Consumer Banking: Digital Business
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Consumer Banking: Digital Business
The advent of digital technology has resulted in the disruption of many contemporary businesses. In fact, some enterprises that have failed to incorporate digital technology have become obsolete, while some that have enhanced their using this technology have significantly increased their performance and global reach. Since the emergence of the internet and the rise digital technology, the operations in the banking sector have always been affected. With the recent more advanced developments in information communication technology, most financial institutions will have to change their business models and incorporate new digital technology innovations for them to remain competitive.
Business Models
A business model is simply an organization’s plan of how it will generate revenues and also make profits. The increase in the adoption of technology has made business models to be an essential aspect in determining the success of any organization. According to Zott and Amit (2007), appropriate business models can increase the success of by increasing its competitive advantage, which can result in it having superior financial performance. Osterwalder (2004) opines that the business model represents an organization’s strategic and operational layer. In this case, the business model shows how the business will achieve its long-term objectives. Strategy indicates the intended future position of a firm, and the operational layer shows the entire perspective of the firm.
The Abdelkafi, Makhotin, & Posselt, (2013) Business Model Framework shows five value dimensions that are essential, especially for business operating in the current e-commerce environment. These dimensions are value propositions, value delivery, value creation, value communication, and value capture. Osterwalder (2004) notes that value proposition is the bundle of a company’s products and services or the job-to-be-done that create value to the customer. Value communication refers to the delivery of the value proposition in the form of a message to the target groups (investors, customers, government). Value creation refers to the partners, processes, and resources needed for the establishment of the value proposition. Value delivery defines the firm’s proposal and how it will be implemented. Value capture, on the other hand, describes how the value proposition will be transformed into revenue to capture the profits.
In the consumer banking sector, the digitalization of the business processes has created opportunities in three major areas: customer experience, operational process, and business models. With regards to customer experience, the digitalization of information and communication process has resulted in the emergence of various ways that banks can engage with their customers, such through digital user communities. Operational processes refer to the efficiencies in the business operations due to digitalization of various activities. Finally, the digitalization process has also resulted in the establishment of new business models that enable banks to create more value for their customers.
El Sawy and Pereira (2013) note that the digitalization of businesses has made their resources and capabilities to become more connectable, shareable, and modular. As a result, organizations that entirely build their businesses models on digital, and Internet-based technologies are usually different from the non-digital ones. On the overall, digital businesses always have more connectivity with their stakeholders. Their competition levels are typically high because of few geographical boundaries. Further, they require just a few resources to reach their target customers. Porter (2001) also notes that the ease of communication, low transaction costs, and less operating costs than in physical businesses increase their levels of competition. These factors are coupled with a reduction in entry barriers, increased consumer power, ease of imitation, few differences between competitors, and many substitutes.
Value Proposition
In most banking platforms, the primary value proposition is always on price and cost-efficient. The digitalization of banks has led to the development of platforms that are easy for the customer to use in most of their banking services. In general, online consumer banking enables customers to request for bank statements, ask and receive credit, transfer cash to other accounts, and also make and receive payments. Accordingly, the digitalization of consumer banking enabled customers to reduce the need for them visiting banks, in turn, reducing their banking costs (Rowley, 2002).
Value communication
The digitalization of the consumer banking sector has also resulted in the use of both online and offline marketing methods of reaching the target customers. Eisenmann (2012) asserts that a digital platform has high virality if it can acquire new customers through direct customer-to-customer transmissions. There are four virality mechanisms that banks use: word-of-mouth, network effects, casual contact, and incentives. Word-of-mouth occurs when satisfied customers refer the business to their friends. Direct network effects occur when the customer and the banks side overlap due to the increased interactions and interconnectedness among them. Even without active recommendation, individuals become informed on the existence of a specific service through casual contact with their friends who use the digital platforms developed banks. In some cases, banks can use incentives to encourage their friends to recruit new users (Eisenmann, 2012).
Value Delivery and Customer Segments
With regards to business segments, the digital platform in consumer banking enables banks to offer specialized services that meet the needs of each category of their consumers. The digital consumer banking also enables financial institutions to add value to their services by customizing their services depending on their geographical scope (Turban, 2014). For example, financial institutions can change the language in their platforms based on the user’s geographical area to overcome cases of language barriers. The ability of online consumer banking to cover more than one jurisdictions makes banking services to be more accessible to customers.
Value Creation
The central aspect of value creation in consumer banking is in enabling customers to receive their banking services conveniently and affordably. Additionally, banks can create various content for their customers, such as advisory services, which help their customers to make more informed decisions (Porter, 2001). Besides the provision of content, online banking enhances consumers by giving them an opportunity to track their finances through the easy access to their financial statements (Turban, 2014). Finally, clients trust into the bank is enhanced by the tightening of user verification such as by encouraging the checking of consumer identity cards, use of passwords, and the confirmation of personal details. Importantly, these processes enhance the security of consumers’ information.
Value Capture
From the Schlie, Rheinboldt and Waesche (2011) revenue model, financial institutions using online banking applications and websites capture value using the commission model. In this case, banks receive a commission for every transaction that they perform. The most common transactions provided through online and websites include interest for loans issued, the fee for every cash transfer, and a commission for payment of bills. Further, prices for all transactions usually vary depending on the value of each transaction.
Strategic Applications
Digital application in banking offers both potential gains and losses to financial institutions. Most banks are in the early stages of developing cultures and capabilities of digitally native organizations (Broeders & Khanna, 2015). Innovative digital capabilities usually have the following elements:
User-Centered Customer-Journey Design
In this design, customers experience highly differentiated online platforms that are personalized for their specific needs. They are generally fast, compelling, easy to use for all financial processes such as loan applications and approval, reconciling of payments, and making transfers. With the increase in the digitalization process, more analytical information about customers’ behaviors will enable firms to acquire more capabilities that will enhance user experiences and the user interface.
Personalization, Leveraging Data, and Advanced Analytics
The increased use of advanced analytics will help financial institutions to offer personalized services to their customers. Accordingly, the data will allow banks to cross-sell or up-sell various services depending on the willingness of the buyer to purchase. Importantly, the information from the analytics will provide banks with valuable insight such as on the product to buy and the business model risk.
Transforming the Retail Banking Industry
            Increased levels of competition in Europe and Asia-Pacific regions have led to political and financial uncertainties in most parts of the world. As a result, consumer bankers are concerned on ways of improving efficiencies, establishing new ways of delivering services, and risk management as methods of dealing with the increased competition in this sector (CISCO, 2017). Further, the reduction in profit margins and increased customer demands requires banks to innovate for them to grow. Digital transformation has been regarded as one of the effective ways that can help banks to grow, mainly due to the following reasons:
A Changed Competitive Landscape
There has recently been an emergence of “digitally native” banking competitors that have necessitated banks to innovate. Customer-centric distribution models have been developed for the needs of satisfying customers’ who use online banks (CISCO, 2017). For example, the presence of successful online business such as Amazon and Google has increased consumers desire for similar online banks that will be fast and reliable.
Aggressive Regulatory Environment
Stringent policies that were established after the financial crisis have also created an overhaul in the consumer banking sector, which has made banks to shift from traditional profitable but riskier business lines to online banking. In online banking, the major competencies needed are speed, creativity, and agility, which enable financial institutions to overcome possible threats from their competitors (Chaffey, 2015).
Macroeconomic Headwinds
Since the financial crisis, there has been an extended period of depressed interest income and also most of the traditional non-interest incomes. These reductions have mainly been due to increased regulation in this sector and a low-growth in the sector due to weak global economic performance (Chaffey, 2015). Due to these issues, most consumer banks have been forced to embrace online-banking as a new source of income and competitive advantage.
Move to “Mobile First” Initiatives
In many parts of the world, such as Asia-Pacific and Latin America, self-service mobile banking is the preferred method due to its increased application in making payments for various services (CISCO, 2017). For example, 60 percent of the transactions in Asia are moving to digital channels (CISCO, 2017). These changes have necessitated the adoption of online consumer banking, which can help financial institutions to offer better customer care services and provide alternative payment channels that can increase in the future.
The Digitalization Effect
The adoption of digital solutions, which started in the 2000s is becoming more mature and pervasive. The recent emergence of consumer-focused solutions has increased the need for financial institutions to provide consumer-centric solutions, especially mobile apps. Although most of these apps do not provide all services, they still enable customers to get important information such their account balance, make a withdrawal, or transfer payments (Rovenpor, 2003). With time however, it is expected that there will be more cross-channel integration in this sector, which will enable businesses to develop closer consumer relationships that will enable retail bankers to enjoy better quality banking experience.
According to Broeders and Khanna (2015), banks have about five years for them to adopt technology or become obsolete.  They further note that banks that successfully use digital technologies in their businesses, such as through automation of processes, improving regulatory compliance, transforming customer’s experience, creating new products, and disrupting various value chain processes, will become more successful (Broeders & Khanna, 2015). Currently, most financial institutions have embraced digital technology by upgrading their website and mobile technologies. They have also created innovating testing centers.
Broeders and Khanna (2015) opine that customers create value in four different ways using digital technologies: increasing banks connectivity, improving their decision making, automating, and innovation. Banks increase their connectivity with their stakeholders by expanding online interactivity, enhancing mobile payment functionality, and using social media to market the bank (Broeders & Khanna, 2015).
Besides increasing connectivity, the digital business processes enhance the organization of businesses by using online big data and analytics to refine their decision making. In particular, the big data analytics provides banks with essential information such as that on sales, pricing, product design, and their target market. Automating is the other benefit of online banking. Most banks have created value for their customers by automating most of the repetitive low-risk and low-value processes (Broeders & Khanna, 2015). Usually, the use of process apps increased the productivity of financial institutions, while the use of imaging and straight-through processes leads to more efficient and paperless workflows (Broeders & Khanna, 2015).
Finally, digitalization of the financial processes has also resulted in the increase in innovation in the development of banking products and improving business models (Broeders & Khanna, 2015). For example, the increased adoption of technology in financial institutions has led to increased cases of social marketing, crowdsourced support, and digitally-centered models (Broeders, & Khanna, 2015).
Digital Technology Innovation
With the increased adoption of technology in all sectors of the economy, there has been an increase in the threat to the performance of traditional banks by new challenger banks such as Moven and Simple. Challenger banks are digitally focused banks and include Virgin Money, Metro Bank, Atom Bank, and Tesco Bank. Since challenger banks are usually more focused on online banking, they are less costly to start and operate than conventional banks. There has currently been an increase in the number of challenger banks, which has made most traditional banks to incorporate technology into their traditional ways of doing business.
Another significant challenge for the traditional banks is telecommunication companies. According to the GSMA, there were about 271 million users of mobile money globally. The primary challenge has been in enabling interoperability. The launch of mobile money in more developed countries such as the United States and the United Kingdom has not been successful because of existing financial infrastructure in these countries. An innovative method of overcoming this challenge, which has been successful in some countries, is the partnership between telecommunication companies and banks. Some of these partnerships include that of Alior Banks and T-Mobile and Orange and mBank in Poland. In Germany, Telefonica intends to partner with Fidor Bank.
The emergence of these levels of competition has negatively affected traditional business models including sales process, security management, customer service, credit scoring, and onboarding. According to Efma & Edgeverve Systems Limited (2016), 74% of the banks in 2016 had an innovative strategy, and most financial institutions increased their annual spending on innovation. The main innovation that has occurred in most banks is the shift of transactions from call centers and branches to digital channels. As of 2016, 39% of transactions in banks are now in online platforms or banks, and 31% are through branches (Efma & EdgeVerve Systems Limited, 2016). For example, in Danske Bank, which uses a mobile payment app (MobilePay), it had seven times more transactions on its mobile and online platforms than those that happened at its branch level transactions.
Another strategy in consumer banking is the acquisition or development of digital-only banks. These banks include buddybank, which is owned by UniCredit and imaginBank owned by Caixabank. In most cases, the digital-only banks will offer different services from those of the parent bank. They will also have different channel applications, processes, and back office technology. The main advantage of having an online bank is that it enables a parent company to overcome challenges of legacy systems and lack of agility (Efma & EdgeVerve Systems Limited, 2016). Also, they facilitate channel integration, which enables the bank to enhance its activities.
Recently, there has been an emergence of various disruptive technologies, which include advanced analytics, open API’s and artificial intelligence, blockchain/distributed ledger technologies, mobility wearables, internet of things, public cloud, and open source technologies. These technologies have the potential of resulting in various innovations that can significantly affect the banking sector. According to the Efma & EdgeVerve Systems Limited (2016), the advanced analytics and big data innovations will have the most impact on the consumer banking sector. Currently, advanced analytics and big data is mainly used for credit scoring. In advanced analytics and big data innovation, scientists develop sophisticated models and algorithms, which help them to make correct decisions and discover hidden insights on data.
Artificial intelligence is an advanced branch of computer science that enables the simulation of intelligent behaviors in computers. It includes subfields such as robotics, machine learning, and natural language processing. Although most banks expect it to have a high impact in the banking industry in the future, only a few of them expect it to have any impact in recent years. Currently, artificial intelligence is used by the DBS Bank in India and RBS in the United Kingdom in customer service area (Efma & EdgeVerve Systems Limited, 2016). In this service, it combines machine learning and natural language processing to provide virtual assistance to customers’ queries.
The open application programming interfaces (Open APIs) have also recently been incorporated in the banking sector. To reduce the cases of monopoly and cartels, banks in Europe will have to open their payment systems to third parties under the Payment System Directive 2 (PSD2) by 2020 (Efma & EdgeVerve Systems Limited, 2016). In the United Kingdom, for example, the Competition and Markets Authority’s (CMA) requires all banks to implement an open banking policy by 2018. This system will enable customers to share their banking data with other banks and third parties securely. Importantly, this method will enable customers to manage their accounts with multiple providers through the single digital application, which will result in a fair competition when they are negotiating for credit (Efma & EdgeVerve Systems Limited, 2016). Already, the solarisBank and Sutor Bank, two German banks have implemented the Open APIs technologies. BBVA and Capital One banks are also developing their Open APIs.
There has also been an increase in mobility and wearables in consumer banking. Efma & EdgeVerve Systems Limited (2016) notes that 47% of smartphone users in Europe use mobile banking and 53% of those in the United States. The growth in this sector may be further accelerated by the emergence of many start-ups that are launching new projects, and also from the partnerships between telecommunication companies and banks. The major wearables that have emerged are Apple Watch, the Barclaycard’s bpay, and those offered by Fitpay (Efma & EdgeVerve Systems Limited, 2016).
Overall, the consumer banking sector is experiencing significant changes in its operations mainly due to the emergence of new disruptive technologies. These technologies have reduced the costs of operations, enabled regional banks to overcome geographical barriers, and helped customers to access valuable financial information quickly. Accordingly, the developments in the information communication technology have made the banking sector more competitive. In this regard, banks all over must adopt these technologies for them to remain relevant and to increase their sizes.
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