Becoming a Digital Bank - Issues and Journey

Banking operations moved from manual to computerised over phases with progress of technology and adoption of computerised operations in business. New functionalities and services have spread around riding over various electronic means and devices -  mainframes and mobile phones, printers or e-mails, POS devices or smartchip cards, internet or ATMs. All of these platforms and devices are electronic, use computers or embedded microprocessors. We term this as ‘electronic banking’. These days another term ‘digital banking’ is used at times, interchangeably, with ‘electronic banking’. In this write up, we take a look at the issue of what, as per the current industry thought, constitutes ‘digital banking’ and if it is somewhat different from ‘electronic banking’ or is the same.

A strict  definition  of the  term  ‘digital banking’  is, so  to say,  not  uniquely  in  vogue,  though  industry  experts and evangelists have described their expectations and ideas on these. In sum, we may consider that when electronic versions of manual services are built for different distinct pieces of services, then may be, we are providing electronic service of banking for that piece, like cash dispensation, money transfer, etc. All or some service may be computerised at a particular time, and the overall activities step by step follow the erstwhile manual  workflow,   albeit   over   electronic  channels. For ‘digital banking’, something more is expected, in that,   the   business  flow  and   services  delivered  may not  necessarily follow the  manual workflow, but,  may leverage the natural  process flow and  strengths of computer operations.

The above tells a little in concrete terms. We gather an impression that after enabling ‘electronic banking’ , a little more is to get done , to move it up to what is understood to be ‘digital banking’. In terms of jobs involved, making an electronic bank into a digital bank involves more in the vision, the ways of handling and organising issues and solutions and also, realising them in the system. Digital bank may be a few steps above an electronic bank in terms of computerisation of processes and their integration, but mostly, the philosophy and structuring of systems and solutions will mark the ‘extra’ dimension of ‘digital’. A little detailed discussion may give us a feel of this.

It may be useful to look at the thoughts found on related industry fora. One of the leading evangelists in the area holds that, a digital bank is one that is ‘built with a vision to reach out to customers through digital augmentation on a ‘consistent enterprise wide digital core’, accessible ‘internally and externally through a strata of access layers’.         This in practice will mean that, a customer touching  a  bank’s  presence  as  a  service  in  any platform – ATM or Social Media like Facebook, branch or Internet service,  physical or digital -  will reach the same uniform enterprise wide digital core and can have the same service at appropriate time in his/her desired platform. The service may be by a combination of many background processes run by bank without customer’s involvement in between. The other expectations are that a ‘digital bank’ should have ‘innate knowledge of the customer’ by leveraging the data to enable ‘predictive, proactive’ service as the winning differentiator. Finally, the human resource for a digital bank would be that the boardroom would think in digital terms, and functionaries (of business verticals) will be able to think , plan and articulate based on digital capabilities and possibilities of serving customer needs.1

We see that the concept of a digital bank starts from a much higher plane than considering IT to be a service department  for  ‘digitising’  services  and  transactions. Of course, these expectations involve management philosophy   and   competence   levels   and   therefore of hardware, software only.

Now, is this distinction important? Or, what purpose such an approach will serve? To understand this, we have to look at how our systems are getting developed and what alternatives are appearing on the scene and even disrupting the scene. While we may take this up in a later section, let us just consider how we developed banking software. The bankers with their detailed procedural and  accounting knowledge of banking,  first document the processes or explains them to computer software experts who go through them and come up with Application Software, and another set of computer experts set up hardware and routine processes. As all bankers are not comfortable in IT and the programmers do not know banking, developments go through few rounds of iterations, and we then get the solutions. For a digital organisation, the business manager (say banker) is expected to know the IT world reasonably well and can think and articulate much better to build up the service. In case of the organisation being more advanced as a digital organisation – the functionaries are IT experts and start understanding the services to be provided, without any legacy thoughts, and may build up the basic service as a more  efficient one,  and  may   knock  off a few processes that the business people thought   of , though were not of much  value. This may result in a new, powerful service that may get a wide acceptance or even if not, suggest a better approach at times.  As for an example of such a thing actually happening, it will be sufficient to   consider that,  despite banks being all around, Google or PayTM and other companies are seen to be easily capturing electronic wallet customers in large  numbers. This is definitely because customers find  some compelling   value   in  that.   The  companies Google or PayTM cited above are only for example and there are many organisations like that – their products are  called  Fintech  products  and  they  are  loosely referred as FinTech  companies that  provide  financial services. The FinTechs are increasingly occupying business space in financial services like payments and remittances and stored value cards or wallets often, posing strong challenge to banks. It is held that Fintechs have  focussed  small  portfolio,  platform  or  products and at times their product or process operations seem lightweight and simpler so that   some people may like it. At times,  such  products address a specific  gap  in the market.  We shall look at this later again.

As we go back to our discussion, we note here that, products by technology based organisations, foraying into  financial  markets, derive  their  strengths  partially from the fact that the people behind planning them think in technology derived mindsets and out of technology heavy knowledge base. The resulting products and services often carve out reasonable space in the market and compete with bank products strongly. The thought behind formulating the solution and the granularity of the offerings are important for users, and will be important to address to enrich the banks’ digital journey.

As to the expert views on what constitutes digital banking, a different way of seeing it is encountered from some quarters. This view holds that use of digital technologies  is  increasing  exponentially  and  people are adopting them easily. This changes the interaction and communication habits of people. These affect the expectations and  comfort levels  of people significantly. If somebody can interact with friends in Facebook and look up train timings           in internet and book train tickets at the same time on the same Tablet or mobile phone sitting in his drawing room, he/she will be comfortable in sending a remittance or opening a term deposit with a bank in the same set up and operational ease.  Now banks have  to fit-in in this usage expectations to remain relevant, and that will involve bank presence in various platforms the present day society uses- say for example - from POS devices to social media; the banking applications need be comfortably interfacing in these platforms, and operations would have to be simple but secure. This is not a single task or single step process but a progressive one , as use of  computerised media, platforms and activities are continuously spreading into new areas. The banking applications will need to adapt to  this  pattern  continuously and  rather   ‘fit  in’ to  this digital life space of people. The specific tasks for this will keep changing depending on where we have reached. We shall see some evolving changes and consider their impact on banking. However, we understand from this that having the banking system on Corebanking, having all  the  offices  or  touchpoints networked ,  or    having internet banking and ATM services available  -  do not complete the task but are only the beginning foundation stones in the digital journey. A bank gets progressively more and more ‘digitalised’ by adding digital servicing capacities in keeping with customer behavioural trends. This and the granular functional details  will decide customer convenience and earn preference. This will mean that product  design and workflow details  will have to  take  care  of  customer  convenience,  expectations and patterns of transactional behaviour, apart from product features, underlying accounting and application security.2

Another line of thought is that digital banking will necessarily be customer initiated , on customer preferred platform, seamless, straight-through, error- free, and provide utility to customer and operational comfort, lower cost,  finish transactions fast, and provide enhanced services ( for example – if a customer checks a proposed loan EMI, it may be useful for him to cast this in some financial planner  to help assess impact of the loan on his/her  cash flow etc, so that a suitable level of EMI can be examined meaningfully. Any banking application providing such a pop-up or built-in extension will be of more utility and relevance for a customer).

As   we   may   see,  a   pinpointed  definition   of  digital banking actually eludes here, but we get the feel. We may say that equipping a bank with fully computerised operations  is  the  base  of  electronic  banking,  upon which qualitative and service content-wise alignment to customers’ behaviours and expectations is the journey to digitalising the bank, and on reasonable alignment, the bank may be counted as a digital bank. Incidentally, these varieties in understandings also have a root in the basic starting point - we started from a universal bank in the back of our mind. There are special purpose banks or Fintechs now , who may be called a digital bank or financial  service organisation .  They  are  ,  so  to  say,

‘narrow’ banks / Fintechs as they may have one technical

delivery channel only ( say, mobile phone based and only  providing  remittance  and  wallet,  and  nothing else) and few products – compared to multiproduct , multichannel set-up of a standard commercial bank in India. Obviously, for a standard universal bank , the call for digitalisation is more complex. Another observation , as a corollary , will be that , banks being a regulated and reliable entity , each and every customer preference may not be possible to be supported , and a digital bank may not be able to serve every felt need of a customer. Floating a Special Purpose Vehicle that may serve as a narrow bank/ may be an option at times, like a cellphone / POS   borne cash-in/ cash-out service by a roving agent at customer locations in remote villages – here customer preference for time slots or delivery platform may not be pragmatic, and bank has to decide to pick up one suitable option.

After considering a few dimensions of what exactly makes a bank a digital bank, it is interesting to see what all in the build-up of a digital bank changes compared to a standard electronic bank. This is at several planes.

The strong proponents of digital banking in the industry suggest that digital is not a project to take up and finish, among many others. Rather digital is the environment and so, banks need rethink and reorient , build upon digital platforms   in a way most synergistic to digital technologies , and not by adding a digital layer on top of all existing layers of operations delivery. This may involve major overhaul of systems, processes and employee functional environment, content and skill requirement. To own and start such a journey, visions and decision making imperatives suggest that the board level should have champions and planners knowledgeable in digital environment trends and happenings.

Products, services and platforms planning follow next. For a normal  universal bank  that  we find most  around us, the product and delivery areas are to be enhanced and  expanded  over  the  existing  ones  as  all  strata of customers will continue to be requiring service. However value additions to existing products are necessary , particularly to cut down delays in crediting money transfers to recipients of funds transfer, issuing final receipts or reference numbers of transactions, settlements, etc. The user experience (UX as told by the new generation) in terms of on-screen operational navigation, and speed are important as also the interface with platforms and systems frequented by the new generation.

One other area where way of working will differ is the development and deployment of software. All banking software come on a base ‘core banking’, on which organisation specific product, functionalities, parameters etc., are built on. Actually this is a permanent feature, no bank  can  expect to put in place  a fixed set  of software and go on operating, because, many frequent changes in rules, competitive products, customer demands keep coming all the time.

The classical model for development and deployment will be in stages of understanding needs, software addition  /modification,  testing,  checking and  ultimately deploying the changed / additional pieces of software on top of what is going on. There are many developmental models depending on how it is done. Classical model was ‘Waterfall’ for example, and similar other models are also there. Under this model, changes are conceptualised step-wise, end of each step leads to start of the next. While the end-state requirement is known, it is considered to be best done in steps depending on  how  the  blocks  of process flow and  hardware are organised.   Normally, a stable system runs on a set of software and then users or business side lets know the new needs for additions , changes, discontinuation, etc. then IT side will understand this from them through discussions and finalised written documents on the requirement. So, under this model or similar models, there will be many iterative stages, much effort is spent on documentation , and, in case, later it is found that some realities were not correctly understood earlier, there will be repeat of previous stages so that a long time is required for any changes to be implemented. Now under the digital banking edge, these may not be preferable because, changes are desired to be implemented quickly, and there are many tools to help developing and recording concepts and documents. Currently ‘Rapid’ or ‘Agile’ methods of developments are  preferred.  Under  these  approaches,  instead  of many written iterations of documentation, discussions, face  to  face  interactions,  developments  immediately and showing prototype or changed screens or functions in parallel and gaining approvals, etc. are done. The developer  and the business  side  analyst  or  product owner representative may spend longer time together, have more discussions and hands on work may happen along with less paperwork, shorter development cycles, splitting jobs and developing different parts parallely, can all happen. Earlier, a bunch of changes were put together and released or ‘applied’ on top of the present set, according to decided release cycles – often monthly, or even quarterly. This ensured stability of operational features of the system, but caused huge delay for any changes required in the system functionalities by the business side. Under the Agile or Rapid methods, the deployments are not necessarily bunched for a month- end or quarter-end release. It can be daily or weekly. There are constructs, tools, and approaches to help such agile developments that are used by the software people now.

Another area of required change is surfacing slowly as we move more and more into an integrated digital mode. This is about servicing and maintenance of many platforms of many ages. Actually this problem is much less in India compared to the Western countries where the computerisation started much earlier. We may have old COBOL programmes, old mainframes, multiple Operating Systems and Servers, and interfaces stage- wise between them. We may have a 1990 mainframe at the centre, and mobile phone based internet operations at the outermost layer. Servicing, maintaining and suitably amending, utilising the older hardware and software can become challenges due to lack of availability of expertise. Present day technologies give us the powers of providing many virtual workstations or even servers very quickly, but the related expertise is necessary. Often therefore, the older hardware platforms demanding much higher manual and command level management, can get retired and new set up obtained in virtual format may be from a ‘cloud’ for cost and manageability ease. This will again call for marginal changes in software and operational controls. Operators and users need be suitably trained as also much work may get moved out to providers - slimming down in-house work, but creating dependence, that need be necessarily managed. The more  new  and  advanced  the  systems  become,  the more versatile tools get working in IT; these will demand native IT experts rather than IT-trained bankers who majorly handle IT in banks today. This trend will only accentuate, and banks will be requiring to hone in-house capacities to manage third party providers effectively, the providers being tech savvy. This is not a new call, but with digital functionalities being more of a core need now, this calls for reasonable knowledge improvement on the bank’s side, may be by absorbing core technical cadre or a different service provider only for managing the outsourced tech-services.

The last piece of difference will be in the need of harbouring some more knowledge resources in the bank. These will not be in the banking or technology domains. As we have noted earlier, digital banking seeks to have an innate view of customer based on customer data as real-time as possible. For this to happen, Data Mining, Business Intelligence, Analytics, and handling Big Data are required. Many banks are already having Data Mines, Data Marts, etc. but the knowledge and vision as to how to organise these, what data to keep in what order, what models and variables are important for the Analytics, etc., decide the value derived from use of these. For this, knowledge in these fields are  important,  which are  not normally in the domain of bankers or hardware experts or software developers. Quite a number of banks in India are therefore started recruiting experts in these areas. Expertise of Data Scientists who can identify patterns and trends - out of huge volumes of data, also will slowly become important. These knowledge based manpower will be quite helpful if the quality of digital services are to be of value to both customer and banks, as also, even for bank management to assess the effectiveness of the efforts taken  by the bank in this field.

There are more interesting items around a bank in its joining the Digital league, in the environment. Let us look at some of them. As of now, competition from banks and non-banks (the Fintechs, say) in unexplored areas or even previously banked areas pose serious disruption in the market and the banks need to face them and continue to remain relevant in the market. Who are such players and what are such products or areas? Actually the crowd is growing, but for our purpose we shall only mention a very few important ones. These new players or products or concepts are catching attention of people for financial  services, and  banks need to decide to join the space, or join hands with these players, or build up viable alternatives which may not be so easy. Let us look at a few Fintechs: -

FinTechs

Fintech denotes new applications, processes, and models in the  financial  services industry.  The  area of involvement  can  be payments, financing,  providing information and matching, advisory, planning, modelling, etc. The transaction space can be B2B, B2C, C2C, C2B, any of them. The business domains can be banking, insurance, payment services, advisory, etc.

There are a huge number of players now. To name a few, without any specific order of parameters, we mention -

Adyen - a Dutch company founded in 2006, is a Fintech, providing payment services over laptops, mobiles and stores. Its valuation now is $2.3 Billion. It handles payments related to  FaceBook, Netflix, Spotify  and  a few global social media services.

Transfer Wise - a British firm, valued  above $ 1 Billion, provide peer-to-peer money transfer across countries and currencies at costs.   Currency Cloud is another such  firm – doing it for business organisations – annual transfers above $ 15 Billion. Both charge lesser than banks, transfer money faster than them.

Nutmeg is a British start-up, regulated by UK’s Financial Conduct Authority, and provides online investment service. They are going to employ ‘Robo’ financial advisors online.

iZettle in Sweden (and Square in US) are servicing payment processing at small shops / companies who are their clients, but do not accept debit/credit card payments to trim costs. They provide a card reader to the client company, that can plug into a PC/tablet/phone and then the payments can be processed from these mobile devices by the client.

WorldRemit, a British company provides remittances over mobile phones to bank accounts or mobile wallets across the globe faster and cheaper than banks. The mobile number itself will be the account number into which money can be sent. The recipient has to encash the received remittance from affiliates of this service.

Funding Circle - provides and manages a platform for peer-to-peer lending. Investors and small /medium business needing funding can be matched and funding by the investors co-ordinated to facilitate peer-to-peer lending. Even British Business Bank is on board as an investor here along with thousands of small investors.

Zopa is also another such lending product.

Kabbage – takes funding from bigger banks (and also investor funds) and provide loans to SMEs in matter of hours.

Lenddo - Alternative credit scoring service using social media

Ripple  –  Payment  system  using  Distributed  Ledger

Technology. ( evolving ).

Coming to India, we have the names like

– PayTM – provides e-commerce, payments with  banks, payments through wallet 

Freecharge – mobile payments thru wallets, mobile recharge

Mobikwik – mobile payments (wallet)

Bankbazar.com – online marketplace to look for loans and insurance products from their respective players

Lendingkart – Online lending platform for SMEs

PolicyBazaar- Online lending – SMEs

Vistaar Finance – Online lending – SME

Capital Float - online lending – working capital – SMEs

(interest 16-19%)

IFMR Holdings – Financial Inclusion – (of the nature of refinancing through  its lending  wings  to entities  for onward lending to ultimate customers)

MSwipe – Merchant Acquirer , mobile POS solution provider

Citrus Pay – Mobile payments; Payment Gateway.

The above names are only a few of hundreds of them operating in countries and some across many countries. The most pertinent observation is that they are operating in the payment and lending space by snatching away the same from banks. They have observed some gaps in  the   fin-service   space  and   built  specific   focussed solution for the same and carved out the related market. This suggests that the banks’ electronic  services are not  complete,  convenient  or  advantageous  enough and these products have actually considered customer convenience and pain-points better than the banks. These Fintechs are providing disrupting products and services in the market, and the usual banking business turf and product suits are getting seriously challenged. This is the pointer that tells that the banks have, despite computerising and providing electronic banking, not yet fully fit into the digital servicing  needs and  acceptability of customers. The more they can do by improving the operational details, the product details, the business process and approval methods, the more it may be considered that they are moving up as a digital bank in tandem with digital services and usage maturity of the society. It is being observed that Fintechs re-imagining banking are doing a good job that gets preferred in the society over banks’ services. In a December 2015 survey by ‘Smart Money People’, it was found that customer satisfaction on Fintechs’ services scored more than that of corresponding banks’ services. This suggests us that there  are inefficiencies in the bank models or processes that must be addressed to gain back market , and failing that , banks need to partner with Fintechs to mature on their journey to sustain as digital banks.

In terms of technology , as we observe above, the solutions available in the market span over a wide spectrum of financial  activities  ,  like -   Mobile  based payments,            card  based   payments          (contact            card, contactless NFC card, mobiles with NFC add-on working as card / POS), loans, peer to peer loans (this will include crowd-funding) with reasonable operational accounting and co-ordination load at the Fintech’s system, etc.

In terms of regulations – most countries have helped with accommodating regulations with progressively lesser restrictions on these activities. We are aware of the mobile, card and Aadhar based payment eco- system in India.

Banks are partnering with these niche technology companies for technology. The way forward seems to be to keep informed, open up, partner, manage changes, co-operate, co-ordinate, think ahead.

As to innovation and pioneering ideas, an observation in the industry is, banks being heavily regulated normally do not stretch the boundaries of risk-prudence and   compliance                so   easily.   However   non-financial companies  are  often  seen  to  stretch  out  in  these areas, push the boundaries and claim for more space from the Government, regulators, etc, and, often the society and Government, accommodate them, may be in steps, progressively. So, there is a positive effect of the techies and non-bankers pushing the boundaries of digital banking, for the whole society. We take just two   examples  in the  financial  domain  that  bypassed the banking system but in good use, or going to spread wide : -

M-Pesa    - M-Pesa is a celebrated and vastly used cellphone based money transfer system in Kenya, by Vodafone subsidiary . Vodafone had more than 83% of all cellphone network in Kenya, and the user base was  huge  covering  the  whole  country.  Under  this, they put  franchisees ( small  outlets  )  where  people come to remit to another Vodafone cell number. De- facto the money deposited is converted to talk time, credited to the recipient phone number. Messages are sent by Vodafone to both. The recipient phone owner presents his/her cell and message detains to his/her local franchisee, who technically converts the talktime to money (‘redeem’ the talktime) and pays the recipient cash, if asked. In fact, the money equivalent favouring the  recipient  phone  can  be  kept  there  (Vodafone server remotely ), and seen by a message query, and the recipient can transfer money similarly out of this, say to a shopkeeper for goods purchased. This is a widespread talktime treated as money wallet , provided by a Telco. The franchisees deposited some security money to Vodafone which were all put in a trust account in  a  bank   in  Kenya   by  Vodafone.  People’s  floating money originally had no money equivalent deposit in a

bank, neither a bank wallet was involved. However the society and Government supported it, and presently this is the biggest remittance system in the country, carrying a sizeable part of the GDP of the country on it. The model has been emulated in other countries after local regulatory controls   and corresponding changes etc., including in India.

The interesting observation is - a widespread telephone network with its speed and reach, a less widespread banking network, social situations discouraging carrying much cash, a background system of telephone numbers, talktimes, could, with minimum tinkering and very low additional cost  – lead to a very popular product people were eager to use and pay for. The synergies of this telephone system cannot be matched by banks and bank controlled risk management was not the starting phase considerations.  This out-of-the-box plan to garner more income and more customers for a Telco contributed very significantly to the money  movement possibilities of the country  benefiting  the welfare  of a large  population. However,  this  illustrates  how  conceptualisation  and use of a market gap and opportunity can be leveraged. Banks, if they display the same agility, can devise new products pushing the borders of what is existing.

Now in our country banks look to the strengths of this arrangement (others have emulated this here), to be partnered to provide the remittance reach for Financial Inclusion.  In our country big Telcos started their Mobile Money Transfer systems under some controls and supervision regime for the last few years. Incidentally banks’ BC based remittances are also there on POS and mobiles. There was a big learning for all banks in this globally, and the best way for banks has been to partner such Telco products, with control by the regulator.

Bitcoin and Block Chain

Bitcoin is software created crypto currency having money’s equivalent maintained in a few secured systems globally, and after many experiments seem to have stabilised from its earlier image of underworld money to use in society. It is still in nascent phase , compared to money. One can pay by bitcoins to another user having a bitcoin stored value account. This is going to have a huge impact in the sense many transactions can go out of banking systems, GDP computations and economic planning of countries ,etc. Banks need to decide and act as to how to handle this .

Block  Chain  is  a  further  more  nascent  product  ,  a distributed ledger technology , where monetary or equivalent exchanges can get recorded in distributed databases securely and can be further used from there. No operating system is around and countries have , including India, signalled for looking into its gainful use in the economy. Once this gets operational, payment and settlements can be faster, and outside banking systems , including for cross-border payments.

The  combination  of  the  two  above  has  a  potential to  render  banks  redundant  ,  and  therefore  these two disruptive technologies need be partnered and internalised subject to acceptable risk management, for a digital bank to survive and continue to remain digital.

One option to bypass the heavyweight banking legacy and deliver digital service may be to open a new bank with narrow objectives of a few services operating on a few          platforms, like mobile phone based payments, money transfers and shopping from say, the comfort of a social media online environment or a separate environment of the banking service itself, as desired by customers. There are a few banks like that already (Fidor Bank, Moven Bank, Simple Bank, Number26, etc.), with limited products, services and platforms. One may please look up in the net for information on these banks.

We have seen that banks are to provide   electronic banking as a baseline, hone and improve strengths in digital technology graduate to become a digital bank. This may be a perpetual journey keeping in tandem with technology absorption and preference of the society, in the country and globally.

Courtesy: S.Mukhopadhyay, Former General Manager & Chief Information Security Officer, State Bank of India.