Becoming a Digital Bank is More Than Rebranding

A digital bank is not based on whether there are branches or the availability of a mobile banking app. A sustainable digital banking organization delivers the majority of products and services digitally. It also allows for real-time digital interactions with a culture that allows for rapid response to innovation opportunities.

By Jim Marous, Co-Publisher of The Financial Brand and Publisher of the Digital Banking Report

Today’s technology offers consumers access to more insight and choices than ever thought possible even five years ago. As a result, today’s consumer is more informed and more demanding of organizations they plan to do business with.

In financial services, new digital fintech start-ups, benefiting from lower barriers to entry, are offering solutions that are responding to these needs before many legacy banks can respond. Globally, entrepreneurs and even traditional banks are creating digital-only banks or neobanks that embrace a digital-first strategy.

Simple, Moven, BankMobile, Number26, Atom, ZenBanx and NuBank are just some of the firms testing the waters. These neobanks have digital technology at the core of their value proposition. Opportunities exist for existing organizations that can leverage the new technologies to engage an increasingly demand consumer in close to real-time, but legacy challenges are difficult to overcome.

In the white paper, Designing a Sustainable Digital Bank, IBM makes it clear that a great mobile app does not make a bank a ‘digital bank. Neither does closing branches. According to IBM, “A true digital bank is built on the value proposition that most products and services are delivered digitally. Its customers expect to use digital channels for their day-to-day banking activities. The digital bank’s infrastructure is optimized for real-time digital interactions and its culture embraces the rapid change of digital technologies.”

Digital Banking Models

In the IBM white paper, they divided the digital banking playing field into four banking models.

• Model A: A digital bank brand. Legacy full-service banks are constantly trying to appeal to NextGen millennials who want a brand that is more digital and meets their unique needs. Rather than alienating existing customers, these banks establish a new brand with a unique value proposition and products designed to the younger segment. These digital banks usually leverage current infrastructure. Examples of this model are FRANK by OCBC in Singapore and LKXA of CaixaBank in Spain.
• Model B: A digital bank channel. Unlike Model A digital banks, Model B organizations build a banking organization focused on an improved user experience. These firms usually use an existing banking organization’s back office and banking license, reselling insured products with an enhanced user interface. Examples of this model are Simple and Moven in the US.
• Model C: A digital bank subsidiary: This model combines a differentiated digital user experience with a true end-to-end business model. Larger banks may find that existing back-office systems are too rigid and siloed to power a digital bank, while other organizations may believe the current silos and processes won’t support a digital bank model. Model C digital banks establish a completely separate organization, with more agile and modular back end systems to provide a better consumer experience. Examples of this model include Hello Bank by BNP Paribas.
• Model D: A digital native bank. These banks build their entire value propositions around digital technologies. Digital native banking does not necessarily imply branchless banking. However, customers of these banks are expected to interact with the bank primarily through digital channels. Examples of this model are Fidor Bank of Germany and Tangerine of Canada.

Digital Banking Success Factors

A critical success factor for any of the models described is the ability to achieve economies of scale. Fintech start-ups that lack an already well-known brand and the reach of a legacy banking organization will struggle with success since new customer acquisition in an industry with a foundation of trust is very difficult.

The second most important success factor for a digital banking organization is the ability to design the right experience for target customers. According to the IBM white paper, “There is no shortage of direct banks – some started by entrepreneurs and others backed by major traditional banks – that have failed to take off due to low customer adoption.”

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