With many financial services moving online, it is not surprising that the most widely used financial organizations, namely banks, joined the trend too. Digital banks are banks that offer all traditional services, but they do it online. The term should not be confused with online banks or internet banks. These are an additional account management tools that traditional banks offer for convenience. Digital banks, on the other hand, are branchless and operate completely online. They offer the whole range of services including deposits, withdrawals, money transfers, checking and savings accounts, loans and so on. Digital banks conduct both the front-end and back-end processes online.
Digital Retail Banking
Banking As A Platform
Although online banking has been around since the popularization of the internet, digital banking is a relatively new business model. With increasing access to the internet around the world and growing usage of smartphones, more people prefer web as the channel for managing finances. There is a huge demand for online services so some banks are choosing to move all of their products online. According to a 2015 study, 47% of bankers see digital banking as a solution for improving customer relationship, about 44% think that it will give them a competitive advantage and 32% find it to be a way to acquire new customers.
Digital banks completely eradicate the need to visit a bank branch every time a client needs a new card, wants to open a new account and so on. This increases efficiency and customer satisfaction. In addition, it cuts costs for banks. Replacing manual labor with automated services cuts salary expenses. In addition, there is no need for physical branches and buildings. Reduced rent and electricity expenses affect costs significantly. On the client’s side, reduced costs could translate to cheaper services.
Digitized processes are oftentimes much more accurate than those done manually. There is no human error factor, which can create severe problems for large organizations. Furthermore, since all processes are digitized, there is a trail of all activities. This means that identifying and fixing a problem for banks is easier and services offered to customers are more accurate and a lot smoother.
Customer relationship management becomes a lot easier when all information on users is digitized. There are third-party providers who can collect this information and statistically analyze it. As a result, banks will be able to customize services and solutions for more specific groups of customers and improve overall customer satisfaction.
Yet another advantage that comes with digitizing financial services is increased speed. With large resources devoted to automating manual processes, there is a huge increase in effectiveness and agility. Increased speed in itself brings customer satisfaction. Besides speed, digitization of banks increases security. Digital banks have a better technology and usually have extra layers of security compared to traditional banks.
One of the first things to do when choosing a digital bank is sorting out priorities. Not every client is going to use every service offered by the bank. Knowing what services one will use most often will give them the ability to judge each digital bank according to their priorities. Some digital banks might offer safer deposits and more favorable terms on savings accounts while others might be better for taking out loans. So, the first thing to do is to understand what services exactly are going to be required from the bank.
Nowadays, there is almost no competition between banks when it comes to prices or range of services. Prices are mostly normalized across the industry and most banks cover the full range of services. What can differentiate different platforms is the user experience they offer. One way to choose a digital bank is to actually go on the platform, check out the interface and see if it’s something that is appealing and easy to use. Once again, this might not be same for all customers. Different people have different habits and tastes when it comes to using online platforms. So, it is advisable to actually go on the website and check it out, instead of listening to somebody else’s opinions. An easy interface can facilitate navigation among complicated financial products and enhance customers’ experience.
It is also important to understand what kind of support a digital bank has. Since in case of these banks there are no physical branches customers can go to, troubleshooting occurs online. If the support center is not set up right, or if there are not enough employees on call who can answer customers’ questions, digital banks’ services could be put at a disadvantage compared to those offered by traditional banks. Consequently, it is important to inquire about the support center and what the banks do to answer individual questions from customers. Many digital banks will have bots. These are virtual mechanisms that can hold a conversation with customers similarly to a human. There are varying degrees of how well-developed these bots are and how helpful they can be to customers.
Besides traditional services, many banks differ by the tools of personal finance management they offer to their customers. Budgeting, savings management, and many more products can enhance customer satisfaction. When making a choice of which digital bank to choose, it is important to assess the availability and simplicity of such tools.
Of course, it is also important how innovative and adaptable the banks are. With new technologies disrupting the markets every few years, banks have to be able to adapt to changes quickly. Otherwise, customers will have to migrate to different services every few years. This was a problem for traditional banks that had established processes that were hard to change. For exactly this reason, these banks are losing customers to new digital platforms. Digitized system is more flexible and can easily accommodate updates or changes to the processes. Still, among digital banks, there is a difference in how technologically advanced and innovative they are. It is important to look at the team behind the project, to look at the development history and see how quick the bank was to adopt new technology and offer its customers new services in the past. Those that are quick to do so, are likely to retain customers for a longer period of time.
Finally, the most important element for many people when deciding where to store and manage their funds is safety. Some digital banks will have more levels of security than others. This is often determined by how much resources the bank devotes to implementing security systems and how technologically advanced the bank is. Those who prioritize security over other services will likely accentuate that feature when promoting their brand. Yet, it is not enough to look at the advertisements. Customers should look in more detail at what the banks are doing to enhance security and safety of depositors’ funds.
Digital banks have to comply with various regulations set by the authorities. In different jurisdictions, these regulations can have different forms. Yet, there are some common themes all around the world when it comes to regulation digital banks. KYC regulations are more difficult to comply with for digital banks than they are for traditional banks with branches. When opening an account in a traditional bank, customers go to a physical branch where they are registered by a consultant. Face-to-face interaction gives a bank ability to establish the customer’s true identity. With digital banks, regulators might require more diligence from banks as the process is occurring online and customers have more opportunities to lie about their identity.
Another type of regulation is for the cash-in cash-out process. This process describes a transfer of money from a store to customer and vice versa. In these transfers banks usually provide the technology needed for the transfer of funds. Regulating this process happens in two ways. First, banks are required to sign agency contracts with merchants and all the legal responsibility for actions committed by these agents also falls on the bank. This is seen by many as a burdensome regulation that needs to be changed to alleviate the stress on branchless banks.
Branchless banking also requires a different form of licensing in many countries. Organizations that want to offer branchless banking services in many cases have to obtain an e-money issuer license. Unlike a regular banking license, those with e-money issuer license have restrictions on what they can do with the depositors’ funds. These restrictions are also seen as anti-competitive and counter-productive to the development of the emerging digital banking sector.
As digital banking is relatively new, many countries are currently developing or modifying regulations to include this form of banking comprehensively, without being anti-competitive or damaging chances of digital banks to compete against traditional, established banks. With the increasing popularity of such services, it is likely that we will see a positive trend in regulatory development for digital banks in the nearest future. As customer demand shifts from traditional banks to branchless banking, regulators will have to adapt to the changes too.
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