Digital Banking –Paradigm Shift in measuring Yardstick by Umar Zia khan

How do you measure successful implementation or transformation to digital banking? Current industry practice is through no of transactions/volume or an accountant would argue – by measuring fee based income generated from such services. Digital banking is medium of conducting transactions as there was through rise of branches on the turn of the century.

The ‘convenience factor’ academically known as ‘place’ of marketing was measured by the number of branches(outlets). Later, the trend was upgraded from convenience to service standards of these outlets. Improving Service standards gained momentum for about two decades and service loopholes were eventually plugged by digital banking platforms. Such transformation removed human element from customer experience journey.

In essence, the real profit driver is not fee income but selling convenience package wrapped in, the true measuring yardstick is how much operational cost has been reduced? How much service square footage has been optimized. How much retail space is required to service customers or target prospects? If the measurement is done through the redefined yardstick, banks will price their services more competitively.

The strategic mistake banks are making is to set ‘Digital Banking Division’ as profit center. Digital journey is means to the end and it needs to be encouraging. Making digital banking division a profit center is counter-productive in driving true value from digital transformation. Focus need to shift from revenue making to cost reduction. Digital platforms are just means and medium to optimize distribution expenses in medium to long run.

Banks with visionary boards are progressively understanding the importance of transforming their client base on war footing basis to digital canvas. Several studies with empirical evidence have pointed out that customers with digital mediums have stickier and profitable relationship with the bank. Life time value(LTV) of such clients is healthier and ‘Products per customer’ ratio is superior.

Language of numbers – Top five banks have accumulatively paying 10% for their operating expenses in rental expense (expense head is subject to increase at 10%(Approx) year on year basis regardless of business cycles and other factors considered thereof.

Driving social responsibility- Less number of branches will create lessor carbon footprint. Standard Chartered Bank Pakistan has done marvellous job in network right sizing. Bank has downsized the branches from 100(in 2015) to 61(in 2019) whereas the profitability has jumped up by whopping 50%. The ‘rightsizing’ strategy exhibits how management has successfully extracted value from their efficient middle line (administrative expenses) management while maintaining profitable customer base. Multinational banks strategically identify their niche but local banks are complexly integrated with indigenous culture of the country.

Without iota of doubt, Pakistan is ripe case to drive value even from top line. Less than 25% of the population has any formal or any banking relationship. Conservative estimates say that PKR 6 trillion (33% of the total deposit) is out there in currency circulation. Banking sector is also witnessing unprecedented US$2 Billion per month home remittances flow in the economy. Multiplier effect of such an inflow can create huge loanable liquidity.

In the nutshell, yardstick to measure digital transformation success needs ‘rethinking’. Fee based income and no. of transactions approach to quantifiable reduction in distribution expense. Banks need to introduce such ratios as “staff per relationship”, sq.ft area per customer ratio, “ Branch to Digital Platform ratio”. Such ratios have capacity to draw conclusive evidence of measuring digital transformation. They say “You can only control what you can measure”. There is no standard formula for measuring OTC cost of any transaction.

The key to drive value from banking business lies in middle management of P&L. In addition to providing traditional transaction services of individual account through digital platforms, banks soon need to deploy their loan approving and monitoring systems online with prudently defined algorithms. One of the problems in calculating loan yields in absence of actual true cost of serving such accounts. Banks here still deploy simple accounting parameters to calculate product yields rather than relationship yields (with all products). Business side of banks do not have any insightful dashboards for rerouting Over the Counter(OTC) transactions to digital mediums. 

Are banks ready to deliver true digital experience to its customers? Competition by fintech is unprecedented. Some banks are yielding to fintech as they believe that their capability to innovate is lackluster.