Transformation in Digital Banking

Data & Artificial Intelligence

Banking in the Connected Economy

Innovation and disruption continue at every level of digital banking. While many ideas reimagine existing processes and customer experiences, others enable growth through new business models. At the core of this transformation: the connected economy, with digital and data at its core.

The trend 

Competing in this new economic era requires bankers to rethink technology and business alignment. Business leaders must also move to a new type of governance to adopt a digital mind-set that enables them to participate in a new digital banking ecosystem. 

In this piece from Razorfish, we explore and highlight some of the innovations driving transformation in banking, from the need to get mobile right to rethinking core aspects of the banker’s business model. 

In a Connected Economy Customers Carry Their Bank with Them

Monitoring one’s finances is easier than ever

The health and fitness industry has shown just how effective wearables and sensors can be in letting mobile consumers quantify their health and track their activity. This same model is being applied to consumers who want to monitor and manage their financial health. Standard Chartered Bank’s Aman Narain, who heads digital banking, notes, “Banks have been some of the richest repositories of data–but are the least likely to do something innovative with it.” Narain adds that this is partly due to regulation, but mostly to self-limitations of the banking industry: “Till now, consumers have accepted this status quo, but not for much longer. As they find their ‘quantified selves,’ no doubt their demand for insights into their finances will increase.” 

Wearables boost digital wallet adoption 

Banks everywhere are embracing the quantified self by leveraging devices such as smartwatches to proactively alert card issuers when customers switch time zones, as a fraud measure. Other wearable banking apps let customers take actions on alerts, track their spending activity, find an ATM or make a payment. This is attracting new market entrants to compete with ApplePay: for example, Google’s Android Pay platform offers a portfolio of APIs for developers to create their own digital payment solutions. Social messaging apps are also getting into the game with solutions such as Snapcash and Facebook Messenger, along with WeChat (China) and Line Pay (Japan). Credit Suisse estimates that 58 percent of China’s online payment transactions go through Alibaba’s Alipay, most of them initiated via mobile. 

Person using Apple pay with their Apple watch.

A Connected Economy Also Reduces Fraud

Bank fraud, which continues to increase in sophistication, along with disturbing stories of identity theft, is driving demand for a more secure method to identify customers. Ideally, new techniques should not rely on something the customer knows (such as the answer to a security question), rather upon a unique identity that is based on a physical attribute not easily replicated. Biometrics provides a solution.

Biometrics offers a better alternative

Biometrics is already in use in law enforcement, government identity authority and border control, given its identification accuracy and security. Similarly, biometrics in banking has the potential to close banking loopholes commonly exploited by criminals. 

Biometrics technology leverages web services and other solutions from vendors such as Apple and Samsung to authenticate customers as they log on to mobile banking or other payment solutions. While some customer resistance still exists, we expect the adoption of this technology to quickly mature as biometric-based authentication systems successfully illustrate their superiority over PIN and password systems for verifying individuals.

Millennials favor emerging technologies

The type of biometric technology we see evolving will likely include fingerprint, iris, facial recognition and similar methods that leverage and elegantly integrate mobile devices into the bank customer’s experience, such as voice. Roughly 250,000 Citi customers for example, have opted into its voice authentication service in the U.S. to verify themselves when they call the bank. 

Citi has voice authentication initiatives in other markets as well. For Citi, voice authentication has not been positioned as a replacement to other methods but rather, as an alternative option. “We want to offer our customers choices when it comes to authentication, and we’re always looking at innovative and secure ways to do that,” said Ash Khan, Citi’s head of information security for global consumer banking. 

Khan’s opinion reflects that of James DeBello, CEO of the digital vendor Mitek, which recently surveyed the current generation on its digital banking habits. The survey of 1,000 milllennials found that in identifying themselves via mobile devices, 61% prefer fingerprints. Additionally, almost a third said they’d accept facial recognition.

A better banking experience

Longer term, we expect biometrics solutions to be combined with other behavioral data to provide robust, infrastructure-level security. Such developments will enable banks to provide secure and seamless access to all of their platforms, from mobile banking to physical branches to ATMs. As this happens, the technology and the mechanics of logging in will fade into the background and be replaced by a simpler, more efficient user experience.

Connectivity Enables Banks to Get Even More Personal

The adoption of biometrics will climb rapidly, given its accuracy in authenticating the individual. Bank customers will expect this bespoke, personalized approach to extend to the provision of financial advice (which is being driven by the deployment of mobile banking services) as well. And while consumers still have security and privacy concerns, the personal convenience provided by mobile banking appears to outweigh the risks in the eyes of banking customers.

Digital assistants represent a watershed moment

This is setting the stage for the digital personal financial assistant, or DPFA, which represents a watershed moment for most banks. As bank fees and other revenue sources dry up, banks need to find new sources of revenue and more ways to engage an increasingly fickle consumer. By pivoting a demand deposit relationship to one that is advice driven, banks will open up new revenue streams and move up the value chain, resulting in more profitable relationships.

Using a group of technologies that analyze the customer’s personal data and analytics, DPFAs learn about a consumer’s financial behavior and personal financial habits, which lets banks provide advice to customers to help them achieve their financial goals. Some emerging DPFA solutions are drawing inspiration from Google Now, which is fundamentally designed as a virtual assistant, helping its user find a specific email or alert him or her about an upcoming flight, bill due date or even a favorite sports team’s score–without requiring the often painful and tedious search process.

By pivoting a demand deposit relationship to one that is advice driven, banks will open up new revenue streams...

Penny and Sense, for example, are both designed to provide need-to-know financial information whenever invoked. Both solutions are designed to make finance less of a chore while gamifying aspects of the financial planning process. Sense, an app deployed by Alfa Bank in Russia, also borrows Google Now concepts by filtering key information, showing only that which matters most to the customer.  

As the DPFA evolves, we expect to see apps that give personal advice along with options for concierge services, either through an added fee or for free (as a loyalty incentive). DFPAs will also be deployed with speech recognition to make the experience conversational and friendly. Overall, we see DPFAs rapidly maturing in an economy that is becoming increasingly connected. They will work best when integrated within other popular, high-value services versus stand-alone solutions.


APIs Offer a Path to the Connected Economy

The rate of change continues to increase, and the creative destruction across the bank value chain demands that banks compress the product life cycle and squeeze every ounce out of productivity capital budgets. This means leveraging what’s already there, buying commercial platforms where necessary and building from scratch only as a last resort.

A new growth strategy

While APIs are not new, they help financial services firms accelerate their ability to compete in the connected economy, by quickly leveraging the value of resources and assets that exist in their own and others’ organizations. ING, for example, created an internal API layer that is reused across its global operations to enable co-creation and innovation. 

MasterCard, Visa and American Express use APIs to reduce the complexity of their partner integration programs. Other providers use APIs to open up new sales channels. Capital One enables merchants to offer personalized deals that can be purchased with reward points through its API. E*Trade Financial lets third parties create new trading apps and platforms, e.g., for sophisticated day traders, through its APIs. Some banks offer B2B customers an API to build their own solutions (Silicon Valley Bank, for example, acquired Standard Treasury to provide such a capability).

APIs underlie architectural innovations

Bank CIOs looking to innovate through  microservices and continuous delivery find API programs a good way to address the longer life cycle constraints of traditional product development. Even ideas that are fast-tracked through the traditional IT process can take months, and products are often competitively behind the day they are launched due to market changes that occur during their development. An API strategy addresses these common constraints and enables organizations to focus on areas that differentiate and truly matter to the consumer.


Man Looking at Laptop Screen.

The Ledger Made Famous by Bitcoin Evolves

Interest in blockchain accelerates 

A connected economy continues to propel the industry’s interest in a trust mechanism called the blockchain, which offers a way to track trusted transactions in a distributed fashion. 

A blockchain essentially provides a sharable, networked transaction database, acting as a repository for storing every transaction ever executed amongst all its members. Armed with this information, any participant can trace back a value belonging to any other participant at any point in time. Because this technology has the potential to transform the transaction flows, expedite the settlement of transactions and reduce the need for a trusted intermediary, it continues to gain validity. 

Nasdaq, for example, recently used blockchain technology to complete and record a private securities transaction. One of its partners,, used Nasdaq’s Linq blockchain to issue shares to a private investor and reduced the time needed for clearing and settlement from three days to 10 minutes. Such dramatic improvement reduces counterparty risk and frees up capital for other purposes.

... blockchain initiatives are inherently open source; hence their evolution and support are driven by their creators

In another recent move, the Depository Trust and Clearing Corp, which tracks stock, bond and other securities ownership, is working with Digital Asset, a financial blockchain company, to migrate data from the repurchase agreement market to a digital ledger shared between participants, similar to that which powers Bitcoin transactions. 

While blockchain promises to overhaul back-office systems used in mainstream finance, most initiatives are in the early alpha and beta stages. Given blockchain’s inherent distributed systems nature (and its various approaches to reaching consensus in a distributed ledger), concerns have been voiced around scalability, security and regulations. Bankers should also bear in mind that blockchain initiatives are inherently open source; hence their evolution and support are driven by their creators.  

Nevertheless, business leaders in banking should include blockchain technology in their strategic planning scenarios. They should also identify where the integration points with existing infrastructures lie, to identify future investments that could generate the highest return. For example, Earthport struck a deal with Ripple Labs to streamline its clearing and settlement processes for low-value, cross-border payment services. 


The Digital Business Model

Transformation on a global scale

The connected, digital economy, underpinned by concepts such as biometrics, blockchain and metacoin platforms, has the potential to help banks address a number of costly and intractable problems in their business model, from reducing forgery and corruption to simplifying transactions. At the same time, emerging trends offer real breakthroughs in the customer experience.

But these innovations and their promises won’t materialize unless banks move beyond static business models that are high cost, constraining and based on command and control hierarchies as opposed to customer-centric ones.

Today, banks compete with a handful of internally created, often static business models. In the near future, dynamic (even disposable) digital business models will add flexibility and lower costs by allowing banks to easily tap into, combine and constantly reconfigure workflows, how resources are utilized and how the organization is contacted, internally and externally. Gartner recently said a third of the highest-performing companies will move to such a model within five years. 

The digital business model, enabled by a combination of smart technologies and distributed computational resources evolving from some of the innovations described in this paper, has even broader implications. If successful, a programmable economy represents a massive transformation of the global economic system.

Exploiting digital business models can monetize a potentially infinite number of algorithms and value-add customer scenarios, letting business leaders garner remarkable competitive strength. Consider the simple vending machine as an autonomous business, reporting its own P&L. Smart, connected vending machines will leverage a cash-dispensing algorithm from a bank to become both vending machine and ATM.

When API-enabled platforms expose existing business assets, such as algorithms, resources and analytics, business functionality is disaggregated, making it available to people or things. In the near future, business models and algorithms could be shared through marketplaces through APIs that enable access to back-end services. The combinatorial effects of such a model would be truly transformative.

Fidor Bank Provides an Example of Dynamic Business Modeling

An open banking platform

Fidor (a German bank with $350 million in assets) offers an example of how the future bank will compete with the digital business model technique. Fidor’s innovation initiative (known as TecS) recently launched its open API platform, which it calls the Fidor Operating System. FidorOS runs on top of its core banking application, Bancos, using Ruby on Rails and MySQL to conduct essential banking functions. Fidor’s platform is open, meaning third parties can exploit the Financial Open eXchange Initiative (FOXI) to create applications within fidorOS.  

Banks can also license fidorOS as a white-label solution, which lets financial technology companies and other banks offer their own custom business models. As of publication of this report, Fidor TecS is not competing with hundreds of business models, yet it has this potential as developers and other partners more broadly adopt fidorOS.

Digital Banking.


Innovate the experience versus the transaction

Try to evaluate the growing list of technologies within an entirely new context by reimagining the experience you want your customers to have (e.g., in reaching personal financial goals, whether based in consumer, merchant or private banking). For decades, business and technology leaders have used automation to increase the productivity of processes designed for a physical world. As we enter a connected economy, this approach will lose out to firms focused on using digital to enable entirely new experience models.

Keep it simple

When envisioning new products and services, avoid starting with the obvious “How can we add value to customers?” Rather, start with “What is the customer job to be done?” (an approach inspired by Clay Christensen, author of The Inventor’s Dilemma). This technique was designed with simplicity in mind. In the digital economy, companies that deliver the most benefit with an approach that is highly intuitive and simple are the ones achieving the highest valuations.

Look outside banking for inspiration

As Penny and Sense have done by adopting attributes of Google Now, this type of benchmarking will help you realize how consumption data, which reveals how customers use your products and the products of others, is poised to create massive disruption (but enormous benefit). That’s because consumption data is rapidly becoming a viable economic resource, fueled by intelligent platforms that use machine language and advanced algorithms to garner deep customer insight.

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