What is Digital Banking?
Simply put, digital banking means the complete digitization of a bank and all its activities, programs, and functions. It should be noted that the concept of digital banking expands beyond the front-end that customers see and perceive: services and products. Digital banking is largely about automating the processes that happen “under the hood” (back-end) and connecting these two sides with middleware. Digital banking means a full transition to a digital environment, which applies to both customers and employees (Wewege, 2017, p. 56). This new kind of banking takes advantage of innovations in the fields of big data and analytics. A bank that launched a working online or mobile banking platform cannot qualify for the digital “status,” unless it has automated each step of the customer-bank relationship. A digital bank optimizes and automates all the functions that it has: starting from product development and ending with end-user service.
There is a clear distinction between digital and online banking and traditional banking. The latter typically requires customers to visit a physical location such as an office or an outlet. Traditional banking relies on routine manual actions and face-to-face interactions.
The difference between digital banking and online banking may not be as apparent as in the first case. Online banking implies that many activities are available online, or in other words, the front-end is digitized (Wewege, 2017, p. 78). However, if one takes a look behind the scenes, one will discover that many of the back-end processes are still done manually and are not much different from those at traditional banks. It is likely that digital banking will be taking up larger shares of the industry as customers’ expectations evolve, big companies invest resources in digitization, and new entrants show a disruptive potential.
Major Characteristics of Digital Banks
- Automation and digitization. As mentioned in the previous section, one single feature that distinguishes digital banks from other types of banks is their reliance on innovative technologies. Digital banks automate both front-end, i.e. functions and interfaces that customers get to see, and back-end processes.
- The use of big data and artificial intelligence (AI). Big data and artificial intelligence (AI) are two forces to be reckoned with in the modern banking industry. With the vast amounts of data available from mobile devices, digital banks can refine their fraud detection mechanisms and tailor the user experience to meet the most diverse needs.
- The lack of actual physical locations. Digital banking means that customers can make all the necessary operations from their smart device: smartphone or laptop. Digital banks prioritize efficiency and cut the middle man: customers no longer need to wait in lines and make appointments to achieve their goals.
- Putting the customers’ needs first. While all banks are trying hard to meet customers’ evolving needs, digital banks take one step further. Drawing on the previous point, big data helps digital banks to understand their customers and improve their experience. For instance, some digital banks provide money management services, using which a person can get a deeper insight into their spending habits. Having detailed financial information at hand, the said person can work more efficiently at achieving their goals and cutting unnecessary expenses. A digital banking environment allows for instant support and quick consultations that do not require a visit to a physical location (Wewege, 2017, p. 129). Some banks take the customization of user experience one step further and transform it down to little details. For example, depending on detected behavioral patterns, an algorithm can change the user interface and tailor it for users’ convenience. Further adjustments may include the change of tone in text information and the prioritization of displayed functions on-screen.
Major Marketing Issues Encountered by Digital Banks
To say that digital banking is on the rise would be an understatement. According to Allied Market Research (2017), the digital market banking size is expected to grow at a 27% annual rate between 2016 and 2023. Its market size is projected to increase from $7,305 million in 2016 to $29,976 million in 2023. Despite these impressive figures, there are still problems that permeate the industry and complicate the marketing of digital financial products.
Market Penetration
Penetrating the banking market is impossible without having a base of potential customers that have enough trust in your product. A report by the UK Bank CYBG has shown that customers are twice as likely to oppose going digital with their banking habits and commitments compared to supermarkets, restaurants, and clothing stores (Epstein, 2019). CYBG writes that customer conservatism with regard to banking can only be matched with the amount of caution that people exercise when choosing a health provider. The survey by CYBG has shown that four out of five respondents still want to speak to an assistant or visit a physical location, no matter how advanced digital services are (Epstein, 2019).
Contrary to common belief, it is not only older people who see human interaction as integral to the banking experience. 78% of participants between 16 and 34 said that they value the human touch (Afghan, 2019). All in all, the research shows that while British customers are joining the digital banking revolution, banks should not rule out one of the cornerstones of trust: human contact.
Customer Retention
Customer retention at digital banks is especially difficult in the time when people are bombarded with news about privacy breaches and information leakages. The fear of tracking and surveillance that are becoming easier because of the availability of data from mobile devices is a common fear among bank customers. The same report published by CYBG revealed that more than half of respondents (54%) are concerned about the safety and confidentiality of their data (Epstein, 2019). 49% admitted that it is the fear of fraudulent data use that makes them warier in using digital banking products (Epstein, 2019).
Lastly, 24% of customers were against the use of biometrics and referred to them as a deterrent (Epstein, 2019). In summation, digital banking marketing is stunted by people’s fears and prejudice, which sometimes are rational and sometimes are not.
Market Segmentation
Lastly, digital banks might have difficulties singling out appropriate market segments. Ideally, digital banking products should find their customer as someone who shows both sufficient computer and financial literacy, which is not the case for many people. For example, in the United States, a developed country, only 81% of adults use computers and smart devices in their daily life. Even fewer – 73% – have the level of digital literacy that allows them to use computers professionally (Mamedova and Pawlowski, 2018). Mamedova and Pawlowski (2018) report that it is mostly older people and minorities (Black and Hispanic) who lack digital skills.
It would not be a reach to hypothesize that these groups may be much less responsive to digital banking products being marketed at them. Interestingly enough, younger people (18-35 years old) tend to be less financially literate than their older counterparts: 56% and 63%, respectively (Klapper et al., 2015). Therefore, even though young customers are likely to be more open to adopting technologies, they might as well misunderstand the financial advantages of digital banking.
Possible Causes of such Marketing Issues Encountered by Digital Banks
There are several reasons why many customers still hold conservative views regarding their banking choices and are reluctant to go digital. These reasons can be roughly categorized into two groups: demographic and psychological. Addressing the latter, banking and money are stressful topics on their own. According to the data provided by the Digital Growth Institute, 36% of the surveyed Millennial customers use unflattering terms when describing their banking experience (Streeter, 2019).
Besides, customers have a disdain for advertising and marketing tricks. A (2016) reports that 91% of people believe that today’s ads are more aggressive than they used to be two-three years ago. 87% say that these days, they see more ads than two-three years ago, and 79% do not like the fact that they might be tracked by targeted advertisements (An, 2016). These facts demonstrate that customers are tired of advertising, and they might block out all information that promotes a particular product, especially if it concerns a topic that is stressful on its own. Taking into account these trends, it is possible to understand why market penetration, customer attraction, and retention pose a problem to digital banks.
As for market segmentation, demographic factors may play a deciding role in which cohorts have the most purchasing power. Today, advanced medical practices and scientific discoveries have made it possible to increase the average life expectancy, which is why developed countries are characterized by aging populations. The majority of consumers are mature and, hence, somewhat conservative in their tastes, making it difficult to draw their attention to something novel and strange. On the other hand, millennials who might be more open lack financial education, fear market uncertainty, and avoid making financial commitments.
Possible Solutions, Techniques, and Strategies: The Experience of Successful Digital Banks
Drawing on the points made in the previous subsection, it becomes apparent that the success of a digital bank may be contingent on two characteristics. Firstly, any digital banking company needs to overcome the initial distrust of customers and prove its reliability. Secondly, it needs to provide enough help, guidance, and even financial education to those struggling with the new products. For a digital bank, the most straightforward way to gain customers’ trust is to show its compliance with the relevant legislation (White, 2016). Mistakes caused by compliance failure can cost a company its entire reputation (White, 2016). Hence, a good approach would be two-fold: keeping up to date with local laws and understanding the legal systems of foreign operating countries.
Secondly, as it has already been mentioned, people’s distrust of digital operations is not universal: for instance, it applies to a much lesser degree to shopping and electronic commerce. Therefore, another way to gain trust for a digital bank could be to collaborate with a trustworthy company in a different sector. Barquin and HV (2016) claim that two industries with a great number of digital customers that can aid digital banks are e-commerce marketplaces and telecommunications.
E-commerce deserves a special note: as partners, these platforms provide a valuable opportunity to introduce lending services to existing customers. E-commerce platforms may find it mutually beneficial because business loans would help many small businesses stay afloat and continue operating on the said sites. As for consumers, they might feel more at ease buying expensive items such as TVs and laptops when they know that loans are available to them.
To illustrate their point, Barquin and HV (2016) provide an example of Alibaba’s Ant Financial in China. Its value has amounted to $20 billion in only two years and has become one of the biggest lenders to small businesses in China. Today, Ant Financial serves thousands of small businesses in the country by offering them simple ways to receive loans. Now Ant Financial is owned by Alibaba; however, it grew out of a collaboration with CCB (China Construction Bank) and ICBC (Industrial and Commercial Bank of China).
Another way of gaining customers’ trust, especially when it comes to younger demographics, is through social media. Today, word-of-mouth becomes electronic: customers take their anger, confusion, and frustration online and rarely hold back in describing their negative experience. The first digital UK bank, Atom Bank handles such cases promptly and effectively. For example, in a recent tweet, a customer shared the following: “The award for the most in unfacilitating & unhelpful bank during #CoronaVirus #COVID19 goes to @atom_bank (Norton 2020).”
In half an hour, Atom Bank replied saying that it understands the customer’s dissatisfaction and offered their help. Were Atom Bank to ignore such comments, it would show others that they silently agree with the situation and accept their fault. Prompt management of customer dissatisfaction builds trust in a financial institution and demonstrates that it prioritizes customer care.
Financial and computer literacy are still major barriers to the adoption of digital technologies in banking. In one survey, 79% of respondents from North America expressed their interest in receiving financial advice on wealth management and investment allocation (“From Demanding to Discerning”, 2019). 74% of participants said that they would appreciate it if their bank would tell them explicitly what kind of account they should open (“From Demanding to Discerning”, 2019). Lastly, 69% were interested in getting recommendations regarding their retirement savings (“From Demanding to Discerning”, 2019). This evidence demonstrates that gaining trust might require comprehensive consultations and advice.
Barquin and HV (2016) from McKinsey recount the experience of AirBank, the first digital Czech bank that was created without the support of an existing bank. AirBank marketed itself as the “first bank you will like,” which showed understanding of how anxious handling bank processes is for many people. Barquin and HV (2016) explain that AirBank attracted customers because it promised not to use jargon in its communications.
Besides, AirBank stated that all the fees would be clearly outlined in one simple document, which will ensure clarity, disambiguation, and transparency. In summation, when it comes to banking, customers’ trust is often tied to the degree to which they understand the new product and the overall reputation of a company. As the experience of thriving companies has shown, legal compliance, collaboration with trustworthy partners, and customer education are the three pillars of digital banking success.
Market Penetration Strategies and Techniques for Digital Banks
Barquin and HV (2016) from McKinsey explored 20 thriving digital banking companies to overview their techniques and market penetration strategies. According to the researchers, the value proposition is an essential concept in building a solid marketing strategy that eludes many businesses. Therefore, digital banking has the potential to penetrate a new market if it takes customization to the next level and capitalizes on diversification.
Barquin and HV (2016) provide an example of mBank, the first Polish digital bank. MBank attracted its customers in the first place by giving them the option of receiving an unsecured personal loan on its platform. The strategy worked well for Poland and the Czech republic because the residents of these countries historically do not like credit cards. MBank understood this cultural and social trait, and instead of pushing credit cards as its core product, it offered an option that appeared more trustworthy to the Eastern European customer base.
Aside from Eastern Europe, Barquin and HV (2016) give quick facts about several more markets that show how different their environments are. For instance, in Singapore, 72% of the retail banking revenue pool comes from loans, and only 16% and 12% from investment insurance and CASA (current account and savings account). The Indonesian market is characterized by the meager interest for investment insurance (2%) and an almost equal preference for CASA and loans (46% and 52% respectively). Any digital bank that would like to market loans as one of the core products is likely to fail in China: only 14% of the retail banking revenue pool accounts for this source. In summation, digital banks should not copy or use existing strategies and apply them to several markets at once. What helps is extensive market research and pinpointing the key interests and preferences of the customer base.
Digital Banking Success Factors: Human Resource Management, Control, and Analytics
The quality of digital banking products is contingent on the quality of employees and managers that work on their creation. The problem is that building a digital banking business requires an iterative approach to marketing, approach, and development, which traditional banking structures might not be apt for. There are three human resource management and organizational structure aspects that require focus from digital banking businesses: team building, communication, and the use of data (see Table 1).
Table 1. Success factors for digital banks.
Digital Banking Best Practices
Market Penetration
There are three main market penetration strategies for financial services: offensive, defensive, and rationalization. Out of these three, digital banks utilize the first and the third. Within this classification, offensive market penetration means capturing the unmet needs of customers and tackling them with innovative, disruptive methods (Nejad, 2016). Another strategy employed by digital banks is rationalization: reducing expenses wherever possible, for instance, by deciding not to create physical locations. An example of a successful digital bank that penetrated the UK market by being both rational and offensive is Monzo.
The company introduced features that made their customers’ banking experience not only less stressful but also much more pleasant. On its official website, Monzo (2019) writes that it was the first bank in the UK that launched a feature that allowed one to see one’s balance right after a payment (Monzo, 2019). Before that, customers had to stay unaware for one or two days before the next update. Another feature that gave users more insight and autonomy is notifications about changes in direct debits such as phone or water bills (Monzo, 2019). The success of the market penetration is reflected in Monzo statistics: in 2020, the leading UK digital bank with zero offices reached five million customers from one million in 2019.
Market Segmentation
The best decision that any for-profit organization can make to yield long-term benefits is to put the customer’s interests at the front and center of its strategy. This requires knowing the target market segments up close and personal. What is critical is to distinguish between what customers really want from a product as opposed to what they might want. For example, one company mentioned by Barquin and HV (2016) in their overview chose urban millennials as their core market segment. This company, whose name is not revealed in the paper, put forward a hypothesis that its customers would appreciate it if they could sign in to their bank accounts through social media. Millennials are the segment characterized by frequent social media use; this assumption was underlying the behavioral market segmentation.
Contrary to this popular belief, deep interviews, structured consumer research, and feedback loops have proven the faultiness of this hypothesis. Educated urban youth was wary of the security of their data and despised the idea of creating a connection between their social media and financial information. The company had to find a different solution and ended up using embedded visual cues for signup.
Customer Attraction and Retention
It goes without saying that new banking solutions require new approaches to customer acquisition and retention as well. Barquin and HV (2016) explain that the new era of marketing means reaching out to customers in a targeted way – something that many banks might not be use. At that, they should maximize value by differentiating based on geography (for example, focusing on WeChat in China) and customer behavior and psychology. One particularly compelling example is the marketing campaign that China’s successful messaging app Tencent’s WeChat launched during the Chinese New Year holiday in 2014 (Barquin and HV, 2016). The goal of the campaign was to promote the new WeChat Payment service that allows peer-to-peer transfers and electronic bill payment.
WeChat knew that otherwise, Chinese customers could be suspicious of the new feature and would not want to tie their bank cards to their accounts. The company overcame this distrust by offering customers to send out monetary gifts to friends. Recipients had to create a WeChat account to see how much money they had received and redeem the sum. In just two days, WeChat motivated 200 million of its old and new users to link their bank information to their accounts (Barquin and HV, 2016). For comparison, Alibaba’s Alipay reached these metrics in no less than eight years. Upon further analysis, it becomes apparent that WeChat did geographic and behavioral segmentation.
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