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Successful Online Banking: The Three Phases of Digital Evolution

This article was published on August 2, 2021

Online banking is still in its infancy, and in the next few years digital technology will likely change the financial services industry beyond recognition. Like retailers, travel agents, and record companies before them, banks will soon look very different than today, as this industry is an ideal target for digital disruption.

In order to withstand the challenges posed by online banking practices, traditional financial institutions need to adapt, evolve, and rethink their digital strategies.

Banking is the ultimate digital product because it:

  • Does not require physical delivery — loans, savings accounts, and current accounts are inherently non-physical.

  • Can be configured in many different ways based on customer needs and circumstances — advanced data analysis can allow banks to customize products differently for each customer.

  • Benefits from being delivered at the point of need — branches are not necessary for customers to enjoy benefits.

As banks begin to embrace their digital products, traditional banking services face the possibility of becoming unnecessary. In order to withstand the challenges posed by online banking, most banks in the world are undertaking a journey comprising three major phases.

The Digital Online Banking Journey: Phase One — Adapt

Online banking can pose some threats to traditional banking practices, including driving customers away from brick-and-mortar banks and into online-only banking services. Adapting to the digital era is one way of reducing the challenge digital banking poses to traditional financial institutions, and in this phase, banks identify business areas that would benefit from change, aiming to generate measurable upside with relatively little disruption. These changes usually focus on two areas:

  1. Cost takeout opportunities. Businesses that have not yet adopted digital technology will likely have business areas that can be improved without a complete overhaul of existing internal and back-end processes. Using digital technology to simplify the way things are done is often the fastest way of gaining tangible benefits from digital change. For example, banks can offer online or mobile banking options for retrieving balance and transaction information, reducing the load at branches and on telephony.
  2. Sales. Without the need to completely change the way products are made, digital distribution can be a quick and effective way to monetize digital change. The scope here is to enable products currently sold by the business to be marketed and sold online. This is certainly not trivial from the design, commercial, marketing, regulatory, security, and technology standpoints, but it is easily understood and accepted by the rest of the firm. Banks can make it possible for customers to apply for personal loans online, for example.

Because of the challenge online banking poses toward traditional banking, most businesses understand and support the need to adapt to a changing digital landscape, especially because adapting usually does not change the way the business operates on a day-to-day basis.

Banks can leverage a more engaged customer, a richer understanding of their expectations, and more articulate delivery capabilities to rethink themselves into something better.

Phase Two — Evolve

After having optimized back-end processes and created new digital channels, a business finds itself with capabilities that can be used to create new products and services. These could be digital-only products that customers cannot buy in other channels or services like personal financial management (PFM) tools that allow customers to manage how they spend their money.

These products are often positioned with pricing and servicing capabilities that are very different from those delivered in branches, giving the bank an edge on the competition. Some businesses might resist such changes, though. For example, the branch network may start worrying about being disintermediated by online sales.

The leadership of the bank, however, must realize that not immediately addressing and resolving these concerns can be very costly. Evolving is sometimes essential to remaining relevant in a digital landscape.

Phase Three — Rethink

Banks often digitize most of their in-branch capabilities and extend offerings to new digital-only products and services in an attempt to combat the threats posed by digital banking. At this stage, banks can leverage a more engaged customer, a richer understanding of their expectations, and more articulate delivery capabilities to rethink themselves into something better.

When a bank reaches this stage, it often will have gone through major changes in its internal culture and talent pool. The bank will be able to think of new products and services that go beyond extending core capabilities to rethinking the relationship with customers to create completely new business models that complement the legacy business. The bank will begin using collaboration tools such as video conferencing to stay ahead of the game, and will employ best-in-class contact center technologies. It's also worth noting that the experiments some innovative banks are attempting with artificial intelligence, robo-advice, the blockchain, and crypto-currencies are good examples of these new disruptive propositions, too.

The most important outcome of this gradual digitalization is that it will change the banks from the inside one step at a time. This gradual approach results in real change at the center of banks, complementing their core assets of reliability, consistency, and trustworthiness with customer-centricity and creativity.

Alessandro Hatami
Alessandro Hatami Contributor

<p>Alessandro is the Managing Partner of Pacemakers, a research and strategy firm dedicated to enabling large firms to deliver successful digital change through partnering.</p><p>Prior to Pacemakers, he was the COO of Digital Banking and Group Innovation Director at Lloyds Banking Group, the UK’s largest retail and commercial bank. He was also the MD of a large EU payment processor and Director Large Merchant Services at PayPal the global alternative payments platform.</p><p>He started his career in financial services as European Marketing Director at GE Capital. Alessandro is a mentor of several FinTech start-ups working with Techstars, Seedcamp, Startupbootcamp in London and Kickstarter in Zurich. He is also an investor in several early-stage technology and FinTech companies.</p>

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