Effective business model for banks in the digital landscape.

The banking industry continues to be at the forefront of digital transformation. The State Bank of Vietnam ranked first in cyber security readiness and fourth in terms of digital transformation activities. Digital transformation is essential for banks to improve efficiency and optimise costs. However, digital transformation is not only about applying modern technology, but also about choosing a business model suitable to the fast-changing digital landscape.

In recent years, digital banks have been born with business models significantly different from those of conventional banks. Rather than differentiating themselves on the quality of their relationship managers and a portfolio of complex products, digital banks emphasise user experience and product simplicity.?

Hyper personalisation is increasingly embedded in financial-services experiences, raising the bar for banks to leverage technology and data to please their customers. According to a?2021 McKinsey survey, 71 percent of consumers expect personalisation from businesses and brands, and 76 percent of those consumers get frustrated when they don’t receive it.

Business model proposition in the digital landscape?

Those digital banks and fintech (challengers) which offer products and services with hyper-personalisation have several strategies to monetisze digital banking business models as they evolve, typically in three stages:

Stage one: Attract customers and build the brand. At this stage, banks could monetisze the core product for net interest and interchange revenue, likely through a deposit account with a debit card; Customer portfolio essentially includes primary bank services users and products are checking, savings and debit.

In this stage, tactics include focusing on rapid customer growth through a “no fee” proposition, higher deposit rates, and a frictionless experience; leveraging cost-efficient digital marketing channels to lower acquisition costs; and gradually expanding the portfolio to become the primary bank of newly acquired customers.

Vietnamese banks have applied this model. Most banks have issued free domestic ATM cards, especially since eKYC was officially introduced in early 2021. Digital banks like Cake, Timo, TNEX have initiated zero annual fee policy.

Stage two: diversify revenue streams

Banks could monetisze value-added services and new products, including subscription-based services, small loans and investments. Customer portfolio is broadened to include small businesses and products are credit, personal loans, investment, and value - added services.?

Challengers do this by using tactics such as expanding into new segments with personalised propositions for consumers and small and midsize businesses, leveraging fees and service commissions, and building a high proportion of non-interest income.

Stage 3: Grow business portfolio and lending volumes. Customer portfolio is expanded to include midsize businesses.?These tactics include driving revenues predominantly through business loans, mortgage loans, or banking - or platform-as-a-service; securing recurring revenues with subscription services; and expanding toward untapped customer segments, such as the “mass affluent” (individuals with an annual income of between $100,000 and $1 million) and freelancers.

According to a 2021 Deloitte report, digital banking business models enable customers to become more engaged and sign up for add on products, hence, revenue per customer can increase exponentially, up to as much as $1,400 per customer - given their ability to cash in on existing brand recognition, trust, and parent bank status.?

Three-pronged technology approach

To deploy the above 3 stages, Mambu – a cloud banking platform -recommends a three-pronged approach for banks. First, build a composable architecture using best-of-breed, cloud-native technologies that allow the bank to swap components in and out as needed. Second, provide a developer-focused platform with a standardised set of flexible APIs and configurable code so developers can easily launch and deploy new products without extensive integrations, training, and people. Third, rely extensively on automation of build, test, and deploy phases using, for example, continuous integration and continuous delivery (CI/CD) and DevOps.

This approach helps CIOs to save costs for large IT human resources. Mambu has seen financial institutions boost developer productivity by about 25 percent in the first six to 18 months. Combined with reduced costs on legacy platforms, it allows for reductions of up to 50 percent in IT run costs for banks. CIOs can instead invest in technology that delivers innovative, revenue-generating products and in retaining and grooming their engineering talents. In addition, they can launch new products or modify existing products up to 95 percent faster than conventional development methods. As a result, they can gain prominent advantage in the market while creating better customer banking experiences.

In conclusion, the digital banking landscape remains competitive, with various challengers able to differentiate themselves with attractive and profitable offerings. To succeed in the digital banking space, incumbents should consider accelerating the digital transformation with suitable value propositions and business models.?