Have you noticed how the banking industry has changed over the last decade? With the meteoric rise of digital banks, traditional business models have been turned on their head, giving customers more power and access to better financial services than ever before.

This is largely because of digitalization. With this blurring of lines between technology and finance, the banking industry is in the middle of a major paradigm shift. Traditional business models and service offerings are no longer sustainable. Customers have been changed by today’s culture of instant access and transparency that was unheard of just a few decades ago and are now in the driver’s seat. The onus is on the banks to address the customers’ desire for a digital first experience, which also creates a large opportunity for nimble digital-only banks to challenge the status quo and carve out a piece of the pie for themselves.

 (To know more about digital banking, read some of our related articles here:

Digital Banking – A Simple Overview

10 things about digital banking you may not have known)

Which begs the question: how do you set up a digital bank? What are the key ingredients in putting together the perfect digital banks strategy?

At Penser, we pride ourselves on our knowledge of the industry, and our experience in the payments and fintech space. We’ve worked with a range of clients on their digital transformation journey and have been involved in the industry from the early days of the digital revolution. From our vantage point, here are 7 key steps in building a digital bank from scratch.

Step 1 – Identify your customer

Understanding your customer is the first step to building a digital bank. It is essential to defining a clear strategy because it helps you clearly define the “why”, or what your value proposition is going to be.

What does this mean? It means you need to do the research to figure out what problem you want to solve and for whom. Are you focusing for young adults who are entering the workplace, and are trying to come up with effective saving strategies? Or are you targeting small businesses that have challenges managing their cash flow? Maybe you want to focus on freelancers, who are looking to minimize the hassle of book-keeping and invoicing? Or will you instead approach customers with poor credit that are eager to build their credit profile? Or perhaps you want to talk to the “global citizen”, the expatriates who travel often and need banking and payments solutions that are global as well?

As you can tell, there are a lot of options. The above is by no means exhaustive. To be a good digital bank, you need to appreciate that you can’t be everything to everyone. Defining your focus is critical to a successful digital bank strategy.

How would we do that? By working on gaining deep insights into what problem(s) you want to solve and creating a clear banking value proposition around it. Establishing this early on will help you succeed quicker.

Step 2 – Define your use case

Use cases are the next step in your digital bank building process. Along with this, you’d naturally also detail the business and technical requirements needed, and of course, outline the flow of the user experience.

In a way, you could look at this as designing the blueprint that you will eventually build on. Assuming you use an agile development methodology as opposed to the waterfall methodology – which would make sense because of its clear advantages in quickly creating a minimum viable product – you’ll work in sprints. The added advantage of this is that every minute detail does not need to be documented at the outset, and you can document as your product develops.

Step 3 – Setting up the platform

When it comes to setting up the platform, there are broadly three strategies you could leverage:

  • Build your own platform,
  • Buy an existing platform, or
  • Partner with an existing platform.

Usually, you will end up using a combination of the above three. Why? Because building an effective platform requires you to pay attention to many disparate moving parts and making sure that each part communicates with the other.

Here’s a quick snapshot of some of the different aspects of the user experience your platform has to address:

  • Customer onboarding
  • Account management
  • Compliance, anti-money laundering (AML) and KYC management, and regulatory reporting
  • Fraud management
  • IT security
  • Customer service, and, of course,
  • Your mobile app and website

Using a combination of the three strategies we mentioned, you can build a robust platform that covers all the bases. Fortunately or unfortunately, there are many banking platforms to choose from, and identifying which ones are best suited for you can be a difficult task. Penser has deep expertise and a history of partnership experience to help guide you to the right partner for you. We can help you identify the perfect partner for you by digging into the details and helping you make an informed decision.

Step 4 – Regulatory approval and licensing

Regulatory approval is a big part of the successful digital bank’s playbook. With new and more stringent regulations being implemented across countries (such as the PSD2 in the EU), your digital bank will need to be aware of the changing landscape and the varying requirements across countries. Depending on the country and the type of banking proposition you offer – such as prepaid accounts, current accounts, credit cards, etc. – your digital bank will have to stay within the defined guidelines. The structure you select and the license you apply for will impact not only the speed of your launch and the cost involved, but also the risk you are taking on, so it’s important to make your choice wisely.

Step 5 – Building the platform

Building the platform could also be thought of as creating the banking experience or defining how your customer is going to interact and engage with the bank. Simplifying the process and removing traditional pain points are some of the key hallmarks that have driven the quick adoption of these neo-banks by customers. These pain points could include being able to turn off a card via an app in case of loss or lack of use, or even being able to quickly get clarifications on transactions they don’t recognize, through an intuitive app.

But creating a fantastic experience is only effective as long as you stay compliant with the rules and regulations and, of course, you don’t lose anyone’s money. Good user experience should not sacrifice strong security measures.

Step 6 – Launching the digital bank

At long last, you’ve reached the final step. However, with the finish line in sight, it’s important to stay focused and clear about the potential roadblocks ahead. The cost of customer acquisition can be anywhere from US$ 100 to US$ 500 for a retail banking product – a range that could easily break a fledgling digital bank as it starts to get its bearings. Consider also that the customer lifetime value may vary from zero to many thousands, depending on the type of customer and product, and it becomes clear that the road from launch to success is a tricky one.

Making a profit, then, is a balancing act. Knowing how to inform and educate your customers about your product and encouraging them to pay for the service, while keeping operating costs low and fending off competition from other fintech startups, will be crucial to establishing you as a meaningful player.

How can you mitigate these risks? The key here is to start small and control your growth. Starting small has the advantage of doubling as a testing ground, allowing you to work out the final kinks in your service. Once you’ve perfected your offering, you can then roll it out to a broader audience and focus on cementing your place in the fintech landscape.

Step 7 – Adapt and expand

Finally, be prepared to adapt. The fintech landscape is dynamic, and technology can drive change in leaps and bounds. Your agile digital bank is better suited for this changing landscape than, say, traditional banks, but it is not immune to its effects.

A good place to start is looking to expand beyond your core proposition. Retail banks earn profits through cross-selling products, especially since the average person today expects a bank account to be free. If you would like to make a revenue (and who wouldn’t?), define your product roadmap to include products that earn interest, or where a fee can be justified by the exemplary service and/or experience your bank will provide.

And that’s it – our 7 ingredients to a recipe for a successful digital bank. Of course, as with all good recipes, the devil is in the details. That’s why most successful digital banks have had an experienced partner to help guide them through this journey and point out any potential pitfalls early on.

To know more, check out our earlier article on strategies for a successful digital transformation journey here. Or, if you’d like to read up on some banks that have done it right, check out our Digital Transformation Spotlight series.