July, 1, 2024
By Nandana Padma Kumara
Digital banking refers to the provision of financial services through digital platforms, such as online and mobile applications, enabling customers to manage their accounts and conduct transactions without needing to visit a physical branch. While the concept is not new, its definition continually evolves with technological advancements, expanding the capabilities and scope of digital banking. Traditionally, discussions around digital banking focused on its strategic operational roles, encompassing models like direct banks, digital-only banks, and neobanks. These entities offer innovative, digital-first solutions that aim to enhance operational efficiency and improve customer accessibility. Additionally, the concept of open banking has emerged, allowing third-party services access to customer data to foster innovation and improve financial services.
Recently, the focus of digital banking has shifted from an operational perspective to a more customer-centric approach, reimagining how digital technologies can enhance the overall banking experience. This evolution has led to the development of various banking models such as advisory banks, which provide personalized financial advice, and contextual banks, which offer services tailored to the customer's specific needs. The concept of marketplace and lifestyle banks integrates financial services with broader aspects of customers' lives, while the idea of invisible and conversational banks aims to embed banking seamlessly into daily activities and use AI for interactive support. At its core, digital banking is about enhancing the experience for both customers and employees, making banking services faster, safer, more convenient, and cost-effective.
Global banking digitization trends include the increasing use of mobile and online banking, the adoption of digital wallets and payment systems, the implementation of artificial intelligence and machine learning for personalized services and fraud detection, as well as the emergence of blockchain technology for secure transactions. Banks are also focusing on enhancing cybersecurity measures, creating seamless omni-channel experiences for customers, and leveraging data analytics for better decision-making. Additionally, there is a growing trend towards partnerships and collaborations with fintech companies to drive innovation in the banking sector.
Global digital banking market is expected to continue growing rapidly in the coming years. In 2020, the global digital banking market was valued at over $7 billion and is projected to reach over $22 billion by 2025, with a compound annual growth rate (CAGR) of around 25%.
The banking sector in Sri Lanka has been historically rooted in traditional, manual processes. However, the increasing penetration of digital technologies and the rising expectations of tech-savvy consumers have prompted a shift towards digital banking solutions. Major banks in the country are investing heavily in upgrading their IT infrastructure to facilitate online banking, mobile banking applications, and automated customer service platforms
As of 2023, Sri Lanka's internet penetration rate stood at 50.8%, with over 11 million internet users. Mobile connectivity is even higher, with a penetration rate of 116%, translating to around 25.2 million mobile connections in a country with a population of approximately 21 million which is a good platform for digital solutions.
In the evolving landscape of digital banking, financial institutions adopt various models depending on their appetite for risk and commitment to innovation. These models range from creating new, innovative entities to gradually incorporating digital technologies into existing operations.
The innovation leader model involves establishing a dedicated section or department within the bank that focuses exclusively on digital products and technologies. This "sandbox" environment allows for high levels of experimentation and innovation without disrupting the bank's core business operations. The sandbox approach facilitates the rapid development and testing of new ideas in a controlled setting, reducing risk while fostering creativity. An example of this approach is DBS Bank in Singapore, which has created a separate digital banking division that operates with significant autonomy to drive digital innovation.
Under the bank-in-bank model, a traditional bank establishes a completely new subsidiary that focuses on digitalization and operates independently. This subsidiary acts as a separate entity, enabling the parent bank to expand its digital footprint and explore new market segments without disrupting its main operations. UnionBank of the Philippines exemplifies this approach with the creation of UnionBank Digital, which serves as a distinct, digitally-focused entity designed to lead the bank's efforts in the digital space. This model allows the parent bank to leverage the subsidiary’s innovations to eventually benefit the broader organization.
The big bang approach involves creating a completely new digital bank from the ground up. This digital greenfield bank is established with a strong emphasis on innovation and digital products, often accepting higher risks to push the boundaries of traditional banking. WeBank in China is a prominent example of this approach, having been launched as a fully digital bank with no physical branches. This model represents a high-risk, high-reward strategy, as it allows for the creation of a cutting-edge banking entity that can rapidly adapt to market changes and new technologies.
In the progressive model, traditional banks gradually transition towards digitalization through a series of incremental changes. This step-by-step approach minimizes disruption to existing operations and spreads the transformation effort over a longer period. It allows banks to carefully manage risk while progressively enhancing their digital capabilities. HSBC and Citi Bank are notable examples of institutions that have adopted this non-disruptive approach, taking gradual steps to integrate digital solutions into their traditional banking frameworks. This method is more conservative and ensures stability during the transition to a more digitalized banking model.
The bandaid approach is commonly adopted by legacy banks that implement digital initiatives selectively and reactively, often based on market trends or lessons learned from pioneering digital banks. This model involves minimal risk as banks introduce digital products and services incrementally, typically after they have been proven successful in other markets. Many banks in Sri Lanka follow this approach, taking cautious steps towards digitalization by selectively adopting digital technologies and services.
Digital transformation in banking necessitates a comprehensive approach that aligns business goals with IT strategies. Once the overarching digital transformation strategy is finalized, banks should focus on key IT transformation initiatives to ensure successful implementation and support ongoing innovation.
Business processes must be optimized or redesigned to align with the digital transformation strategy. This involves introducing new operational methodologies and digital channels to enhance customer reach and support new business avenues. By optimizing business architecture, banks can streamline operations and improve agility in responding to evolving market demands.
Effective handling of both transactional (OLTP) and analytical (OLAP) data is essential for digital banking success. Banks need to ensure that their data architecture can accommodate large volumes of structured and unstructured data, providing sufficient capacity, performance, and low latency to prevent bottlenecks. Investing in data architecture transformation enables banks to leverage data for informed decision-making and enhance the customer experience.
Modernizing application architecture is crucial to support the evolving business strategy and ecosystem. This involves adopting new technologies and development methodologies to enable agility and innovation. Banks must also prioritize operational risk control and enhance visibility into operations as they introduce new applications and integrations. By modernizing application architecture, banks can improve efficiency, scalability, and resilience in their digital operations.
From core system infrastructure to branch-level IT infrastructure, banks need to enhance their technical architecture to support digital transformation. This includes upgrading data center infrastructure, improving branch connectivity, and enhancing the digital experience for customers. Decision-making around cloud transformation should consider application capabilities and adhere to data governance and sovereignty requirements. By enhancing technical architecture, banks can ensure the reliability, security, and scalability of their digital infrastructure.
In conclusion, the transformation of IT architecture is imperative for the successful implementation of digital banking strategies. By optimizing business processes, upgrading data architecture, modernizing application architecture, and enhancing technical infrastructure, banks can effectively align their IT initiatives with overarching business goals. These strategies enable banks to streamline operations, improve agility, and enhance the customer experience in the rapidly evolving digital banking landscape. Embracing digital transformation not only ensures competitiveness but also positions banks to capitalize on emerging opportunities and meet the evolving needs of customers in the digital era.
In addition to enhancing IT infrastructure, fostering partnerships with fintech companies, investing in talent development, and adapting regulatory frameworks, Sri Lanka can further bolster its digital banking transformation by prioritizing customer-centric initiatives. This entails designing digital banking solutions that are tailored to the needs and preferences of Sri Lankan consumers, including language localization, intuitive user interfaces, and personalized services.
Moreover, Sri Lankan banks can leverage the country's unique socio-economic landscape to innovate new banking models that cater to diverse customer segments. This may involve offering specialized services for rural populations, small businesses, and underserved communities, thereby promoting financial inclusion and empowerment across the nation.
Furthermore, collaboration between the public and private sectors is vital for driving digital banking adoption in Sri Lanka. Government initiatives, such as digital literacy programs and digital payment infrastructure development, can complement banking efforts and create an enabling environment for digital transformation to thrive.
Ultimately, by adopting a holistic approach that integrates technological advancements, regulatory frameworks, talent development, customer-centricity, and collaborative partnerships, Sri Lanka can navigate its digital banking transformation journey successfully, unlocking the full potential of digital finance to drive economic growth and prosperity for all its citizens.
Nandana Padma Kumara is the Senior Solutions Manager for Enterprise Business at Huawei Technologies Lanka Company Private Limited
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