What does it mean to be digital in modern banking? It's a question most financial institutions have grappled with. The influx of mobile-only financial service companies has won over an increasingly digital customer base. So, how do established banks compete?
It helps to start by knowing the key terms thrown around by players in the industry. Those terms help define the digital banking landscape. You may have a website or an app — but do you truly offer digital or open banking?
Fintech is a term that's been around for a decade or more. Short for "financial technology," it refers to companies using technology to modernize financial systems. Fintechs include global payment providers and online-only banks that offer credit and loan products as well as deposit accounts.
Investopedia named Xero one of the world's top fintechs this past fall. It's a software as a service (SaaS) provider that offers a full suite of accounting and reporting features. The publication also highlighted Lufax, a peer-to-peer lending service. Peer-to-peer lending is a process through which individuals borrow from each other, without any financial institution — like a bank or credit union — acting as a middleman.
The effect of fintechs on banking consumers has been quite dramatic. More and more, consumers are exposed to new ways of doing things, and they’re taking note. Why go to a bank for a loan, when you can run a crowdlending campaign? Why take the time to withdraw cash if you can make an online payment to a business or friend? People are realizing banking can be easy and the vast majority of tasks can be completed through a smartphone.
If you are a brick-and-mortar bank, it's likely you are not a fintech. But there are ways you can compete with those companies to keep your existing customer base and attract a new generation of clients.
One way traditional banks can stay competitive with fintechs is to explore the idea of open banking. This is another one of those amorphous terms that means different things to different people. But at its root, it means making your APIs accessible to third parties, so those third parties can offer a financial product to your customer.
An example of this is Mint. This is a budgeting and financial information tool that consolidates a user's entire financial life in one place — deposit accounts, investments, credit cards, loans — and provides actionable intelligence on how to improve the picture. Users get an up-to-date snapshot of where they stand financially, without having to manually enter transaction information from multiple sources.
To work, Mint needs more than the customer's permission to access account data. It needs bank authorization to see and gather that information. That's open banking — letting third parties use your data in a way that helps your customers. Your customers benefit from the service, and it actually makes them more likely to stay loyal to your bank, especially if they rely on the third party app to such an extent that they’re at risk of switching to a bank that offers such access.
Banking as a Service (BaaS)
As revolutionary as an app like Mint may appear, it still doesn't quite reach the level of banking as a service (BaaS). This next step, which falls under the open banking umbrella, does more than simply allow for information sharing. BaaS means open APIs such that a third party provider can perform services and functions using your platform.
An example of this is Digit, an online platform that uses an algorithm to analyze spending habits. The service automatically calculates how much a user can save in a day, and transfers that amount out of their bank account into a Digit account. That Digit account, according to the company's website, is held at FDIC-insured institutions. The app functions as an automated savings tool for people who simply don't have time to calculate savings, but want to put money away for the future.
Mint and Digit, which both rely on open banking, serve a direct need for the modern banking consumer. Those customers are bombarded with financial information, perhaps have multiple financial products, and don't have time to organize their accounts in a way that optimizes financial health. If financial health is the goal for your clients, partnering with third party providers under the open banking umbrella may be one way to help them meet their needs.
Then there's digital banking and onboarding. This is what most people see when they think of how banking has changed over the past several years. This is much as it sounds: everything you once associated with paper documents, or an in-person visit to a branch, now happens online. Customers use a smartphone to open accounts, apply for credit products, and become new clients of a financial institution.
After this onboarding is complete, they continue to use the online platform to maintain their day-to-day financial life. That includes making payments, moving money between accounts, and communicating with customer service agents when need be. More and more consumer activity takes place online, and banking is no different. In particular, the younger generation of banking customers want that ease of digital access to handle their finances.
Lightico allows banks to completely digitize and streamline the bank onboarding process. For example, new clients can upload photo ID, which is verified through AI and face recognition. They can fill out and sign forms entirely online using eSignature technology. New clients complete the signup process without frustration or delay, and before you lose their business to an agile competitor.
Adopting Digital Innovation
For today's banks, becoming digital is a necessity. But there are a number of ways you can innovate for your customers. In the end, it's about maximizing utility, convenience, and the customer experience. The most successful banks listen to what their customers want, and move forward with new ways to provide those services.
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