The term ‘Digital Banking’ is widespread but it’s an often misunderstood concept. What is the definition, how does it compare to online and traditional banking, what are the benefits, challenges, and risks of digital banking, and what do you need to become a digital bank? The question ‘What is digital banking?’ will be answered on this page so you will fully understand its meaning.
In short, digital banking means the full digitization of banks and all its activities, programs and functions. It’s not just about digitizing your services and products — the front-end that customers see — but also about automating your processes (the back-end) and connecting these worlds with middleware. Digital banking is about the automation of every step of the banking relationship, and it goes way beyond an online or mobile banking platform.
Digital banking contains a full transformation to a digital environment — frontend and backend and anything in between — for both customers and employees. Digital banking relies on big data, analytics and embracing all new technologies to improve the customer’s experience. You will only be considered a digital bank if you have digitized all the functions you have — from product development to customer service.
There are several reasons why digital banking becomes increasingly important in the banking industry:
Customer expectations are evolving, new regulation is put in place, and competition from tech giants is increasing. These changes force banks to look at the very core of their existence and to plot a way forward in an increasingly digital world. They need to reinvent themselves to survive. It’s as simple as ‘do or die’.
Banks are affected by digital disruption and penetration, and they know they need to act fast to manage it. New entrants or startups are changing customer expectations and impacting revenue streams. Banks need to improve customer experience, increase operational efficiency and respond faster to industry changes if they want to succeed in a digital economy. They need to make a fundament switch in their (day-to-day) operations, yet stay true to their own identity; they need to handle digital in a way that suits their organization, customers, and workforce.
Two main trends regarding the way digital disruption changes in the banking industry can be observed: large banks have the financial means to invest in digitization which creates a greater distinction between small and large banks and there is also a strong increase in the number of new, smaller players who are responding to specific customer demand, serving a particular segment or niche within the market. These developments change the banking landscape.
The most important difference between digital banking and online banking and traditional banking is that customers’ relationship with a digital bank starts and stays strictly online without the need to visit any physical location. Traditional banking is based on manual actions and face-to-face contact.
However, digital banking goes a step further than online banking. In online banking, many core activities are available online, but there hasn’t been a full transition to the digital world. The front-end is digital, but behind-the-scenes processes remain largely the same.
Digital banking includes the digitization of this legacy back-end.
Going digital means more than just having a fancy website or app. However, making the switch to a full digital bank is critical to improve customer relationships and ensure viability. Banks can take advantage of a digital transformation in the following ways:
With digital banking, operational cost savings could be achieved due to automation of functions, processes, etc. It eliminates costly back-office processing operations, leads to fewer errors and requires less staff.
Automated functions of digital banks can easily be trained to perform differently and react quickly to market changes. Digital banking provides quick and simple process adjustments, fast product launches and swift adapting to new regulatory changes.
Full transition to a digital environment is what banks need to
Digital banking doesn’t only create opportunities for improving efficiency and reducing costs and creating high-value digital services; it also leads to major challenges and risks.
The challenge for banks to protect themselves against cyber-attacks and digital fraud is also a risk. Threats have become extremely advanced, and the attackers are smart enough to identify the kind of precautions that the banks can take, and they design their attacks accordingly. It’s something banks need to be well aware of.
You need customers' data to improve their customer experience, but it can also lead to reputational damage as customers may feel that you have too much data. Privacy becomes increasingly important, so trust is key.
On this page, we’ve told you all about digital banking; what it is, how it compares to traditional and online banking, what does digital disruption in banking means, what the benefits are, the challenges, and the risks. But what do you need to become a digital bank, what are the digital banking basics?
The essential elements can generally be reduced to just three:
1. A three-tier banking architecture with a digital core
Many banks that are digitizing their services are starting in the front layer with portals or apps. We believe it is more effective to focus on all three layers of the core banking platform: the presentation layer, the client and orchestration layer, and the product layer.
Customers expect seamless customer experience, yet many banks have multiple back-ends for different types of products that mingle product and client information. These systems need to be separated into:
The processes are adjustable in the client and orchestration layer and products are configurable in the back layer, meaning banks can make changes and introduce new products and services in a matter of weeks rather than months.
Banks can’t and shouldn’t approach the new world on their own. Successfully making the digital switch requires a collaborative ecosystem. It is recognized by banks that partnership with fintechs not only create a next-generation technology ecosystem – and fulfills the visions of the future – but also ensures rapid response to changing market conditions and an enhanced customer experience.3. Trust and attraction
For banks, the traditional method of selling has been to push information about products through advertising on online and offline channels. However, new technologies mean that the digital bank of the future will be organized around its core database and its customers rather than around its products.
Banks need to build trust around their brands and attract people naturally to become clients, and eventually, fans instead of pushing ads through channels.
Explore how evolving business conditions in the banking industry and dynamic changes in the core system market are driving legacy modernization.