to the sales and service requirements and also to reduce their operational costs.
Historically retail banks have always had a strong branch network. Around 1970s banks
added ATMs which made anywhere anytime cash withdrawal possible. Then came the
contact or call Centres in the 1980s and then mobiles were added in the 2000s. Each time a
new channel is introduced it is added as an extra layer on the base of the branch distribution
network. Branch networks form the foundation on which all the other electronic distribution
is spread over.

Today, the mobile boom which started a decade ago has emerged as a critical component in
the way banks do their business today. The emergence of Smartphone and Mobile Internet
have transformed transactional Banking beyond imagination. The growth in internet has
ensured the speed of transactions and ease of Banking is enhanced making Banking a joy and
pleasure for the customers. Along with the growth in alternate delivery channels and
advancements in technology, another major change witnessed by banks worldwide are the
monumental changes in customer expectations.

Traditional customer requirements have been replaced by growing demands of the new Gen Y
customers who today are more technology savvy, well informed and has multiple banking
options. Customer Loyalty which was a major factor in the growth of banking business is
today replaced by Customer Preferences. Banks are finding it increasingly difficult to manage
the expectations and retain the existing customer base.

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Certificate in Digital Banking TCS Business Domain Academy

For so many decades now consumers visited bank branches for monetary and non- monetary
transactions, for information about bank products and services, credit transactions and service.
But with the proliferation of ATMs, Kiosks, internet banking, mobile devices, smart phones,
social media and other gadgets such as tablets etc., there is immense competition faced by the
branch from these alternate channels. Today most of the core transactions which were being
done in branches are now shifting to electronic channels.

While this scenario has been the case for the last few years it is seemingly increasing in pace
now. As per a survey conducted in 2011 by the American Bankers Association, 62% of the
banked population preferred conducting transactions online versus other channels as
compared to 36% previous year and about 20% of them preferred the branch channel. Digital
channels are responsible for this shift in consumer banking behaviour.

As per a study conducted by Forrester, some important transactions such as viewing balances,
bill pay, funds transfers, viewing statements are mostly happening online in North America.
The number of customers choosing the branch for routine transactions and retail banking
products saw a decline whereas the online channel footprint increased.

The ever changing eco system is also forcing the banks to have a closer look at Branch
Profitability and the Cost per Transaction. This focus is key to migration of transactions to the
digital channels thus reducing the costs for the bank.

As per sources from CEB Tower group, the average cost per transaction in the US via each
channel for instance the Call Centre is estimated at $4.04, branch- $4.00, ATM - $0.61,
Mobile- $0.19, IVR- 0.17, and an online transaction at $0.09.

Shift in Preferences
The shift that is occurring in financial services now has been seen before in other industries.
Technology is playing a major role in reshaping the way banks are doing business. After the
Global Financial Crisis of 2007, the banks were hit hard in terms of stringent regulatory
guidelines, a shrinking customer base, falling revenues and margins and a period of low
interest rates. Moreover the lower-performing assets are impacting the top line and bottom
line of the banks. To improve the profitability, banks are looking at alternative ways to deliver
value to the customers. This approach includes new products and new platforms to deliver
services to the customer, meet the expectations, grow the product suite, revenues and
profitability.

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Certificate in Digital Banking TCS Business Domain Academy

Customer preferences for interacting through these multiple channels are driving banks to
adopt a Digital Banking Strategy. The Digital touch points are overtaking the Internet
Banking and Branch touch points and this trend is the key priority for all the Bank CIOs
globally.

In modern day banking, the customers are more connected and empowered with information
than ever before. This exposure is leading to high expectations and therefore demanding
greater choice from their banks. Today's customer is very well connected in the social circles
and this is a big influencing factor is his decision making. Engaging a customer in the social
media is one of the biggest challenges for banks today in all the areas of sales, servicing and
grievance redressal.

Customers interact with different organizations in their daily lives apart from banks. Hence
the impressions they gather outside through their interactions with other companies will also
have a bearing on how they wish to communicate with banks. Therefore customer
expectations are being set more and more based on their engagement with other companies.
This is especially the case with the younger generations- the Millennials. This is not just
about technology but an entire shift in culture.

It is very important that banks focus on what their customers need and how their interactions
with different organizations are impacting their expectations from their bank. In todays
scenario where very high standards are being set by organizations and solutions on offer by
them such as Netflix, iTunes- banks need to do everything required to catch up with the speed
at which some organizations are adapting to the latest technologies and making different
offers.

Banks cannot afford to take it for granted that the financial industry cannot be disrupted. The
digital technologies are allowing even banking services to become better and much more
efficient. These technologies are rapidly changing the whole dynamics of how consumers can
interact with their banks as compared to the traditional branch channel of the bank. The
expectations among customers is rising with more and more customers wanting a seamless
experience through Omni channel, anywhere and anytime banking facilities. They want an
integrated online, mobile and in person (face to face) service.

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Certificate in Digital Banking TCS Business Domain Academy

Digital Aliens Vs Digital Natives

The Gen Y customer segment of 75 million, i.e. individuals born between 1982 and 1995 are
only second to another 80 million baby boomers. Banks are trying to woo these customers
who as Gen Y have different characteristics as compared to other customers. Banks have to
take steps to attract these customers by launching new facilities that this generation identifies
most with. Accessibility, practicality and affordability are some of the features they seek
while conducting their transactions. As compared to other generations they have the tendency
to prefer such avenues that cater to these requirements the most and can switch between banks
easily for better location, services etc.

Another important aspect is that for the Gen Y, technology has become more of a way of life
than a mere tool! To gain their loyalty banks have to keep pace with the ever changing
technologies and design their products, services etc. and review them continuously.

The terms Digital Aliens and Digital Natives have been coined by Marc Prensky. They
are meant to refer to people from two different generations and their usage of digital
technologies. As stated by him, a digital alien is an adult, that person who is typically
comfortable using the latest web-based technologies. Digital natives as compared are the
younger generation who have practically grown up along with internet as an essential part of
their lives. The people who belong to this category of digital natives are the generation D.
They do not consider the internet as a separate thing from their daily routine, they just live life
and consider the web, mobile and any other digital channel as being seamlessly integrated

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Certificate in Digital Banking TCS Business Domain Academy

into their life. For this generation, branches, call centres or the internet are not something they
give any specific thought to. They just treat them as life and this segment should be targeted
by the banks.

Until a half of the century banks have conducted business on the basis of physical distribution
networks. That model has been challenged to progress towards electronic distribution. Banks
have finally reached a stage where electronic distribution has matured and has proven it
works, but this was enough in the past. But to stay relevant in the 21st century, it is time for
the banks to enhance on these electronic platforms and take them to the next level.

Banking Industry Perspective

Global banking industry is undergoing a state of commoditization. Banks cannot be satisfied
with themselves anymore by just providing financial services to their customers. They should
constantly work on providing a differentiated and delightful experience to their customers and
even try to service those needs of the customers even if they are not explicitly stated by them.
Banks need to understand their customers and their preferences just as the way the airlines
industry understands the preferences of their frequent flyers or the way the retailers keep a tab
on the likes and dislikes of their customers even without any direct feedback from them.

New technologies and new devices are taking birth every single day and these innovations
provide different customer touch points. Each time the customers use a computer or touch a
screen they are giving out an information trail about themselves and it is up to the bank to
understand and use this information to better understand their customers. Historically, banks
used up most of their effort, time and money on ensuring smooth execution of transactions
which has come to be a very basic feature of the banks overall service.
Although ensuring execution of perfectly carried out and error free transaction processing is
still critical to any bank, banks have much to learn and imbibe from the way retailers view the
customer journey across all channels. Therefore its time for the banks to review the way
customers are being valued from the perspective of those organizations or industries that
centre their business on their customers.

Another aspect to the traditional model of banking is that by the nature of its business it
enjoys comparatively high barriers to entry because of regulations that restrict and deter for
competitors who are non- banking organizations. But the new digital technologies that are
driven by cloud, mobile, social and analytics have considerably low entry barriers.

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Certificate in Digital Banking TCS Business Domain Academy

The regulators in many countries all over the world have also loosened their grip on
regulations in order to encourage further innovations in banking. Therefore many companies
that have newly adopted digital are pursuing customers by addressing their needs in new and
unique ways.
For example, the Chinese internet giant Tencent created WeBank. It focused mainly on
capitalizing on its large user base of microblogging and P2P (peer-to-peer) chatting services.
Other non-banking players such as the e-commerce leaders for ex: Tesco in Europe, Rakuten
in Asia-Pacific and Walmart in the US have also made an entry in the banking industry.

All around the world, entrepreneurs and even the typical traditional banks are establishing
digital-only banks or the so called Neobanks. The popularity of mobile banking has given
rise to a much simpler and unique way of banking for customers, popularly known as Neo
Banking or virtual/online banking. This type of banking is more appealing to tech savvy
customers typically the millennials. These types of banking locations are just a click away as
there are no traditional brick and mortar branches/ locations. These banks basically cater to
the needs of such customers who do not prefer to personally visit the branches and rather do
their banking online or through the mobile. Quite simply they are those banks offering retail
banking services but without physical locations.
Players who are making their presence felt are BankMobile, Number26, Atom, ZenBanx and
NuBank. All these Neobanks have a common agenda which is that digital technology holds
the key and is at the centre of their value proposition.

1.2 Planning the Digital Banking Strategy

The beginning point for any bank or banks in planning a digital banking strategy has to be
their customers and employees. Making this the starting point banks are then required to take
into account how to construct the processes and organization structure using digital resources
in an ideal way to reach and support those customers and employees. Lastly, the banks need
to take into account how the conventional model of banking merges with the new digital
structure in order to maintain the physical organizational structure that will be utilizing the
digital network.

What is a true digital bank?

A digital bank is not characterized by the number of its branches or apps or user experience.
The mere fact that a new mobile app has been introduced does not transform a traditional
bank into a digital bank and neither does shutting down of some or all the banks branches. A
digital bank in the true sense is based on the value proposition that a majority of the products

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Certificate in Digital Banking TCS Business Domain Academy

and services on offer are digitally delivered. This banks customers would expect to interact
and transact through digital channels for their everyday banking activities. A digital banks
infrastructure is developed for digital interactions in real-time and the banks culture is such
that it can mould itself quickly to the fast paced changes of digital technologies.

The digital bank Scenario

There are distinctive characteristics associated with banks that are new entrants and others
that are much more established digital banks. They can be broadly classified into four models
based on these characteristics which are:

Digital Bank Brand

Quite a few banks that have been established for many years and are full-service banks have
difficulty in appealing to the millennials. They fear losing their existing customers, hence they
are not keen on changing their existing branding. Establishing a new brand with a
differentiated value proposition and products created to grab the attention of the targeted
customer segments is a better strategy. These digital brands may be marketed as a new bank,
but they typically make use of infrastructure from their parent banks wherever it is possible.
For instance, FRANK by OCBC, Singapore and LKXA of Caixa Bank, Spain.

A Digital Bank Channel

There are gaps between the customer experience consumers expect and the actual experience
that the traditional banks offer. Many industry specialists and futuristic banking professionals
see these very gaps as untapped opportunities. These banks are of the opinion that enhanced
user experience must go beyond branding and that it can be made possible by introducing new
mobile and online apps that are focused on delivering superior user experience. Instead of
incurring heavy costs of building a bank from scratch and also bear the burden of being a
regulated bank, these companies typically resell a real banks products and then redirect
customer money into a real banks accounts that are insured.
For instance, Simple and Moven bank, US.

Digital Bank Subsidiary

Many forward thinking bankers wish to not only design unique digital user experiences but
also a real end-to-end business solution. Big banks may also find that their current banking
systems are too inflexible and siloed to support a digital bank. Therefore they set up

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Certificate in Digital Banking TCS Business Domain Academy

subsidiaries. Apart from implementing the latest digital channels these banks also depend on
more agile and modular back end systems to offer customers a structured and streamlined
end-to-end user experience. The brand new back end systems also let these digital banks to
make product innovations.
For instance, Hello Bank- BNP Paribas.

Digital Native Bank

These banks are full service banks that base their fundamental value propositions on digital
technologies. But that may not mean that these banks are purely branchless banks.
Nevertheless, the customers of these banks are meant to interact with the bank mainly through
digital channels. Some of these digital native banks are completely branchless while some use
a combination by supplementing the digital channels with face-to-face interaction. They do
this through some customer touch points such as financial centres, or through video chat over
smart phones etc.
For instance, Fidor Bank, Germany and Tangerine, Canada.

Creation of a Workable Digital Bank

Digital banks which have proved to be successful are attractive on the front end and are
digitally efficient on the back end. A real sustainable digital bank model makes the most
effective use of its interactions with its customers, products and processes and data around
digital technologies. These banks make us of mobile and digital technologies to reduce the
cost of service and also to improve higher touch services.

For ex: ING Direct tries to reach a wider number of people by operating through cafes. USAA
does not use branches for day to day transactions that are routine but provides banking advice
in its financial centres. The small business lender Live Oak Bank which is growing
successfully, implemented the branchless model but has set up private jets to let its bankers to
meet the clients in person before the closing of a loan. Another example is of Hello Bank
which offers many ways for a customer to get in touch with the bank along with real-time
mobile text chat service. A customer may be doing most of his transactions through mobile
phone but may wish to take assistance from a live person when there is a problem.

The use of digital channels may be the appropriate choice for a certain type of transactions but
in-person (face-to-face) interactions are essential for other activities. Convenience may be a

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Certificate in Digital Banking TCS Business Domain Academy

major factor for day to day transactions but it may not matter for more important and
complicated financial decisions such as wealth dealings, big investments of customers etc.
Banks need to have a balanced approach and be good at offering the convenience that digital
channels offer and engage with customers more closely whenever and wherever a personal
touch is required.

The setting up of a digital bank requires enhancement of the following areas:

Digitally Enhanced interactions

It is the digital channels through which customers do their transactions and therefore they
must be at the core of every banks distribution strategy. Customers value convenience,
therefore banks should ensure that services are delivered through digital channels in a secured
manner. If in certain interactions it is found that a personal touch to it is giving more results
then banks can make use of digital channels to enhance the interactions. For instance, many
forward thinking established banks distinguish themselves by providing customers the facility
to interact with their relationship managers, contact centre agents or bankers through video
chat on customers personal devices such as a smart phone, tablet etc. It is this balance of
convenience of digital along with personal touch is what separates the leading banks in the
market from competition.

Digitally Enhanced products

The products offered by a digital bank should be structured in such a way that they can both
be purchased as well as serviced on digital channels with ease. The banks should wear the
retailers hat when designing products. They should work around different aspects of the
product life cycle around the product such as:

How the customers would first come to know about the product?

Where do customers look when searching for a product?

Is it possible for the customer to buy the product digitally?

Is it possible for conducting the after sales services digitally?

How can problems and queries be redressed and solved digitally?

The answers to these questions will help banks work up a successful digital strategy.

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Certificate in Digital Banking TCS Business Domain Academy

Digitally Enhanced Processes

In the case of Netbank the digital-only bank, it failed due to high operating costs. Although
the front end of the bank was digitized, most of the processes were still being done at the back
end. This impacted the customers experience. They ended up with inconsistent and
fragmented experiences as processes took too long to complete and had errors and they also
lacked transparency.

Banks need to have a full 360 degree view of the customer journey that goes beyond their
digital interactions i.e. an end-to-end view. Therefore banks should look at investing in
digitization of processes that enhance the journey. The starting point can be digitization of
user signatures and all the forms towards becoming paperless organizations. At the back end,
the top banks centralize and integrate business processes on to an enterprise business process
management system. This helps banks achieve STP (straight-through processing) in the long
term.

 STP (Straight Through Processing)

Straight-through Processing ("STP") is a mechanism that automates the end-to-end processing

of transactions of the financial instruments. It involves use of a single system to process or
control all elements of the work-flow of a financial transaction, including what is commonly
known as the Front, Middle, and Back office, and General Ledger. In other words, STP can be
defined as electronically capturing and processing transactions in one pass, from the point of
first deal to final settlement. (Source: sebi.gov.in)

Digitally Enhanced Insights

Face-to-face, direct interaction with a personal touch are still regarded as the most impactful
in terms of enhancing customer relationships. Although in reality not all banks in the market
may be in a position to provide that level of personal touch to all the customer segments.
Alternatively banks can give the customers personalised attention, with the help of customer
insight instead of face-to-face interaction which is more expensive. The personalized services
that are designed keeping in mind their requirements are regarded highly by customers as they
want their bank to understand them better. Today, the customers have diverse needs and their
banking patterns are not predictable. Hence banks are required to develop the ability to sense
and quickly respond to their customers ever changing demands. With the capacity to use
customer insight in real time banks can formulate unique and differentiating banking

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Certificate in Digital Banking TCS Business Domain Academy

solutions and experiences thereof in order to deliver the right product at the right time through
the right channel.

Digitally Enhanced Organization

The journey of transforming to a digital bank also involves changing the banks existing
culture and organization. A digital native bank will be more adaptive to the constantly
changing behaviour of the customers. A good number of traditional banks put in place a
subsidiary with altogether new teams and fresh talent when starting a digital brand. Banks
sometimes look for inputs and talent from other customer-oriented businesses like the retail
industry as well. For instance, one of the leading banks in Canada, TD Bank implemented a
social platform for enhanced collaboration within (internally) and much more active
involvement in customer interactions.

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Certificate in Digital Banking TCS Business Domain Academy

Summary
Banking traditionally was done in branches as the main interaction point between
the bank and the customer.
With the advent of technology, the initial channels to come up were the ATM
(Automated Teller Machines) and Internet banking.
The next biggest change agent in the Banking industry was the introduction of
Contact Centers and IVR Banking.
Today, the mobile boom which started a decade ago has emerged as a critical
component in the way banks do their business today.
For so many decades now consumers visited bank branches for monetary and non-
monetary transactions, for information about bank products and services, credit
transactions and service.
Customer preferences for interacting through these multiple channels are driving
banks to adopt a Digital Banking Strategy.
A digital bank is not characterized by the number of its branches or apps or user
experience.
The mere fact that a new mobile app has been introduced does not transform a
traditional bank into a digital bank and neither does shutting down of some or all the
banks branches.

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