While digital ecosystems challenge banks in terms of data utility and client satisfaction, it is a fact that it can boost their value proposition, and enable the growth its clients need in this new age.
The increasing impact of technology has seen a simple reality of service-based businesses highlighted. The more convenient a consumer’s life is made, the more they appreciate the service provider that enabled the convenience. Particularly in the context of SME business owners, McKinsey’s global banking practice report corroborates that businesses that make the lives of SMEs easier, reduce the impact of non-core activities, and optimize their time allocation. Therefore, these businesses are those that come out on top, both in terms of increased customer satisfaction as well as revenue.
Deutsche Bank’s Thomas Dapp has a more pragmatic take on the concept in his paper titled Traditional banks as digital ecosystem. He affirms that via the optimum interlinking and utilization of compatible and interoperable standards/technologies we—the platform-spoiled consumers—are courted with attractive products and services conveniently, globally and from a single source.
The Benefits of Digital Ecosystems
PwC’s Digital Services state the opportunities of a digital ecosystem plainly improve value proposition, access new customers and segments, benefit from Fintech (innovation) and lead the space, gain data insights for product development and risk reduction.
A prominent role of a digital ecosystem is to provide banks with the opportunity to improve their value proposition, in turn generating loyalty with existing clients and attracting new clients.
The digital ecosystem helps banks achieve this mainly by:
- Providing non-traditional offerings such as marketplaces and easy redemptions.
- Introducing core tools that convenience the lives of clients such as seamless payments systems and loan approvals.
- Reducing administrative burdens via digital passporting and e-KYC
This last element has a larger scope and one can argue whether banks must assume complete responsibility or only contribute to a larger project lead by public authorities.
Such is the case of India, where the country has just introduced DEPA (Data Empowerment and Protection Architecture). In its simplest interpretation, the architecture eases the administrative load on businesses and individuals by making the necessary information available to respective data consumers at the appropriate moment in time.
However, banks’ digital systems contribute essentially to such ecosystems through the unified provision of credit, solvency, and monetary information of each client.
Banks’ Data Challenges
Several traditional banks are setting up standalone digital banks, falling into the category of ‘challenger banks’, to service their commercial clients. Challenger banks, while setting up more like Fintech’s still need to partner to create an ecosystem.
While we are creeping into more technical territory here, a simple reflection of the success of these banks in a digital age is that half of their partnerships come in the format of integrations and via providing API access to their partners. According to PwC, this is more than double compared to their incumbents, who focus more on developing, white-labeling, and referring, with integrations making up only about 20% of their partnership formats.
There is a strong argument for these banks to be set up and in this particular way. Due to the digital nature of the ecosystems they are building, their cost-to-income ratios stand at between 30-40% compared to the cost heavy structures of traditional banks.
While it remains true that today, the acquisition and handling of data must be reconsidered and redesigned to ensure maximum utility of that data, the increased generation of data from the ecosystem structure compounds its monetary impact on those banks that opt to go down that route.
Data enables better:
- Risk profiling
- Client segmentation
- Tailored product offerings
- Improved perception of service
And it manages this all at a lower cost.
The benefits of implementing technological solutions are clear when executed correctly—lower cost structures, boosted revenues, and most importantly increased data.
The obvious blind spot here is that all this data, which is relied upon to make business decisions about products and services offered to those clients, is retrospective data. What if there was a way for banks to include in its ‘algorithm’ of decision making, the pre-empted strategic objectives of their clients?
Enabling Client’s Growth
In line with the overarching goal of ecosystems, is the ability to not only support client growth but also enable it.
The quintessential business debate between make vs. buy is core to this transformation but needs to be reframed as join vs. build. Growth enablement may occur only when banks see the light of participating in a network of companies/institutions that interact to create a combined client proposition, thereby generating value for each partner and its clients. Scale and reach in an increasingly global market is not an option but a requirement. In this light, ‘join’ seems to be the only viable winner—allowing banks to be agile, iterate, and remain flexible with the ecosystem that suits their objectives and commercial clients.
An anecdote from tech-consultant and IT Platform Vice President at DBS Bank Shailendra Malik’s commentary on why banks should care to provide an ecosystem supports the sentiment of growth enablement.
Banks are originally enablers, enabling economic growth, financial prosperity, and community development. As a result, they built goodwill and trust, with the local bank branch often acting as the classic Indian matriarch/patriarch playing matchmaker, only for businesses. That setup was and is still in many parts of the world, particularly beneficial towards micro and small businesses.
As digital banking came to the fore, those physical run-ins with potential clients and business partners became ever so rare. Building an ecosystem for its clients to interact with, engage with, and connect will provide banks with the chance to regain its position as matchmakers, enablers, and all-round good guys, looking out for their clients’ growth and providing the new-age, digital environment to do so.
BD Director – Asia, Middle East, Australia for Opportunity Network.