Usage of technology in every sphere of life is in the core of 4th Industrial Revolution (4IR). The financial sector is at the forefront of 4IR globally and Bangladesh is not an exception. Technological Innovations in financial services popularly known as Fintech brings disruptions to the conventional banking system.
However, the wide acceptance of technology by this millennium generation forced financial market to revisit and adjust the way of doing business by adopting technology. Two aspects of such digital revolution in banking business are: (i) Digitisation and (ii) Digitalisation.
Banking digitising means converting currently manual or paper-based documentation into digital format and changing the business rules/procedures to accommodate those. Whereas digitalising of banking is a whole new way of doing business. Digitalisation of banking or digital banking is the application of technology to ensure seamless end-to-end electronic processing of banking operations/ transactions. Digital banking is also known as electronic banking, cyber banking, or virtual banking which can be conducted from anywhere.
Usually it works in state through processing manner, initiated by the client, ensuring maximum utility to the client in terms of availability, usefulness and cost. For bank, it reduces operating costs, minimises errors and enhances services i.e overall provides a better user experience as a whole.
Financial technologies e.g. Internet of Things, Blockchain Technology, Augmented reality (AR), virtual reality (VR), Open APIs, Big Data , Machine Learning, Robo advice, Smart contracts and Cloud computing, etc. could be used separately or all together to bring numerous benefits to the financial system as well as to consumers.
This new business model of digital banking is getting very popular throughout the world especially at the retail level. Traditional banks understand the growing customer demand for digital access and convenience and aware of the emergence of new competition within and outside the banking industry. Banks also recognise adoption of various existing and emerging technologies will optimise their workflow and lower operational costs.
On the other hand, the Fintech companies successfully address the gaps left by traditional financial institutions along with new product development and innovating existing products and services. The agility to adopt the latest technologies, combined with best practices from other industries has enabled Fintechs to develop these competitive advantages.
From the experience of other countries it has been found that, collaboration between traditional banks and Fintech firms often resulted in the best form of digital bank. Countries like Australia, Brazil, Singapore, Hong Kong, Malaysia, UAE, KSA have already successfully implemented digital banking to meet the ever growing client demand.
The prospect of such banking services in Bangladesh has already been partially demonstrated by the Mobile Financial Services (MFS) providers in the country like Rocket, bKash and others.
But it is important to remember that every benefit has some inherent risk. High proliferation of digital banking also fight with certain associated risk e.g. Security Risks, Breach of Privacy, Disparity in Services, Cybercrime, Systemic risks, etc.
So, for the particular targeted client segment of digital banking who wants to experience the benefits of improved consumer experience, benefits of reduced costs, and to have greater transparency in all services also need to develop a richer insight into own financial well-being along with actionable advice on steps.
Regulators also need to take appropriate stance to strike the balance between innovations customer protection and monetary policy transmission. Banks in Bangladesh have already realised the importance and opportunities of digital banking in the country and are experimenting different models like creating partnership with MFS to offer banking services or creating subsidiaries with Fintech firms for offering digital banking services.
However, necessary policy to unleash the opportunity created by Digital Banking is to be adopted by the regulators to materialise the concept of Digital Banking. Therefore, digitalisation of banking industry is no longer an option, it's a simple bare necessity - the collaboration of banking and Fintech will be the key to flourish.
The piece is excerpted from Bangladesh Bank Annual Report (July 2019-June 2020).
