Digital banking is part of the broader context for the move to online banking, where banking services are delivered over the internet. The shift from traditional to digital banking has been gradual, remains ongoing, and is constituted by differing degrees of banking service digitization. Digital banking involves high levels of process automation and web-based services and may include APIs enabling cross-institutional service composition to deliver banking products and provide transactions. It provides the ability for users to access financial data through desktop, mobile and ATM services.
A digital bank represents a virtual process that includes online banking, mobile banking, and beyond. As an end-to-end platform, digital banking must encompass the front end that consumers see, the back end that bankers see through their servers and admin control panels, and the middleware that connects these nodes. Ultimately, a digital bank should facilitate all functional levels of banking on all service delivery platforms. In other words, it should have all the same functions as a head office, branch office, online service, bank cards, ATMs, and point-of-sale (POS) machines.
The reason digital banking is more than just a mobile or online platform is that it includes middleware solutions. Middleware is software that bridges operating systems or databases with other applications. Financial industry departments such as risk management, product development, and marketing must also be included in the middle and back ends to truly be considered a complete digital bank. Financial institutions must be at the forefront of the latest technology to ensure security and compliance with government regulations.
The earliest forms of digital banking date back to the advent of ATMs and cards in the 1960s. As the internet emerged in the 1980s with early broadband, digital networks began to connect retailers with suppliers and consumers to develop needs for early online catalogs and inventory software systems.[1]
By the 1990s, the Internet had become widely available and online banking started becoming the norm. The improvement of broadband and e-commerce systems in the early 2000s led to what resembles the modern digital banking world today. The proliferation of smartphones through the next decade opened the door for transactions on the go beyond ATM machines. Over 60% of consumers now use their smartphones as their preferred method for digital banking.[2]
There is a demand for end-to-end consistency and for services, optimized for convenience and user experience. The market provides cross-platform front ends, enabling purchase decisions based on available technology such as mobile devices, or a desktop or Smart TV at home. In order for banks to meet consumer demands, they need to keep focusing on improving digital technology that provides agility, scalability and efficiency.
A study conducted in 2015 revealed that 47% of bankers see the potential to improve customer relationships through digital banking, 44% see it as a means to generate competitive advantage, 32% see it as a channel for new customer acquisition. Only 16% emphasized the potential for cost saving.[3]
The major benefits of digital banking are:[4] [5]
A key way in which digital banks can gain a significant competitive edge is by developing a more robust IT architecture. By replacing manual back-office procedures with automated software solutions, banks can reduce employee errors and speed up processes. This paradigm shift can lead to smaller operational units and allow managers to concentrate on improving tasks that require human intervention.
Automation reduces the need for paper, which inevitably ends up taking up space that can be occupied with technology. By using software that accelerates productivity by up to 50%, banks can improve customer service since they will be able to resolve issues at a faster pace. One way a bank can improve its back end business efficiency is to divide hundreds of processes into three categories:
It still isn't practical to automate all operations for many financial firms, especially those that conduct financial reviews or provide investment advice. But the more a bank can replace cumbersome redundant manual tasks with automation, the more it can focus on issues that involve direct communication with customers. The obstacles currently preventing banks from investing in a more digital back end environment are:
Digital cash eliminates many problems associated with physical cash, such as misplacement or the potential for money to be stolen or damaged. Additionally, digital cash can be traced and accounted for more accurately in cases of dispute. As consumers find an increasing number of purchasing opportunities at their fingertips, there is less need to carry physical cash in their wallets.
Other indications that demand for digital cash is growing are highlighted by the use of peer-to-peer payment systems such as PayPal and the rise of untraceable cryptocurrencies such as bitcoin. Almost anything imaginable that can be paid with physical cash can theoretically be paid with the swipe of a bank card, including parking meters. The problem is this technology is still not omnipresent. Cash circulation grew in the United States by 42% between 2007 and 2012, with an average annual growth rate of 7%, according to the BBC.
The concept of an all digital cash economy is no longer just a futuristic dream but it's still unlikely to outdate physical cash in the near future. All digital banks are possible as a consumer option, but people may still have a need for physical cash in certain situations. ATMs help banks cut overhead, especially if they are available at various strategic locations beyond branch offices.[6]
Emerging forms of digital banking are
These solutions build on enhanced technical architectures as well as different business models.