How to win in digital banking: Four essentials for success

Blame COVID if you like. But the reality is that rising customer expectations, evolving regulation, rapid technological innovation, and cloud-native disruptors were already driving a breakneck pace of change across the banking and financial services sector – even before "COVID-19" entered the popular vernacular. The pandemic only poured gas on the burning platform for change.

It turned fintech startups into unicorns with billion-dollar valuations. It made digital transformation a matter of do or die for legacy banks. It put customer needs and experiences front and center. It made collaboration cool and ecosystems critical.

What we've learned along the way is that success in digital banking means rethinking everything from the ground up from the customer perspective and then stitching together the right partners, products, advanced technologies, and capabilities to deliver a differentiated and compelling value proposition – a 'digital banking masterpiece.'

Financial institutions should start with a clear understanding of the importance of trusted, collaborative, and innovative ecosystems. Basically, ecosystems in banking can be described as an interconnected set of services through which customers can fulfill a variety of needs in a single integrated experience.

These ecosystems are already emerging and growing, bringing together technologies and enablers, including large enterprise banks, fintechs, cryptocurrency platforms, technology companies, and service providers to create entirely new value propositions for distinct customer segments.

Goldman Sachs, for example, has created a leading digital consumer platform, with partnerships as a core pillar of its strategy. Starting with a fresh sheet of paper, the 186-year-old firm became an industry disruptor with Marcus, its customer-centric online-only bank, and Apple Card, the Apple-branded credit card it backs, which allows consumers to access Goldman Sachs products and technology through its big tech partner.

Likewise, leading US-based fintech Chime partners with regional banks. According to Janelle Sallenave, senior vice president of operations and member services, "These partnerships enable us to design member-first financial products that create better, lower-cost options for everyday Americans."

Financial services players need to move smartly. This isn't necessarily about being at the bleeding edge and first to market. But it is about being a fast follower – emphasis on the fast.

Recently, JPMorgan Chase set up its digital-only UK bank. Chase UK launched with current accounts (akin to US checking accounts). But it will soon broaden its product lineup by integrating Nutmeg, a wealth management fintech it acquired, and making a push into consumer lending, which will better position it to also compete with digital-only UK insurgents, such as Monzo, Starling, and Revolut.

The fact that fintechs are themselves disruptors hardly makes them immune to disruption. Consider how buy-now-pay-later (BNPL) players disrupted traditional payment providers, for example. And now Apple has unveiled a BNPL feature as part of Apple Pay, disrupting Affirm and Klarna. The key for fintechs and startups, therefore, is to build for scale with partners who can become agile and support profitable growth.

Camilla Morais, vice president of finance at fintech Brex (a credit card and cash management startup), says her team spends a ton of time analyzing potential partners and building relationships with them. "Sometimes it's another startup that's launching a new and innovative product. Other times, we're looking at partnerships with traditional banks where we can bring a very unique proposition," Morais notes. "You really need to think about what you are trying to achieve from the partnership."

All financial services players need to develop holistic business, product, technology, and operational models – it isn't just about one of these in isolation. For digital-native organizations, this will mean creating an ecosystem of both product and service partners. For legacy organizations, this may first require some reconstruction of the back office.

As Darin Cline, chief operating officer and co-founder of Highline (a payments and consumer lending startup) notes, both fintechs and legacy organizations need to really focus on digitizing the back office. "If you want to scale rapidly, you are going to need that back office as digitally enabled as possible, leaving your humans to do the things they do best," he says. As well as investing in new technologies and capabilities, Cline suggests players "move from a build-your-own mindset to a buy/partner mindset in order to move at the speed of digital."

This article first appeared in The Financial Brand and was authored by Jim Marous, industry influencer and CEO of The Digital Banking Report, and Balkrishan "BK" Kalra, formerly global head of banking and capital markets and now president and CEO at Genpact.