Digital Banking

By Mansoor Ahmad

FINANCE
Financial institutions the world over have recognized the importance of financial
technology after being hammered by startup fintechs that seamlessly started grabbing the
share of banks through different high tech products acting as branchless banks.

It is true the banks have been using computer technology since decades
but new technology has gone beyond computers that could provided various financial services
like purchase and sales of goods though handheld smart phones. The consumers now want
transfer of funders through one click of their mobiles. They demand the bank statements online.
In fact they consider going to a bank branch a hassle.
They have a reason to aspire for seamless service 24/7. The technological applications have
ensured that they can transfer money or get credit in their accounts even on weekly or other

official holidays. They do not have to worry about the banking hours in their branch. The speed
of service is so efficient seen before in financial services.
In simple words financial technology or fintech relates to innovations to financial processes,
products and services. Big banks all around the world are now spending liberally on fintech.
Bank of America for instance spends $3 billion a year technology initiatives. JPMorgan Chase
chairman also spent about $3 billion on new investments in technology last year.
Pakistani banks are also investing heavily in digital technologies but still lost a major chunk of
the market because of various cellular phones ventures and other similar offerings that have
tapped the majority of population that did not have any account. The speed with which these
platforms transferred money eased the misery of workers employed far away from their homes in
villages. Now the transfer of the money they send back home is executed on one phone call. The
recipient if at that moment is at any of the outlets of these platforms gets the money promptly
with proper identification. The chances of fraud have been completely eliminated. Earlier it took
days and weeks to send money through banks or money order. The hassle to the sender and
recipient was uncalled for. Now most of the Pakistani banks also transfer money online promptly.
The cheques can be deposited through any of the machines installed in the branches of some
banks.
Even in North America despite this heavy spending on the digital technology by the banks, the
banking sector generates around one percent of their consumer banking revenue from the digital
market. These banks are still in the process of shifting to new digital business models. Now
they have some share in the digital economy and have started shielding their operations from
sudden attacks by startups. Financial experts are hopeful that this share will rise to 10 percent by
2020 and 17 percent by 2022. This means that these banks will be partly increasing their share in
digital economy by eliminating some weaker digital launchings and partly due to overall increase
in digital transactions. It is worth noting that even in China where the controls on transactions are
stiffer, 96 percent of all online sales in are conducted without a bank which three percent higher
than most developed North American economies.
It has been found that 59 percent of the banks earnings flow from pure fee products, such as
advice or payments, as well as the origination, sales, and distribution component of balance-sheet
products. However in these areas, returns on equity (ROE) average an attractive 22 percent. This
is much higher than the 6 percent return on equity of the balance-sheet provision and fulfillment
component of products (for example, loans), which have high operating costs and high capital
requirements.
The fintechs or big nonbanking technology companies in e-retailing, media, and other sector try
to exploit this mismatch in banking business model. They are aided by shifts in customer
behavior and technological advances and shifts in consumer behavior which provides them with
a chance to weaken the heavy influence banks exert on their customers. Challengers slice off the
higher-ROE segments of value chain of banking in origination and sales. This leaves banks with
the basics of asset and liability management. It is worth noting that fintech players do not desire
to operate as pure banks and do not want customers to transfer all their financial business at

once. Instead they offer targeted (and more convenient) services. They offer the customers
services at much lower cost on avenues from where banks generate high income.
The banks in developed economies are making some investments on upstarts as well to make
them partners in trade instead of acting as disrupters of their business models. To make the
impact positive, banks are acknowledging that they need to shake themselves out of institutional
complacency and recognize that merely navigating waves of regulation and waiting for interest
rates to rise wont protect them from obsolescence.
Banks are now fully aware that because of fintech platforms like Paypal and Apple Pay and
Google pay and everything else pay have emerged as an alternative to, say, credit card
payments or direct deposits. They have to come up with products that bring back the consumers
to traditional but revamped banks. Thats happening in a world full of innovative devices. In
emerging markets where banks have far less reach, for example, new platforms can be exploited
to serve the unbanked market.
Mobile devices are being increasingly used in Pakistan for payment services. The apps
developed by experts are easy to use even by least educated population. The mobile devices are
not a substitute but an enhancement of payment process. It acts as facilitation for the population
that has no access to banks. Regulations are still a challenge for this portion of fintech, especially
those with a social media component.
The banks in Pakistan should not be complacent as the digital technology has just started
impacting their business. They should realize that raise of digital innovators in financial services
presents a significant threat particularly to retail banks. Banks usually generate value by
combining different businesses, such as financing, investing, and transactions. They serve their
customers broad financial needs over the long haul. They offer basic services, such as low-cost
checking, but the sticky customer relationships they develop allow them to earn attractive
margins in other areas. These include investment management, credit-card fees, or foreignexchange transactions.
The writers is a staff member