Monday, 11 December 2023

Digital transformation - An existential reality or incremental change?

5 min read

By Richard Hartung

The annual heads of retail finance dialogue discussed key issues impacting institutions’ digitalisation journey and what it takes to be successful in their digital transformation

  • Technology providers focus on processing low value transactions such as payments, while banks focus on relationship driven transactions
  • Data analytics and artificial intelligence are becoming increasingly important for banks that want to compete effectively
  • Retail banking leaders need to start with the customer and use data to deliver better services

Start with the customer, and don’t end there

The big question banks need to answer as they go about mapping their digital journey is knowing what customers want. The challenge, though, is that customers themselves often don’t know what they need.

Most banks start their digital transformation by trying to force digital on customers rather than listening to what customers want. Instead, banks need to figure out what customers need, regardless of whether they are 50 or 15 years old and design transformation around the customer experience. Customers are at different stages of development, so it’s important to understand segments of customers through attitudes and needs rather than just demographics. Once banks know what customers want, they can then decide whether to deliver solutions themselves or use partnerships.

One bank that has done especially well on digitisation is Kakao bank in Korea, which acquired 5.2 million customers within nine months after it launched. The primary reason for its success is that the onboarding technology is incredibly frictionless.

While Kakao bank does well, digital adoption is strongest overall in China. Consumers there focus on using a wallet from Alipay or WeChat, however, rather than on banks. Indeed, a study by The Asian Banker showed that Chinese consumers do not see Chinese banks as relevant brands.

Looking at technology vendors also provides insights on how to become more digital. Facebook, for instance, has 2.16 billion daily active users globally and simply the network effect of its sheer size is driving growth. Moreover, about 51% of total global digital advertising revenue is in hands of two companies, Facebook and Google, and their global market share is growing.

The difference between what these or other technology providers are doing and what banks are doing is that technology providers focus on processing low value transactions such as payments where the technology is relatively easy, while banks focus on relationship driven transactions.

Additionally, technology innovators tend to be more successful in countries where there is low banking penetration. It is also important to note that the disruptors are not making money yet, since many of them cannot deploy assets and have a high cost-income ratio.

For both banks and technology companies, the key to success is trust. To build trust better, banks should put customers at the centre of what they do, use the data they have, and move from account-centricity to customer-centricity.

Why is “legacy” a bad word in finance?

Another big question banks are faced with is how to deal with their legacy platforms, which have a huge impact. Grab has about 140 million customers in eight countries and an average cost of acquisition of about $0.20 as compared to about $10 to $20 per account at traditional banks in Southeast Asia.

While most people think of legacy systems when they hear the word “legacy”, there is far more to legacy than just technology. Legacy is often more about culture, peoples’ mindsets and corporate culture. Legacy is also external, as banks are shouldering legacy from customers with legacy behaviors.

One legacy issue for banks internally is that they have become used to waiting for people to come to the bank. Similarly, many banks also expected people to come to the bank’s apps when they launched them.

With big technology firms now reaching out to consumers and dominating their lifestyles, banks need to reframe their approach by unlearning, relearning, and becoming less dependent on legacy.

The role of the branch in an omni-channel world

Although many people have said the future will be about branchless banking, most bankers agree that branches will remain important. Data from the World Bank confirms that view, as the average number of branches per 100,000 population at commercial banks has increased by 40% since 2008. Rather than disappearing, the branch is going through a transformation.

In Italy, for instance, even Che Banca, which was set up in 2008 as a digital bank, has been opening branches as a marketing tool to build trust.

Part of the reason that branches will continue to play a role is customer mindset. When a bank in Hong Kong started to map its plans for digitisation, for example, it conducted a survey and asked customers which bank they want to bank with when they open an account, A majority said they want to open an account at a bank with a branch close to them. When they were then asked whether they would actually visit the branch, they said “no”. Branches thus play a different role than what many bankers may expect. The first is trust, since consumers will trust a bank more if they can see branches. The second is relationships, since consumers want to be able to go to a branch when they have something important to discuss. And finally, consumers want to go to branches for complex transactions.

In countries such as Indonesia and Vietnam, banks can’t even close branches when they want to because regulation requires face-to-face verification and consumers cannot open an account without going to a bank.

Rather than being wedded to a philosophy about branches, the key is to deliver the right customer experience for the right reason so that customers put money with the bank.

The power of data

Data analytics and artificial intelligence are becoming increasingly important for banks that want to compete effectively.

A key challenge, though, is accessing the data. Only about 10% of data is structured and accessing unstructured requires data scientists. Even if banks have accumulated the right data, then, they may have to invest a lot to be able to use it.

Once the bank can access and use the data, the next step is to systemize and scale up so the bank can add features such as customer context, cognitive offers relevant to the customers, and chatbots. One bank has seen things about customers it didn’t know, once it got its data warehoused, Other banks are using card data to tell corporates who’s walking past their stores, what they buy and what to stock.

Rather than just looking at data inside their institution, banks also need to look at external data such as data from partnerships. One bank, for instance, is incorporating partnerships such as working with Grab as an acquisition channel or as a source of data.

Bankers also need to realise that data processing is changing. Ant Financial is on its fourth-generation systems architecture and starting on its fifth, having rebooted the company every three or four years. While Ant can currently process 125,000 transactions per second (TPS) and uses artificial intelligence (AI) to look for risk, compared to Visa handling about 2,000 TPS, the fifth-generation system will process about a million TPS.

Bankers agreed that the future is linked to using data from the right sources to be relevant to customers and the customer context.

Does size - asset size or user base - matter for retail finance institutions?

Another important question for banks is how big they can be in the digital age, and what “big” actually means.

Some banks have grown to the scale of holding more than a trillion dollars of assets, with the largest ones at about $3 trillion. Banks are no longer the largest financial institutions by that measure, however, as Blackrock has total assets of $7 trillion. And to put scale in context using another measure, Facebook has 2.16 billion daily active users.

In line with how firms such as Alipay and Facebook focus on their number of active users, some banks are similarly focusing more on increasing the number of active users rather than on assets. Learning from how Alipay is obsessed with active users and frequency of usage rather than just getting customers, these banks have similarly focused on customer journey and the customer experience to grow usage.

Participants concluded that even in the digital age, they are still playing an important role in intermediating financing and will continue to grow their asset size, although digital may change the ways they run their business.

Open platforms - Do banks get it that nobody owns the data exclusively?

While banks have long owned the customer relationship, banking and how data is accessed or owned is changing rapidly.

One example is open application programme interface (APIs), which enables third parties to access limited parts of banks’ data.

Another is partnerships, as banks link up with big players such as Google and Facebook. These and other innovators are interested in the adjacency of banking to their platforms and how to use that context to make life easier for their customers. One example is, which is as big as Amazon and which is working with banks.

While banks may own customer data, they need to understand how to manage data well as they open it up and partner with other firms in collaborations that enable them to grow faster.

Staying ahead in a digital world

To succeed in a rapidly changing world, then, retail banking leaders need to start with the customer and use data to deliver better services. While the role of branches and ownership of data and definitions of size may change, bankers will continue to play a key role in financial intermediation – as long as they keep up with the changes. 

Keywords: Technology, Digital Banking, Legacy Banks, Digital Transformation, Data
Institution: Kakaobank, Alipay, Wechat, Grab,, Blackrock
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