Storming the banks
Can digital banks deliver of their promises?
Traditional banking has taken quite a beating in recent years as more and more customers prefer to handle their banking needs digitally rather than be bogged down by paperwork or wait in lines at a physical bank. In a bid to meet developing customer expectations, many banks have begun offering web-related services such as e-deposits, online messaging, online management of personal and business finances, and more. But is this enough to please customers who already handle almost all of their daily needs, from shopping to paying bills, online or via their mobile phone? Ben Yaniv Chechik, VP of product at Zooz, explores the issue.
Online banking vs digital banking
To understand the downhill process that traditional banks are undergoing, it is important to understand the crucial differences between online banking and digital banking.
Many traditional banks are restricted by inflexible cultures, organisational inertia, and strict banking regulations. They are also encumbered by human and resource elements accumulated over many years that hinder innovation. Thus, the best they can offer is “shallow” online front-end banking services such as mobile apps, filling in forms and checking one’s balance. For example, when it comes to applying for a mortgage, the initial form may be completed online but manual involvement and paper-based processing take over subsequently. As banking analyst Frank Schwab notes, traditional online banks are based on legacy software capabilities originally designed for physical bank branches.
In contrast, digital banking refers to a totally different outlook vis-à-vis bank processes, because those leading this initiative are digital natives. These organizations look for real IT experts who never experienced a world without the Internet. Digital banks look for people who understand UX, speed, automation and scalability. They offer quick onboarding, accelerated upscaling, and big data management.
These cyber entrepreneurs are not fettered by outdated thinking or conservative banking mentality. The aim of this type of banking is to quickly onboard digital customers and meet their constantly evolving needs by building flexible new digital products and services. In contrast to traditional banking, these web companies seek out gaps in current laws and craft innovative solutions.
Can digital banks actually deliver on their promises?
For all their inventive approach, digital banks may not be able to deliver on their promises at this time simply because no e-bank is an island. While on the front-end they may offer quick online services, banks – digital or not – cannot ignore regional banking regulations. For example, US regulations permit banks to issue credit cards to customers online, but these entities are obligated to contact credit authorities before doing so. Similarly, when a digital bank offers a loan, some entity behind the scenes must carry the risk and manage internal operations. At the end of the day, a bank needs far more than attractive UI and UX to be able to offer solid financial services to customers.
Banking and customer expectations
Millennials were practically born with a smart phone in their hands. According to a recent Fintonic survey, 14% of the respondents believe that major conglomerates such as Apple and Google will eventually become financial institutions that will replace traditional banks in the eyes of consumers. This is undoubtedly a response to traditional banks’ indifference to developing customer needs and their inability to innovate.
Mobile commerce is currently joining with messaging applications to create more payment possibilities. Western Union now enables WeChat app users in the US to distribute funds to 200 countries and territories via the messaging service. Today’s younger customers are accustomed to combining different shopping channels, social media and mobile, and they want to be able to apply this type of synergy to their banking and payment needs.
For all that, when it comes to money, many older consumers still prefer the tangibility of brick-and-mortar banks. They also like the idea of talking to and consulting with an actual breathing banker rather than a virtual one.
An emerging phenomenon – the new banks
We are currently witnessing the emergence of several new banking paradigms which aspire to meet both the demands of today’s increasingly digital society and the still inescapable need for tangible banking:
• Creating new banks – For the digital diehards, several innovators with no previous connection to banking have entered the field and created new banks like Moven and Fidor. These enterprises provide inventive offerings such as end-to-end mobile financial services, social-media based communities, or direct banking without physical branches.
• Joining forces with existing banks – Some of the new digital banks have partnered with traditional banks to offer front-end services whilst relying on the back-end processes of an established player with a banking licence. Simple, for example, has been working with Bancorp Bank in the US in this way (NB: Simple is now owned by another banking entity, BBVA).
• Acquiring a banking licence – Following a prolonged period of procedures, Germany-based Fidor Bank acquired its own banking licence. It is now able to offer a full spectrum of new and traditional banking services through interaction with customers directly across social media. It has also recently acquired a licence to operate in the UK.
If you can’t beat ‘em, join ‘em
Traditional banks are slowly coming to realise that they are no longer the sole players in the industry and that the newcomers have a lot to offer to a digitalised clientele that is still smarting from the global banking crisis. It’s wake-up time, and banks must scramble to collaborate with cyber entrepreneurs to survive.
Both sectors will inevitably come to understand that they need each other; fintech can profit from cooperation in classic banking areas requiring regulatory compliance, while traditional banks may be able to play an instrumental role in funding fintech companies that will lead the journey to digital banking offerings.
Who knows? It may just turn into a win-win proposition for all of the parties involved, including the customer.
