Over a year ago, the introduction of the finance (Miscellaneous provisions) Act 2020 made provision to include “digital banking business license” to the list of banking licenses granted by the Bank of Mauritius. As of today, we have not seen any fully-fledged digital banking service provider, except incumbent banks in the local economy that have facilitated digitally enabled banking services.
How will digital banking impact the current banking model as provided island wide? Are digital banking businesses a threat to them? Let’s look into the world of digitalisation and digital banking. Unlike other phenomena, increasing digitisation has contributed in shaping the 21st century, which has inevitably led to meaningful changes in our everyday lives. Financial institutions have also leveraged on technologies to compete and this technological progress has created opportunities to offer and provide products & services via public network to customers locally and globally without having to establish any type of physical presence in its field of operation.
In the banking sector, Internet & Mobile Banking has benefited both banks and clients. To incentivise the use of internet banking, many banks have provided no fees or discounted fees for some transactions. These discounts are considered a trade-off for banks when less staff’s interventions are being engaged, and more transactions are received and processed round the clock.
The notion of digital banking is basically built on the internet economy to achieve quicker, smarter and cheaper (“QSC”) banking services through the adoption of artificial intelligence and algorithms. If these critical success factors “QSC” are not attained, its economic-benefits have failed.
As existing banks design their new generation Digital Bank, as seen in the local markets recently, the starting point has to be through building technological foundations for customers and employees. However, greenfield operations could do so brilliantly. To put this in perspective, the main distinction of digital banking as compared to existing banks with internet banking is that digital banking operates in a paperless environment. The Banking Act (2004) clearly emphasised that “digital banking business” is a type of banking business which is carried on exclusively through digital means or electronically.
This said, the focus then must move to a strategy whereby the design & architecture lays the digital foundation rather than tries to maintain the old brick foundations. Similarly, the key difference is that digital banking is built to interact with clients as they live their lives rather than to interact with the organisation. Without any prejudice, after having attempted to register with a local digital banking service provider, the first attempt was rejected because it could not recognise my ID Card and later the KYC Video recording failed to launch.
One of the big things about Digital Banking is that it must be a human bank. Just because the bank is digital does not mean that it is automated and robotic. In fact, it means the opposite. A digital bank actually has to be more human than a branch-based bank because it needs to exude intuitive and intimate customer understanding through technology. As a result, the design and architecture of digital banking has been focusing more towards personalising offers to every customer. Likewise, at the operation level new approaches have been adopted to access customer credit scoring.
Another key issue of digital banking is its role and contribution in socio-economic development. Most importantly, it has to fully achieve financial inclusion and in the medium to long-term, reducing banks’ margin whilst the cost of financing and deposit decreases.
Digital banking is seen as a natural progression, however it still raises a number of challenges. First and foremost, at the early stage customers do not switch off their old behaviour when new ones are introduced. Other major challenges include supervising and auditing the banks. As for the latter, some have argued that technologies would manage these challenges. Hence, in the local context, capacity building in the area of digitalisation and fin-tech become a crucial factor.
All in all the digitalisation of banking is now mainstream and those who think digital networks are just layered on top of old infrastructures networks, distribution strategies and organisations are mistaken. Digital bank relevance could grow greatly overnight and become a main competitor to incumbent banks.
Digital banking business licenses can also cater for Islamic financial instruments. It is considered as one of the most appropriate strategies for established overseas Islamic banks to officially extend its businesses through a digital banking business to fill in the current gap.