CORPORATE GOVERNANCE AND BANKING
Scientific - review paper
Singidunum University International Scientific Conference
RESHAPING BANKING INDUSTRY THROUGH DIGITAL
TRANSFORMATION
Vladimir Mirković1*,
Jelena Lukić,2
Vesna Martin3
1
Economists Association of
Belgrade, Serbia,
2
Modern Business School,
Belgrade, Serbia
3
National Bank of Serbia,
Belgrade
Abstract:
Development and breakthrough of information and communication technologies in all spheres
and aspects significantly changed the way of conducting business. Digital transformation is not
an option for organizations, no matter of their size, industry, maturity, number of employees,
customers and so on. In order to survive and stay competitive in digital age, organizations need
to be agile, flexible, ready to adjust on rapid changes in the business environment and create new
values for customers. Traditional banks recognized all benefits and potentials reflected in usage of
new digital technologies. Their focus is shifted on simplification of providing service on anytime
in any place to potential customers. Through adoption of Big Data concept and customer-centric
approach, banks are among those organizations which widely use new technologies in digital age
with the aim to create and sustain competitive advantage. Banking industry is obviously changed
and significantly reshaped by digitalization process. In this paper is presented the case of DBS bank
from Singapore, which made an extraordinary turnover in its business toward digital transformation and positioned itself as the leading digital bank in the world..
Keywords:
digital transformation, organizational agility, banking industry, Big Data, FinTechs
INTRODUCTION
Globalization processes and adjustment of bank’s operations toward new business models represent one of the main features in contemporary banking industry.
At the same time, the role of banks experienced serious changes, in regards that
usual understanding of banking business relied on traditional loan and deposit
transactions nowadays remains enriched with new forms of relationship between
banks and customers. Those new relations between banks and customers are based
on existence and development of new technological solutions which significantly
change modern banking business.
Business processes and models in digital age reshape banking industry imposing adjustment of banks in all segments that are earlier recognized as a source of
their regular lucrative engagement (Lukić & Mirković, 2018). As the other organizations, banks should react promptly on rapid changes in the business environment caused by the impact of digital transformation and create new opportunities
through capturing market niches.
Correspondence:
Vladimir Mirković
3 The views expressed in this paper are those of the author, and do not necessarily represent the
e-mail:
[email protected]
official view of the National Bank of Serbia
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DOI: 10.15308/finiz-2019-31-36
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DIGITAL TRANSFORMATION: LITERATURE
REVIEW
The manner in which technology is used by people
is completely changed (Stone, 2019). Digital technologies change: attitudes, behavior, expectations, the way of
communication, decision making process etc. All these
changes transformed the way in which organizations conduct their operations and functions (Bankewitz, Aberg &
Teuchert, 2016). Digital transformation is not an option
for organizations; on the contrary it is an imperative if
they intend to maintain competitiveness on the market
(Andriole, Cox & Khin, 2018). Regardless of various views
on digital transformation, in which is stated that:
•
digital transformation means “use of technology in order to radically improve performance or
reach of enterprises” (Westerman et al., 2011);
•
digital transformation is “ongoing digital evolution
both strategically and tactically” (Mazzone, 2014); or
•
digital transformation “establishes new technologies
based on the Internet with a fundamental impact on the
society as a whole” (Pricewaterho use Coopers, 2013);
It is clear that digital transformation changes the whole
business landscape of any organization, no matter of its
industry, size, maturity, number of markets etc.
Most organizations rethink the practical meaning of the
quote “being digital organization”. A lot of them have already initiated digital projects without success, while some
of them hope that digital technologies are just a one-off
trend. However, banks could not be classified in neither of
the mentioned groups, because they carefully plan their approach to digital transformation. That approach means that
digital transformation of banks is not related to purchasing
new technologies, but on finding new opportunities, markets, chances and the new ways of conducting operations.
The key results that organizations could expect after digital
transformation are (Herbert, 2017):
•
Increase in revenues: higher marker share, occupying new market niches, lower costs of maintaining
existing and attracting new customers;
•
Higher competitive advantage: better products or
services in comparison with competitors or innovative products or services;
•
Capability to “do more with fewer resources”:
higher efficiency, coordination, using of all advantages that organization creates.
Digital transformation is much more than investment.
It is commitment to implementation of new technologies
and commitment to the adjustment process across the
whole organization (Hyatt, 2018).
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For adequate response on changes in business environment in digital age, it is very important for enthusiasm to be
Corporate Governance & Banking
built-in throughout organization and that the vast majority of employees clearly understand how much change is
necessary. Certainly, rapid changes in organizations at the
same time have a lot of barriers, but the crucial challenge
for leaders and managers is establishing and nurturing the
organizational structure, which is agile, flexible, responsive, open and innovative (Hughes, 2017). Likely, the key
point in understanding of digital transformation role in
organizations is the establishing of the novel “mindset”
throughout organization, which is not an easy job. Digital
transformation could not be observed as one-off job or
activity, since is almost impossible at the very beginning
of the process to predict the effect of changes on all operations and activities.
An organization which applies new technologies, should
pay special attention on employees, whose duty is to handle with technologies in the right way. When starting their
digital journey, organizations must employ new employees such as: Data Scientist, Data Engineers, Data Architects
etc. (Lukić, 2016; Lukić, Salkić, Ostojić, 2018). On the other
hand, in some cases, digitalization results in layoffs and staff
reductions at some positions due to intelligent systems,
chatbots, automatization of some processes and activities.
All stakeholders (managers and employees) should be involved in the process of understanding how organizations
functions when they experience digital transformation. In
that manner they create conditions for comprehensive insight and overcoming ongoing organizational difficulties
during digital transformation, which is the optimal path for
future development (Mirković et al., 2019).
DIGITAL TRANSFORMATION IN BANKING INDUSTRY
To maintain its competitiveness level, traditional
banks should become more agile, accept innovative culture and become more focused on simplification of providing services on anytime in any place to potential clients
(Mirković & Lukić, 2015). To achieve all that goals, banks
found out new support reflected in modern Big Data technologies. For many organizations, especially banks, Big
Data technologies represent the new source of competitive
advantage (Lukić, 2016).
Big Data era opened the whole spectrum of innovative possibilities for the interaction between banks and
clients, imposing to banks a new challenge - to become
integral part of clients’ life and to adjust its business toward satisfaction of clients’ needs and desires (Dudić et
al., 2018). Lukić (2017) emphasized that Big Data should
not be observed through the aspect of data size. It is rather
the matter of data attributes which make them robust to
work with traditional technologies and tools on the one
hand, and data that are useful for new value creation on
the other hand. Modern operations consider the mix of
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traditional data with all new data collected from various
sources (called Big Data). Collection of data in described
manner could possible lead to new models and analytical
tools for prediction of clients’ future behavior and their
assessment.
With digital transformation of main business operations, banks made a big step toward optimization of its
business. Although, optimization and modernization of
business in banks are bearing different kind of risks and
some of them are already recognized, whilst new types of
risk will arise as a consequence of digital transformation.
It will significantly change the perception of risk and operational realization of business processes in banks (Dudić
et al., 2018). Reporting requirements make banking business slow and complicated due to more formalization and
paperwork instead of establishing more efficient business. Concept of Big Data provides the opportunity for
improving efficiency of banking business with simultaneous fulfillment of reporting requirements. In Dudić et al.
(2018), the author points out the necessity for successful
implementation of Big Data concept in banks as a tool
for avoiding robustness, which is imposed by regulatory
reporting requirements.
The modern phase of financial industry development
is marked with significant rise in the segment of financial
technologies (so-called FinTechs). FinTech innovations attract a lot of attention in public, but simultaneously there
exists a risk that whole concept of FinTechs could be compromised due to an even small, unintentional error. In that
sense, Republic of Serbia took several actions in order to
regulate this segment, especially taking into account the fact
that 2016 was announced as the “year of entrepreneurship”
with focus on FinTech start-up companies.
Due to entrance of FinTechs, the major issue emerges
in dilemma whether banks and FinTechs will be competitors or collaborators on financial markets. FinTechs have
some competitive advantages, such as (Mirković, 2017):
•
they are more agile than traditional banks;
•
they have no obligation toward competent national authorities (e.g. central banks) regarding
regulatory reporting;
•
they are innovative and flexible when it comes to
adjustment on variable environment;
•
they are capable to occupy those market niches
which are abandoned or forgotten by traditional
banks or traditional banks did not recognize the
potential of certain market niches; and
•
they satisfy existing needs of customers on the new
way, significantly different than traditional banks,
making the average customer became a “fan of information-communication technologies”.
On the other side, traditional banks are those with incomparable higher financial strength in comparison with
usually small, start-up FinTechs. Although FinTechs satisfy the needs in the different way, there will still be a certain segment of customers which could be described as
“admirers of traditional products”. Also, FinTechs could
be observed as a good motivator for banks and at the same
time a collaborator in the global game well known as “innovate or disappear”.
With the revolution caused by smartphones and online
culture, people could access information almost anywhere
and anytime. Using a mobile phone as a mean of multiple
communications, payment and borrowing, small firms
could reach consumers more easily. In addition, smartphone technology provides a unique insight into the habits of its users through sophisticated analytical data processing tools, which were previously available only to large
companies. Also, the field in which new market participants, such as FinTechs, could seriously threaten major
market participants would be the field of payments. The
emergence of bitcoin as an electronical mean of payment
redefined the regular functioning of payment and settlement systems, representing the possible alternative to
traditional banking payment operations (Mirković et al.,
2016). By increasing digitization in all spheres of life and
changing people’s habits, a new generation growing in the
digital world expecting quick, simple, secure and easily
accessible pay-per-click services, and that is the segment
where small players (i.e. technology-oriented companies)
could occupy a significant part of the market.
Modern information-communication technologies are
widely accepted throughout the banking industry worldwide, contribute to the digitalization process globally.
Technology itself created conditions that had an impact
on business areas through time and made the adjustments to continuous changes and innovations easier. Introduction of new technologies in banks provide higher
efficiency and lower costs accompanied with larger use of
contemporary communication channels between banks
and clients. Digital banking is directly dependent upon
telecommunication services with the focus on service
availability at any time (24x7) at any place (multifunctional devices, ATMs, mobile phones, tablets, desktop
computers etc.) in the right time.
Almost all commercial banks in Serbia have banking
applications for smartphones and advanced applications
for electronic banking (e-banking), while a large number
of banks have mobile banking (m-banking) services in
their offer. Digitalization entered into the Serbian banking
industry, with two banks (Telenor Banka and mts Banka)
which are exclusively specialized in mobile banking. In
banking industry, Telenor Banka entered first, after acquisition by Belgium KBC bank, and put the main focus on
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providing sophisticated services from the area of digital
banking. Innovative approach in banking industry implemented in Telenor Banka is designed in the manner that
physical presence of the client is not necessary; already
clients have the numerous modern services adjusted to the
new, digital age. It means that Telenor Banka made possible for the clients to satisfy their needs via application,
which is available on smartphones or desktop computers
(Mirković & Lukić, 2015).
Described innovation made by Telenor Banka induced
the reaction of domestic telecommunication operator Telekom, which entered on the Serbian banking market by acquisition of Dunav bank and formed new Mts Banka with
a very similar range of services to Telenor Banka. Arising
competition in Serbian banking market in the area of digitalization should make banking services cheaper in the future
(some of them would be free of charge), while the sources of
profit would lie in additional or consulting services. It should
be noted that entrance of Telenor and Mts is a pioneer venture in the digitalization sphere and those two banks are not
among larger players on Serbian banking market. Namely,
the aggregate market share of those two banks, measured by
the portion of their assets in total assets of Serbian banking
industry, amounts only to 0.7% out of RSD 3.774,1 billion
at end of December 2018 (National bank of Serbia, 2019).
Globally, banks are more than interested in digital transformation and they made a significant turnover in business orientation toward digital transformation.
In cooperation with the company “Saga doo Beograd”, Raiffeisen bank has developed a completely new
and unique banking service on the domestic market: a
platform for communication betwenclients and the bank,
based on artificial intelligence. It is a software solution
that is symbolically called Rea (abbreviation from: Raiffeisen Electronic Assistant), with a specially designed
android-like female figure as an avatar. Users, clients of
Raiffeisen Bank, as well as those who are still not, can
use all of the platform’s capabilities in a very simple way,
sending the message to Rea (or Raiffeisen Bank) through
the most common channels of communication: Facebook
Messenger or Viber.
In this way they can ask any questions about the services and products of the bank, find the nearest branch
and ATM or get some other relevant support, 24 hours /
7 days a week, very quickly – using their mobile phones
or computers. Unlike other communication solutions that
already exist on the Serbian market, based on the so-called
“decision tree”, the Raiffeisen Bank solution is known as
“enterprise bot”, which is based on artificial intelligence
and a complete understanding of the natural language.
The conversation between Rea and the client takes place
in Serbian or English, interactively and resembles communication between two people (Raiffeisen Bank, 2019).
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It is worth a mention that in October 2018, the National Bank of Serbia launched IPS (Instant Payments Serbia) system, which is the modern, very operational and
efficient system of instant payments. In this system, it is
possible to transfer up to RSD 300,000 per transaction in
just several seconds, after which the payee will have those
funds available (National bank of Serbia, 2018).
BANKING IN THE DIGITAL AGE: HOW DBS BANK
EMBRACED DIGITAL TRANSFORMATION
It is clear that banking is reshaped by new digital technologies, while banks which adopt those technologies are
called digital banks. According to Caicedo (2019) digital
banks should be classified into following four types:
1. New banks – which possess banking licenses and act as
direct competitors with same offer as traditional banks;
2. Neo banks – banks without licenses, which act as partners with financial institutions in offering services;
3. Beta banks - are joint ventures (subsidiaries) of existing banks that offer limited services to a broader
consumer base; and
4. Non-banks – are not linked to traditional banks and
they rather operate on apart from them providing
services uniquely.
As digital banking develops further, it is more likely
that digital banking market will become saturated. Consequently, it will lead to emergence of new digital banks and
simultaneously changing the focus of traditional banks on
more flexible and digitalized services in their offer. Certain financial institutions primarily recognized the above
mentioned opportunities and used them to obtain the
comparative advantage on the digital market. An illustrative example is DBS, the most successful financial services
group in Asia, with a large network and presence in over
18 markets (DBS Bank Ltd., 2019).
DBS started digital transformation in 2014, quite earlier
than their main competitors. Due to orientation on digital
transformations in the early stage, DBS became a global
leader. Their achievements are reflected in development of
extensive digital transformation programs, which supports
digital journey and culture change with adequate measurement methodology (DBS Bank Ltd., 2018). DBS re-architected their technology infrastructure to be cloud-native, so 66%
of open systems were cloud-ready in 2017, while at the end
of 2018, this had risen to over 80%. DBS become customercentric bank and for that purpose DBS changed its motto
to “Live more, Bank less”, which reflects beliefs that in the
digital era customer should spend more time without direct
involvement with banks and their procedures. DBS launched
Digibank in India, which set high standards in the field of
mobile banking. Digibank provides unique financial solutions when it comes to opening saving accounts.
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Their applications are user friendly, so users could simply
create an account and verify their details.
The above described example of the most successful
digital bank in the world in the past few years, clearly
points out how banking industry experiences dramatic
changes nowadays. Automation, robotics, data and data
analytics are being used to make intelligent decisions.
THE IMPACT OF DIGITAL TRANSFORMATION ON
BANKING IN THE FUTURE
In the world of increasing number of competitors,
banking industry overall will become more strategically focused to answer on prospective consumer expectations. The
FinTech Times (2019) made banking predictions for 2020:
• Significant reduction of fixed cost induced by existence
of physical branches and their replacement with some
other formats, e.g. „branches” in coffee shops;
• Digital customer experience will be in the center of
bank’s focus;
• Consumer will minimize the cash usage and real wallets will be replaced with mobile payments;
• Blockchain and Internet of Things (IoT) will prevail
in banking interactions, but it will raise the issue of
cyber security; and
• Smartphones will dominate service delivery and interaction.
One of the most important changes which digitalization brings is the adjustment process and transformation of
organizational structure, business processes, employees etc.
Digitalization will make many administrative positions and
routine jobs unnecessary. On the other hand, besides existing risk that some employees will lose their jobs, there will
also be new jobs that require experts from different profiles
who are familiar with digital technologies.
To summarize what represent the future of banking
digital transformation we can use words of Nikola Tesla:
“Let the future tell the truth, and evaluate each one according to his work and accomplishments. The present is
theirs; the future, for which I have really worked, is mine”.
We strongly believe that digital transformation will reshape the banking industry in future.
tions and delivering services to customers. Organizations
should identify and response on possibilities and risks
of digitalization, as well asto quickly adjust to different
markets and business conditions. In the center of digital
transformation is a mindset shift, which puts the emphasis
on a more holistic view of customer financial health. It
is crucial for banks to rethink how they engage with customers at every interaction, from marketing and customer
acquisition through on-boarding, product setup, to payments and transactions.
Digital transformation reshapes banking world in various aspects. Changes toward digitalization have affected
the labor in banking industry, periodically resulting in reduction of employees’ number. On the other hand, there
is an increasing demand for Data Scientists, Data Engineers, Data Architect, Chief Data Officer, Chief Analytics Officer etc. with long lasting banking experience. The
banking industry is a data-driven industry, where regulatory requirements enforces banks to store a lot of transaction data. One of the greatest challenges for banks is to
translate the bulk of data into meaningful information.
Digital technologies provide significant opportunities
for banks to be better than their competition and to provide a higher level of service to customers. Using digital
technologies creates added value to bank’s business and
becomes a source of competitive advantage in satisfying
customers’ needs. In the paper, the case of the leading
digital bank in the world, Singapore-based DBS banks, is
presented, which successfully implemented digital transformation into banking business and obtained the status
of the banking leader in this growing segment.
LITERATURE
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CONCLUSION
Among the most important factors which affect the
success of digital transformation are agility and flexibility of the organization. Specifics of digital tranformation
could be analyzed through comparative analysis between
banking industry and other industries. However, digital
transformation bears essential changes in business opera-
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