What is digital banking?
Although the definition of digital banking varies the main difference between digital banking and traditional banking systems lies in the distribution channels. Before the internet-era, bank customers would visit the local bank branch to make payments, take out cash or seek advice on their personal finances. With the internet now enabling remote access to such services through smartphone interfaces, traditional means of banking have been perceived to be highly frictional and inefficient. Customers that now have universal access to internet are seeking a convenient way of making payments and accessing their finances. Given its early phase of growth and low-barriers to entry into this new industry, the traditional banking sector is under pressure to conform to the digital revolution.
What is driving China's digital banking?
A gradually liberalizing financial industry in China has made competition fiercer and has increased pressure on the returns of Chinese retail banks. Primarily caused by declining net interest margins, higher risks associated with a slowing global economy, and the emergence of a more sophisticated user base, traditional financial institutions have been pushed into the digital space in order to both protect their existing market share and try to extend it.
In addition, smaller and community banks have a greater need to offer a superior service, as branch proximity is proving no longer to be a differentiation factor as customers can now remotely access banking services. With urbanization taking away much of the small banks’ business, they have been lending at rock-bottom rates and sometimes to much riskier parties to increase their market share, and so are in greater need to adopt new technologies to provide a more sustainable, secure, and profitable competitive advantage.
How banks must adapt?
With around 40% of Chinese mass affluent customers preferring online or mobile banking, the increasing number of digital and mobile Internet users means that banks must adopt a customer-centric business strategy, in which they closely monitor the rapidly changing needs of their clients. A flexible multi-channel distribution strategy that takes advantage of offline and online synergies will be a key determinant for banks moving successfully into the digital space. New digital consumers have shown to value convenience and experience over low prices and so banks must learn how to streamline their distribution channels to make financial transations easy and fun to use.
A lot of the technology that could make a bank a “digital bank" already exists, such as cloud technology, big data analytic systems, and other enterprise technologies. One way that these technologies can be implemented is to support credit-risk management systems. By receiving unconventional insights into customer’s purchasing processes (external data), banks are able to fully leverage quantitative and qualitative information to improve credit-risk models. Newly acquired risk assessment techniques will give current undeserved but tech-savvy segments of the economy, such as SME’s and mass markets, access to credit. In addition, cloud computing systems and valuable analytics can give banks deeper insights into their customers to tailor services and establish a more profound relationship with high-potential clients. Data will allow banks to analyze the consumer and competitive landscape on a geographical basis and build micro-markets to identify and address high-value customers with appropriate resources.
It is now up to the bank to harness the potential of integrating these technologies effectively to boost bottom line and customer growth. The digital revolution that is sweeping through the Chinese finance sector will ultimately be a vital force in reforming China’s inefficient financial industry and will accelerate financial inclusion.