Module 1: Introduction to Digital Banking PDF

MODULE 1: INTRODUCTION TO DIGITAL BANKING AND ITS VARIOUS PRODUCTS: This module introduces you to the basic concepts of digital and open banking. This unit begins by outlining the definition, origins, and methods of digital and open banking. These subsequent sections of this unit give a detai...

MODULE 1: INTRODUCTION TO DIGITAL BANKING AND ITS VARIOUS PRODUCTS: This module introduces you to the basic concepts of digital and open banking. This unit begins by outlining the definition, origins, and methods of digital and open banking. These subsequent sections of this unit give a detailed discussion on the link between digital and opening banking and other disciplines as well as the usefulness of digital and open banking to business management and decision making. Overall, this unit establishes the nature and scope of managerial economics. At the end of this module, you should achieve the following topic or unit learning outcomes. UNIT LEARNING OUTCOMES  Define Digital Banking  Identifying digital banking services  Benefits and challenges of digital banking for consumers  Various products of digital banking  Different types of digital banks  Need of Customer education and awareness of digital banking  Channels of Digital banking  Digitization, Digitalization and Digital Transformation ENGAGE Reflect: What do you know about digital banking? EXPLORE To give you an overview of the concept of Digital banking, watch this video entitled Digital Banking in 1 Minute: The future of Banking https://www.youtube.com/watch?v=swJ-g4Cr0MU you can also watch this video entitled Building better digital banks https://www.youtube.com/watch?v=lhjz- KMpRl4 EXPLAIN TOPIC 1: INTRODUCTION TO DIGITAL BANKING Generally Digital banking, also known as online banking or e-banking, refers to the use of digital platforms and technology to provide various financial and banking services to customers. This approach has transformed the traditional banking landscape by offering convenient and accessible ways for customers to manage their financial activities without visiting physical bank branches. Digital banking encompasses a wide range of services, from basic account management to more advanced financial products and services. Digital banking services are accessible through web-based platforms, mobile applications, and other electronic devices, allowing customers to conduct transactions, check account balances, transfer funds, pay bills, and access a variety of financial information remotely. The evolution of digital banking has been driven by technological advancements, changing customer preferences, and the need for more efficient and convenient financial services. Although the two terms may seem interchangeable, there are actually fundamental differences between digital and online banking. Digital Banking VS. Online banking, are they the same? Online banking is the form of banking that most of us are most familiar with. It can be a pretty broad term and even encompasses what has come to be known as mobile banking. Online banking is simply any form of personal banking which we conduct using the internet. This can anything from checking our balance and previous statements to setting up direct debits, paying bills or transferring money to another account of an individual. For many years, online banking was conducted with a laptop or desktop computer, but the massive advances in smartphone technology means that a growing number of people can now use mobile apps to carrying out many core banking functions. As online banking has evolved, so have the services offered and customers can now even apply for loans, send money internationally with a few clicks of a button and even receive payments early through their online bank accounts. Digital banking is more of an overarching term which refers to all forms of financial transactions taking place with the aid of technology. Therefore, it could be argued that online banking is a form of digital banking, but that digital banking is much more than just online banking. As we move more rapidly towards a cash-free society, digital banking is the system by which an entire online economy has been allowed to grow and thrive. So we may interact with various aspects of digital banking on a daily basis. Digital banking can refer to the many digital products available to businesses to make them run more efficiently, such as accountancy and payroll software and payment technology. This can either be a physical store or an online merchant. Many of the transactions we complete on a regular basis are classed as some form of digital banking, for example, booking tickets for events, paying for car parking, ordering and paying for food or using a store-specific app. One particularly profitable area of digital banking which has shown a surge in recent years is the idea of data as currency. Companies will trade data which gives insights into customer behaviour as a commodity as it allows them to make predictions and shape policy. Therefore, digital banking is the catch-all term by which all financial activity which exists through technology can be referred to and there is plenty to suggest that greater integration will develop as technology evolves. Comparison Between Online And Traditional Banking Services Online banking options:  Available 24/7 and conveniently be accessed from anywhere  Lower fees or no fees  Financial transactions can be processed quick and efficiently  Sometimes do require minimum balance fees  Online and Phone customer services Traditional banking services:  Physical branches  Human interaction and personalized attention  Higher interest rates, monthly service fees, account fees  Obtain physical documents such as cashier's checks, safe deposit boxes  Additional services include investment advice, retirement planning, loan services  In-person, online, and phone customer service Both online banking and traditional banking services have strengths and weaknesses. Online banking is available 24/7 for customers to conveniently and efficiently manage their finances from anywhere with an internet connection. Transactions are processed quickly and customers can check balances, transfer money and pay bills electronically. Traditional banks, on the other hand, can meet more complex banking needs through face-to-face interactions with bank representatives. They also have physical branches where you can get services like lockers. However, the traditional bank may not have the same high level of security measures as online banks and customers' personal and financial information may be at risk if proper precautions are not taken. Traditional banks may also offer additional services such as investment advice, retirement planning, and small business loans. Choosing Between Online Banks And Traditional Banks We will break down the main differences between online banks and traditional banks in the variety of factors of accessibility, safety and security, fees, and customer service. This can help you narrow down the deciding factor between online banks and traditional banks. Accessibility The key difference between an online bank and traditional banks is the online option availability of having access to your account at any time and from anywhere with an internet connection. In contrast, traditional banking services require you to physically visit their local branch during business hours to perform these same tasks. While some customers may prefer the face-to-face interaction of traditional banking, others find it to be an inconvenience or a waste of time. Safety And Security Another key difference between online and digital banking is security. When it comes to monetary purposes, there is common speculation that online and mobile banking are regarded as unprotected thus leading to a higher chance of fraud or theft of one's identity. As sort of a countermeasure, many online banks have employed sophisticated safety protocols such as MFA along with data encryption. However, younger generations are still demanding better online banking security from their financial institutions. On the other hand, the older generations say they feel "safe enough". Fees When it comes to fees, online banks typically charge cheaper fees and provide greater interest rates than traditional banks Although some consumers may prefer to pay more expensive fees due to additional services and benefit traditional savings accounts bring along with such as deposit protection, free checks, etc. Customer Service Many traditional banks have the best advantage over online banks which is in-person customer service as the majority of people prefer to have their banking issues solved in person In online banks, customer service is often provided by email, chatbots, or phone help, and may have limited customer service hours. Due to a lack of direct human interaction, dealing with complex banking-related situations can be channelling and difficult. In contrast, online banks rely on modern technology and tech-savvy solutions to offer personal customer-solving services, while on the other bank, traditional banks will have physical troubles such as customers dealing with long waiting periods, limited business hours, etc. What are digital banking services? Most frequently, they include the following operations and activities (all the traditional banking services that are available 24/7 on mobile phones, computers, and compatible smart devices, without the need for a customer’s presence in the bank branch):  Obtaining bank statements  Cash withdrawals  Transfer money  Checking/savings account management  Opening a digital bank account  Loan management  Bill payments  Cheques management  Transaction records monitoring Obviously, digital banking software makes all traditional services easier to access, understand and manage. This approach allows us to test digital banking risk concepts before moving parts of the old legacy business to the new system. Notable examples include Goldman Sachs’ Marcus, RBS’ Bó, and State Bank of India’s YONO, which gained more than 26 million customers and reached profitability within 18 months. The stats below prove the assumption that digital transformation will be a top priority for banks in 2021. BENEFITS OF DIGITAL BANKING The digital banking industry is unstoppable and will only advance because it offers better and cheaper services than traditional competitors like: Round-the-clock access. The biggest benefit of going digital is that banks can offer their services anytime and anywhere. People can log in to their banking app or website in the middle of the night to execute online payments and other transactional needs. Unique banking features. Digital banking offers a variety of special features that go beyond what traditional banks offer. For instance, customers can invest in the stock market or buy cryptocurrencies directly through the mobile banking app itself. Innovative business solutions. The e-commerce sector is highly dependent on digital banking services. Increased competition in online shopping portals and marketplaces encourages businesses to engage with customers through innovative solutions. Personalized offerings. The digital transformation in banking has resulted in banks and financial institutions understanding customers' needs. Instead of making assumptions, they provide services based on their daily expenses and ease their experience. Added transparency. Since bank accounts are accessible with a few clicks, banks can provide extra transparency to customers on their banking activities. This includes any withdrawals, transfers, deposits, and bill payments. Challenges of digital banking With the growing demand for digital banking solutions, banks might struggle to keep up with evolving customer behavior. Here we discuss this and some other standard challenges digital banks are grappling with. Security issues: Customer data is highly sensitive for banking institutions. Hackers and scammers are constantly trying new ways to get that information. Cyberattacks expose the bank and its customers to financial fraud. Applying multi-factor authentication is one of the solutions to enhance fraud detection methods. Technical problems: Since digital banking is highly dependent on electronic communication, any technical error or lack of connectivity has severe consequences. Banks must amp with technology to find solutions that prepare them for such emergencies. Changing banking landscape and customer expectations: With digital-only banks providing efficient banking solutions, customer expectations and the industry landscape are changing rapidly. Merely having an online banking component is no longer enough for traditional banks. VARIOUS PRODUCTS OF DIGITAL BANKING 1. Online Banking Platforms: These platforms provide customers with the ability to manage their bank accounts, view transaction history, check balances, and transfer funds between accounts. Online banking platforms often have user-friendly interfaces and secure login processes. 2. Mobile Banking Applications: Mobile apps allow customers to access banking services through their smartphones and tablets. These apps offer features such as mobile check deposits, account alerts, bill payments, and even cardless ATM withdrawals. 3. Digital Payments: Digital banking facilitates various types of digital payments, including peer-to-peer transfers, bill payments, and online shopping payments. Popular methods include digital wallets like PayPal, Venmo, and mobile payment systems like Apple Pay and Google Pay. 4. Digital Savings and Checking Accounts: Many banks offer digital-only savings and checking accounts that can be opened and managed entirely online. These accounts often have competitive interest rates and fewer fees compared to traditional accounts. 5. Online Investment Platforms: Digital banking has expanded into investment services, offering online trading platforms and robo-advisors. These platforms allow customers to invest in stocks, bonds, mutual funds, and other investment products. 6. Personal Loans and Credit Products: Digital banks and fintech companies offer personal loans, credit cards, and other credit products that can be applied for and managed online. The application process is often streamlined and quicker than traditional methods. 7. Digital Financial Planning Tools: Some digital banking platforms provide tools for budgeting, expense tracking, and financial planning. These tools help customers manage their finances more effectively. 8. Cryptocurrency Services: Some digital banks and fintech firms have integrated support for cryptocurrencies, allowing customers to buy, sell, and store digital assets like Bitcoin and Ethereum. 9. Digital Identity Verification: Digital banking services often incorporate advanced identity verification methods, such as biometric authentication (fingerprint, facial recognition) and two-factor authentication, to enhance security. 10. Chatbots and Customer Support: Many digital banks use AI-powered chatbots to provide customer support and answer queries in real-time, enhancing the customer experience. THE TYPES OF DIGITAL BANKS 1. Neobank Neobank is a digital bank operating online, without any physical presence, which provides its customers remote access to its services via a mobile app. Many neobanks don’t hold a bank license and partner with an existing bank for bank- licensed operations (which means, their customers need to create an account at the partner bank). Often, the range of services offered by a neobank is narrower compared to the licensed banks. Unlike traditional banks, neobanks or digital banks are direct banks that operate without any traditional physical branches. Instead of these physical branches, clients can only access digital banks through their phones or computers. These fintech firms do best in specializing in certain financial products such as time deposits, checking, bills payment, and savings accounts, among many others. With neobanks, you can enjoy paying bills, transferring funds, and adding money to your account without having to go to a physical location. According to Acidre (2022), some examples of Neobanks in the Philippines are the following:  Tonik Bank  EON Bank (brought by Union Bank)  Komo (neobank service of East West Bank)  ING  GCash  2. Challenger Bank This term originated in the UK and refers to a recently launched bank that “challenges” traditional banking institutions. Being more user-friendly and cost- effective for an end-user, challenger banks focus on the audience segments that are underserved by the big financial institutions. A challenger bank is a financial institution that aims to compete with established traditional banks by offering innovative products and services, often through digital technology. These banks typically focus on specific market segments or niches and may offer mobile banking, digital-only accounts, and peer-to-peer lending services. A challenger bank is an institution with (or who intends to apply for) a banking licence. For this reason, we haven’t included e-money accounts in this list. We also don’t consider subsidiaries of established parent banks, such as Mettle, as challengers. They are called a ‘challenger’ because they are challenging the dominance of the existing leaders, which, in the UK, are the big four: Barclays, Lloyds Banking Group (Halifax, Lloyds Bank and Bank of Scotland), HSBC and the NatWest Group. Why Choose a Challenger Bank? There are several reasons why you may choose a challenger bank over a traditional high street bank:  Innovation: Challenger banks often use technology to offer a more seamless and convenient banking experience, such as mobile-only banking apps and digital-only accounts.  Faster Sign Up – Many challenger banks focus on the fastest onboarding process possible, even issuing virtual cards that can be used to make payments before the real one arrives.  Fees – Challenger banks may have lower fees than traditional banks.  Customer service: Challenger banks often have a more direct and personal approach to customer service, and many offer extended hours of support through digital channels.  Niche services: Some challenger banks focus on specific market segments or niches, such as poor credit or small businesses, and may offer specialized products and services tailored to those groups.  Online banking experience: Challenger banks focus more on the online Example of a Challenger bank Tide Bank Tide partners with Clearbank to offer bank accounts, allowing existing high-street bank account holders to connect their accounts to its APP. Currently serving 400k SMEs, about 7% of the market, Tide’s outstanding reviews, class- leading APP, and solid customer service make it a great choice. 3. New bank These are fully licensed neobanks that provide a full range of banking services and their only difference from the brick-and-mortar banks is the mode of operation – which is completely online. Examples of the new banks are Revolut, Monzo, N26, and Starling Bank. Examples of new banks or licensed neobanks in the Philippines are Tonik Bank, GOTyme, Maya Bank (formerly known as Pay Maya), UNO Bank – credit-led digital bank, OFBank (Overseas Filipino Bank)- is a neobank of LandBank 4. Non bank Exactly as the name implies, these are non-banking institutions that provide financial services – for example, streamlined loans or mortgages, but they don’t simultaneously accept deposits or offer checking and savings accounts. Some of the nonbanks like Monese operate on EMI licenses. TOPIC 2: NEED OF CUSTOMER EDUCATION AND AWARENESS FOR DIGITAL PRODUCTS (CARDS, ATMS, CDM, CASH RE-CYCLERS, POS TERMINALS). USE OF BIOMETRICS AND MICRO ATMS. POWER DIGITALIZATION. Need for Customer Education and Awareness for Digital Products: As the financial industry continues to embrace digital transformation, there is a growing need for customer education and awareness regarding various digital products and technologies. This is particularly important for products such as cards, ATMs, cash recyclers, POS terminals, biometrics, micro ATMs, and other digital solutions. Here's why customer education is crucial: Security Awareness: Customers need to be informed about the security measures associated with digital products. They should know how to protect their personal and financial information, understand the risks of phishing, fraud, and other cyber threats, and be aware of best practices for keeping their accounts secure. Effective Utilization: Educated customers are more likely to utilize digital products effectively. Proper understanding of features and functionalities helps customers make the most of these tools, improving their overall banking experience. Reducing Mistakes: Lack of awareness can lead to mistakes during transactions, such as selecting incorrect options at ATMs or making errors during online payments. Educated customers are less likely to encounter these issues. Enhanced Convenience: Understanding how to use digital products correctly can lead to enhanced convenience and efficiency. Customers who are well-versed in using digital tools can save time and effort in their financial transactions. Empowerment: Educated customers feel more empowered to take control of their financial matters. They can confidently manage their accounts, track their spending, and make informed decisions about various banking products. Adoption of New Technologies: As banks introduce newer technologies like biometrics and micro ATMs, customers need to understand how these technologies work and how they can benefit from them. DIFFERENT CHANNELS OF DIGITAL BANKING Banking cards: Cards are not only used to withdraw cash but also enable other forms of digital payment. Cards can be used for online transactions and on Point of Sale (PoS) machines. Prepaid cards can also be issued by banks; such cards are not linked to the bank account but function through the money loaded onto them. Unstructured Supplementary Service Data (USSD): is a communications protocol used in GSM networks for sending short text messages. USSD is similar in format to SMS. However, it is an instant messaging service, so messages are not stored on the operator side or on the subscriber’s device. Example: *143# Globe Unified Payments Interface (UPI): is a popular mobile payment method that allows you to transfer funds from one bank account to the other, instantly and free of charge. Ever since its inception, UPI has made financial transactions much easier for account holders. Examples of UPI are Google pay, Paytm Mobile Wallets: Mobile wallets have eliminated the need to remember four-digit card pins or enter CVV details or carry loose cash. Mobile wallets store bank account and card credentials to easily add funds to the wallet and make payments to other merchants with similar applications. PoS terminals: Typically, PoS machines are portable devices that read a card to authorize and complete the payment. Supermarkets and gas stations opt for this method of payment. However, with digital banking thriving, PoS terminals have evolved into more than physical PoS devices. Virtual and Mobile PoS terminals have surfaced, which make use of the mobile phone’s NFC feature and web-based applications to initiate payment. Internet and Mobile Banking: Commonly known as e-banking, internet banking refers to obtaining certain banking services over the Internet, such as fund transfers, and opening and closing accounts. Internet banking is a subset of digital banking because Internet banking is only limited to core functions. Similarly, mobile banking is availing banking services through mobile-based applications. There is also a rise in banks without physical branches fuelled by mobile banking. CDM or Cash Deposit Machine: performs the opposite function of an ATM or Automated Teller Machine; CDM machine accepts deposits against a customer’s bank account instead of dispensing cash from the same account. CDMs are freestanding kiosks that may be wall mounted as well, and they have a very similar interface and user experience to more recent iterations of the ATM. Cash Re-cyclers: A teller cash recycler (TCR) machine is a unit that bank tellers use to quickly count incoming cash. These units are available in a range of different designs, from standard models to high-capacity or ultra-quick machines. Usually, you’ll find them behind the teller counter, though they are also popular with companies that do a large part of their business in cash. The teller simply inserts a stack of bills, and they are counted, separated by denomination, and stored in cash cassettes within the machine’s secure safe area. Using the latest software, the TCR sends updated information on balances, cash on hand, and denomination selection to your FI’s core software. Link for cash re-cyclers demo https://www.youtube.com/watch?v=JnRKVJ7Wan0 Use of Biometrics and Micro ATMs: Biometrics: Biometric authentication, such as fingerprint recognition and facial scanning, adds an extra layer of security to digital transactions. Customers need to be educated about how biometric authentication works, its advantages in terms of security, and how to set up and use biometric features on their devices. Micro ATMs: Micro ATMs are portable handheld devices that allow customers to perform basic banking transactions, even in areas with limited banking infrastructure. Customer education should focus on how to use micro ATMs, their benefits in reaching underserved areas, and the importance of keeping transactions secure. DIGITIZATION, DIGITALIZATION AND DIGITAL TRANSFORMATION THE FUTURE OF DIGITAL BANKING The world is rapidly changing, and so is the finance industry. As they say, the future is digital. With the demand for personalized services rising, personalized banking will become the next big thing. Using technologies like AI and ML will enable banks to analyze customer data and deliver services that meet their individual needs the best. Digital-only banks will continue to grow. Since these banks don’t have to worry about a physical branch, they have the advantage of operating on a lower price model. Customers can continue to use these digital-only services at a cheaper rate. Voice banking is also a trend on the horizon that is picking up its pace with voice assistants like Alexa, Siri, and Google Assistant. It allows customers to use voice commands to execute banking transactions. The adoption of chatbots will allow banks to serve customer queries faster at any time of day or night. Chatbots mimic human interactions and add a personalized touch to 24/7 online support portals. Open banking is another driving force of innovation in the banking industry. It's a great tool that helps lenders accurately understand a consumer's risk levels, resulting in more profitable loan options. Banks might also pivot to cryptocurrency, but challenges like regulatory compliance and cybersecurity must be addressed before that shift happens. ELABORATE What are the effects of digitalization of money to the following: 1. Local currency 2. Foreign exchange 3. Central Bank – in terms of implementation of Monetary Policy 4. Inflation 5. Businesses EVALUATE REFERENCES: https://sdk.finance/what-is-digital- banking/#:~:text=Digital%20banking%20involves%20the%20digitalization,computers%2 C%20and%20compatible%20smart%20devices. https://www.signedmarco.com/top-neobanks-philippines/ World Bank Group. (2020). Digital Financial Services: Challenges and Opportunities. Retrieved from https://openknowledge.worldbank.org/handle/10986/34132 Deloitte. (2020). The Future of Banking: Banking reimagined. Retrieved from https://www2.deloitte.com/global/en/pages/financial-services/articles/future-of- banking.html PwC. (2020). Banking in a Digital World: PwC Banking 4.0. 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