How best to launch a digital banking scheme

There are certain questions bankers are bound to have when it comes to creating a digital bank subsidiary: should they build it on their own, or should they buy a tech package? What's more affordable? 

The answer to these questions can often be confusing. So, here's what bankers need to know before creating a digital bank. 

Yes, it seems obvious that fintech may have the edge in the digital banking movement, but banks of all sizes are not conceding the contest. So far, many banks have an interest but it's not easy to get started. The options alone are terrifying: build or buy, low code versus no code, platform banking and even the "buy, build, extend, and assemble" model. 

To further increase confusion, there are big questions often left unanswered in the conversation regarding digital banking. For instance, should the interested banks hire specialised experts to build the tech themselves or should they buy a digital banking package from a fintech company that can do it faster and better for less money?

Remarkably needed excelling

Creating a separate digital banking unit is a vital step for banking growth in the 21st century. The use of fintechs for daily financial activities is increasing day by day and prominent banks must combine the strengths of an incumbent with the agility of a fintech start-up to excel on multiple fronts. 

Illustration: TBS

They also need a unique idea, a top-notch team, and a clear path to profitability. None of this is easy. However, banks that make the grade are likely to boost group performance and, potentially, create a star of the future.

Whether to build or buy schemes

The "build or buy" debate can apply to any bank technology question. However, the term is now applied more often to financial institutions interested in developing a separate digital bank subsidiary. 

To 'build' refers to a bank hiring tech experts to build online banking technology in-house, whereas "to buy" in this sense means purchasing the necessary capabilities from a fintech or other vendor. Investment, time and payback periods are also pertinent factors to be taken into consideration. 

Although many new business heads are often to be sourced from the existing bank's core team. One study found that any company would benefit more from buying over building given that firms can reduce innovation time by up to 19% if technology licensing is used as an input to their research and development (R&D). 

Digital banking vendors, not surprisingly, support this view. Experts suggest that buying a prepackaged digital banking scheme can be easier and much more cost-effective for a legacy financial institution looking to technologically raise its game. 

It allows the company to develop a business case for either setting up one of our digital niche brands or helping a bank to invest in the market they want. Buy options can benefit from adopting new capabilities typically within one to two years to cater immediate needs and market demands. 

Choosing to buy key technology solutions will also help achieve a return on investment (ROI) more quickly because implementation costs can be spread over time and a faster implementation cycle means a quicker realisation of benefits like in-house efficiencies and cost savings, or a boost in sales growth and revenues. 

There are many arguments in favour of buying the tech components needed for a startup digital bank versus building it, but it's not entirely one-sided. To build is a tough road that mostly does not suit the banks that do not have core technical expertise in-house and rely on partners to deliver applications. Each bank must weigh the pros and cons to figure out what works best for their backend systems and teams.

There are some non-financial factors that banks should consider before relying solely on an outside fintech for the technology to create a digital bank subsidiary. As bank technology provider Technisys points out, when buying a supplied tech package, the financial institution itself will rarely own the technology. Again, it will be difficult to differentiate the product from competitors who hire specialists in-house. The benefits of building your digital bank tech are evident, but a bank must be able to afford the technology experts to design and maintain.

Strategic move

Choosing the right approach to technology is one of the most important decisions for a bank today. It will shape the bank's competitiveness for the next five years, one in which new disruptive competitors are leaping into banking. 

Planning to replace online or mobile banking solutions must involve an understanding of the key drivers for the initiative before they choose vendors to evaluate. Banks must align strategic goals and readiness with digital banking technology to build the appropriate foundation for digital business. 

Banks seeking to acquire a new digital banking solution must address a fundamental decision between two often conflicting priorities for the bank: IT cost optimisation and business transformation. 

Banks cannot rely on traditional parameters they used in the past for previous channel application initiatives for identifying and evaluating vendors for online and mobile banking or even branch solutions. 

To succeed, banks must choose a digital banking approach that supports the bank's key priority as well as the ability to be sensitive to customer needs, goals and other requirements. Modern digital banking platforms leverage digital transformation dramatically, allowing banks to differentiate themselves and reduce the time to market. Building a winning digital experience from scratch is possible if it has time and talent.

Expected advantages and experience in the years ahead: in the largely undisturbed retail banking business, which has enjoyed excessive profits and left many customers dissatisfied and unserved, digital banks will be the solution providers. The intended incumbent banks will grow faster in the coming years, driven by underserved market segments such as non-bank customers, SMEs, freelancers, startups, and credit entrants. 

Md Kafi Khan is the Company Secretary at City Bank Ltd.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.