Ikigai of Digital Banking

Digital Neo banking is a phenomenon taking the world by storm and it has redefined consumers’ understanding of finance by providing innovative and convenient solutions. There are ~ 400 neo banks across the world managing more than 1 billion accounts, yet only 5 % of them are profitable. In this article we will learn about the essentials of Digital banking those defines fundamental principles on which digital banks will have to be built and can truly become sustainable to create their own mark in the history.

Start with a purpose – Knowing the WHY

Although the advantages of digital banking are distinct and compelling, comprehending the purpose or the “why” of these banks is essential before setting foot on this exciting yet painstaking journey. Interestingly, Digital banks lead their mission with a defined purpose which varies from country to country. On one hand, developed economies such as Europe, Australia, and Taiwan are solving ‘overbanking’ by introducing digital banks to induce competition. On the other hand, developing countries such as Vietnam, the Philippines, and Indonesia are addressing ‘under-banking’ / financial inclusion with the help of digital banking to accelerate financial inclusion. In summary, choice between overbanking and under-banking will form part of critical decision that drives banks' purpose, thus influencing their product offerings.?

?According to the World Economic Forum, around 60% of Southeast Asians are currently underbanked due to the high percentage of cash wage payments and minimal account ownership. Many #MSMEs , informal workers, and the rural population comprise this region's demographic, so economic expansion depends on financial inclusion, giving rise to the vast potential for incumbent and digital banks to bridge this divide.?

?In contrast, overbanking often leaves the customers confused because they struggle with disconnected and fragmented banking journeys. As customers are a core component of digital offerings decision, determining the target customer segment is crucial for digital banks. Consequently, digital banks launch products based on these segments and the business goals they aim to achieve.?

Define products and customer segments based on purpose – The bait

Digital banks thrive on use of advanced technology and data analytics has enabled digital banks to understand consumers better and provide services tailored to their needs. Historically, banks segmented their customers based on geography, age, gender, occupation, credit rating, assets owned, and other demographic factors. Traditional banks depended on internal data to find customer segments, which lacked accuracy. However, today due to data explosion and advanced data analytics, customer segments are identified with ease and precision. In the age of hyper-personalization, banks are using advanced data analytics and AI tools to derive detailed insights from the wealth of data they possess to find niche and profitable customer segments they plan to target and develop product portfolios accordingly.?

Lucrative customer segment varies from individuals to corporate, retail, and SMEs. Individual segments are further divided into mass population and high net worth individuals. #TNEX bank in Vietnam is an excellent example of a digital-only bank driven by consumer behavior. TNEX recognized the need to provide digital banking solutions to the vast digitally adept Vietnamese population and targeted forty million people. TNEX targets the tech-savvy mass segment, and its products are meant for any user with access to a device.

?On the other hand, some digital banks target high net worth individuals and premium segments by offering wealth management and digital asset investment offerings. Hongkong and Singapore are ideal markets for digital banks targeting this segment. A report by Quinlan Associates validates this and found that affluent customers between ages 25 and 44 are most attracted to retail-focused digital banks.?

Another bolstering segment in SEA is SMEs and the rural population. Incumbent banks and fintech firms are launching digital arms with the sole purpose of targeting these underserved segments. #GoTo , the Indonesian tech giant, formed by the merger of #Gojek and #Tokopedia , is the perfect example. GoTo reaches about 139 million unbanked Indonesians and offers e-wallet capabilities and digital payments to serve this segment. Although the general objective of digital banking is to fuel financial inclusion, considering business goals while planning product offerings is crucial for banks' sustainable growth.?

Profitability as an essential business goal – Propel to next level

Digital banking industry is seeing a tectonic shift to profitability as a strategy. Funding and high valuation support fintech and digital banks to grow at all costs during the development stage. However, past that stage, neo banks, struggle to break even. #SimonKucher , a global consultancy, recently reported that only about 5% of global neo banks are breaking even and many of them too year to reach that stage. Henceforth, neo banks cannot afford to burn money at a rate faster than revenue generation. To grow sustainably, they must focus on driving profitability through optimum product offerings to specific target markets and aim to break even in two years. A singular focus on client acquisition may work in short run yet increases the risk of failure exponentially.?

Offering the right product to a narrow target segment and enabling practical usage will ensure that customers remain active on their digital accounts and maintain per-customer revenue higher than the acquisition costs. SMEs are a profitable segment for digital banks in Southeast Asia, as SMEs are notably underserved in this region. Seamless onboarding, easy access through mobile phones, and quick loan approval attract SMEs to the value proposition digital banks offer.

Loan offerings, remittances, and wealth management are optimum for an early-revenue generation. Korea's #Kakao Bank broke even within two years of launch because it started offering loans in its preliminary stages. As these offerings require licenses, access to quality consumer data, credit scoring, and extensive customer trust, partnerships between digital banks, fintech firms, and traditional banks are potent.?

Digital banks have the upper hand in decision-making due to the structured use of AI as it performs by the rules and enables sustained automation of operations, thus requiring lesser people as opposed to traditional banks where each process, such as the credit process, depends on a chain of processing and approvals by several teams. This helps digital banks to improve crucial profitability metrics such as COCA, CLV, and operational expenditure.?

A leading practice to improve COCA in the digital banking space is through partnerships as partnerships foster the onboarding of millions of customers a day due to network effects and thus form a key part of digital banking strategy.

Partnerships are a core part of strategy – Be social

With increased digital banking licenses in Southeast Asia, a wave of consolidation, acquisitions, and collaboration has set in. While incumbent banks are partnering with tech firms and digital banks for digital transformation and innovation opportunities, digital banks are collaborating with incumbent banks to leverage their existing customer base, reduce the cost of customer acquisition, increase customer lifetime value, and ensure customer stickiness.?

In the Philippines, #SecurityBank and Philippine National Bank partnered with #Microsoft in 2021-2022 for digital transformation of their legacy systems and operations. In Cambodia, traditional banks are forging partnerships with various digital payment platforms to lead digital banking efforts and innovation. #Sathapana Bank, #Hattha Bank, and #Canadia are pioneering digital solutions through collaborations with #TruMoney to drive growth.?

Malaysia recently awarded digital banking licenses to five consortiums comprising well-known banking, lending, and investment establishments such as #RHB Bank, #Boost , and #KAF Investment Bank. Because of the regulatory limits placed on digital bank applicants and scale requirements by the Malaysian government to reach the under-served market, consortiums are the best way for these banks and firms to provide digital solutions and attain licensing.

Just like the concept of ikigai helps us balance essential components raison d'être in personal life, digital neo banks as living entities constantly need to balance the four dimensions of purpose, product, profit, and partnerships to succeed. Collaboration between banks and fintech has spurred advanced data analytics and cloud infrastructure, enabling digital banks to keep up with increased personalization. Once they have a focused target customer segment, these banks tailor their product offerings and align them to their goal of attaining profitability and sustainable growth. Digital banks experience a tightrope walk to become profitable but are constantly innovative value propositions that super charges them to surpass customers' expectations. Building a successful digital bank can be an electrifying experience for those who are part of it, yet it is similar to practicing Ikigai, rewarding in the long run provided that the banks adapt critical four tenets.

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