Can Traditional Banks Compete with Digital Banks Through Spin-Off Strategies?
How Incumbent Banks Can Leverage Spin-Offs for Digital Domination
Decoding Digital Bank Spin-Off Strategy
Traditional banks face fierce competition from challenger banks and fintechs offering smoother digital experiences and innovative products. To combat this, many established banks consider launching separate digital banking arms, often called "Spin-Off."
A traditional bank spinning off a digital bank is like building a speedboat. The speedboat represents an independent, cost-effective, agile, and lean digital banking spin-off that operates like a fintech. Bringing this fully digital approach to life meant an entrepreneurial mindset and a fully cloud-native environment. The digital bank spin-off is as lean and agile as the business itself, allowing it to nimbly navigate the waters of digital banking.
This approach offers benefits like:
Faster Decision-Making: Freed from legacy systems and processes, the new entity can innovate rapidly.
Customer-Centric Design: A blank slate allows for building services around customer needs from the ground up.
Tech Innovation Sandbox: It becomes a testing ground for cutting-edge technologies like cloud computing, artificial intelligence (AI), and open banking.
Talent Acquisition: It attracts top digital talent and fosters partnerships with fintechs.
Market Segmentation: Banks can better serve specific customer niches by creating targeted offerings.
However, spinning off a digital bank also presents challenges in technology, operations, regulations, and company culture. Careful consideration is crucial before embarking on this journey.
Spin-Off Failure: Why Incumbent Banks Need a Radical Approach
Many incumbent banks have made the critical mistake of viewing spin-offs as mere extensions of their existing businesses. This approach is a recipe for failure. These attempts often flounder due to four key shortcomings:
Legacy technology: Encumbered by outdated systems, these spin-offs struggle to keep pace with the agility of FinTech startups.
Legacy business models: Stifled by established procedures, they fail to embrace the innovative approaches needed to compete in a digital landscape.
Traditional mindset: A lack of fresh perspectives hinders their ability to disrupt the status quo and cater to evolving customer needs.
Incompatibility with core culture: Operating within the bank's existing framework stifles the customer-centric culture and agile work practices crucial for success.
To overcome these challenges, incumbent banks must create a truly separate entity for their spin-off venture. This requires a dedicated team with a distinct mission, comprised of a mix of experienced bank personnel and individuals possessing forward-thinking digital expertise. Only through such a structural and cultural shift can incumbent banks successfully nurture their spin-offs into thriving competitors in the digital banking arena.
Business Model
The core of a digital spin-off is to create a highly efficient, low-cost operation that deepens customer relationships and unlocks new revenue streams. The business model hinges on:
Low Operating Costs: Achieved through a lean organisational structure, cloud-based technology, automated processes, and a remote workforce.
Efficient Client Acquisition: Digital onboarding, social media marketing, self-service tools, and data-driven outreach strategies are key.
Premium Value-Added Services: These can include premium accounts with enhanced features, commission revenue from product cross-selling, and revenue sharing from partnerships.
Scalable Technology
A digital bank's core requires a cloud-native, API-enabled technology stack to facilitate rapid innovation, seamless integration, and easy scaling. Key components include:
Modern Core Banking System: A modern core banking engine handles deposits, lending, and other core functionalities.
Data & AI Platform: This centralizes transaction and customer data, enabling AI/ML models for personalisation, fraud detection, and advanced analytics.
DevOps & Microservices: Agile development practices and a containerised microservices architecture ensure flexibility and scalability.
Open Banking: Standard APIs enable data sharing and integration with third-party service providers, fostering embedded finance opportunities.
Product Strategy
The product roadmap should balance innovative offerings with traditional banking services. Key areas include:
Launch Essentials: Mobile-first checking and savings accounts, person-to-person payments, bill pay, budgeting tools, and digitized account opening, lending, and investment options.
Value-Added Banking: Premium subscriptions with enhanced features, high-interest savings products with robo-advisory capabilities, and digitized loan products for mortgages, home equity lines of credit, personal loans, and small businesses.
Lifestyle Banking: Merchant offers and cashback programs, integration with buy-now-pay-later platforms, personal finance management tools with open banking data aggregation, and embedded banking services via APIs for third-party platforms.
Building a Winning Digital Bank Model: Lessons from Nubank
Incumbent banks can learn valuable lessons from Nubank's phenomenal success, which has seen them amass 90 million customers and generate a billion dollars in annual profits. Here's how Nubank achieved this outlier status, and how banks can adapt their approach for their own digital bank spin-off:
The Nubank Flywheel: A Self-Reinforcing Cycle
Nubank's success hinges on a self-reinforcing cycle fueled by four key pillars:
Mission-Driven Culture: A strong, purpose-driven culture fosters employee alignment and exceptional service.
Extraordinary Customer Experiences: Delivering exceptional customer service across all touchpoints is paramount.
Advanced Technology: Leveraging cutting-edge technologies like cloud computing and AI is essential for seamless digital experiences.
Proprietary Data Science: Utilizing advanced data analytics and AI/ML models allows for personalized offerings and deeper customer insights.
These pillars work together in a virtuous cycle. Better Products & Experiences lead to More Customers and More Data. The increased scale allows for Lower Costs, enabling banks to offer More Attractive Fees & Rates. This, in turn, drives More Engagement from existing customers, perpetuating the cycle and fostering continuous differentiation and value creation.
Product Strategy for Success: Learning from Market Leaders
While Nubank's flywheel provides the foundation, successful product strategy requires tailoring product offerings. Here's what we can glean from the leading digital players:
Starling Bank: Their focus on mortgages suggests a strategic approach to catering to homeownership needs.
Monzo & N26: Their emphasis on Buy-Now-Pay-Later (BNPL) highlights the potential of this growing market segment.
Revolut: Their aggressive expansion into personal loans demonstrates the opportunity in this space.
By understanding the target market and learning from these successful models, incumbent banks can develop a product strategy that resonates with their customers and fuels their digital bank spin-off's growth.
Successful Spin-Off Use Case
Bank Jago by PT Bank, Indonesia
Indonesia's Bank Jago, founded in 1992, wasn't always a digital frontrunner. Recognising the changing financial landscape and the growing demand for tech-driven solutions, the incumbent bank embarked on a bold transformation journey.
Launched as a digital brand in mid-2021, Bank Jago has rapidly grown to over 5.5 million customers, becoming one of the few profitable digital banks globally.
Jago is not just about banking; it’s about life centricity. Jago’s focus is not on basic banking products, but on a solution that helps people get closer to their dreams and aspirations.
The bank's success can be attributed to its strong tech partnership with Dkatalis, which has offices across Asia and employs remote teams. Bank Jago leverages an "ecosystem" integration with key partners like Gojek, Atome, Tokopedia, Bibit, and Stockbit, allowing it to offer a unique value proposition and reduce customer acquisition costs.
Additionally, the bank has achieved successes in implementing AI and analytics with a focus on customer experience (CX) through a product-led organization and close collaboration with data scientists during the design phase. Key CX initiatives include bootstrapping data by releasing features to internal staff first and using modern language models like ChatGPT-based tooling for contact center engagements.
They launched a user-friendly mobile app designed for a life-centric approach to money management. This app went beyond basic transactions, offering budgeting tools, collaborative features, and seamless integration with popular e-commerce platforms.
Bank Jago's transformation is a testament to the power of embracing technology and prioritizing customer experience. By shedding its traditional skin and embracing a digital future, Jago has positioned itself as a leader in Indonesia's rapidly evolving financial landscape.
Chase UK
Chase UK, the digital banking arm of U.S. banking giant JPMorgan, is rapidly growing its customer base and deposits in Britain since its launch in 2021. Some of the key highlights:
Chase UK has amassed over 2 million customers and manages around £15 billion in deposits so far.
The digital bank is aiming to become a "major player" in the UK market by providing better returns and rates on savings products as consumers hunt for higher yields.
The bank is benefiting from JPMorgan's brand recognition and deep pockets to invest in building out its UK digital banking capabilities rapidly.
Bank Jago by PT Bank, Indonesia:
Indonesia's Bank Jago, founded in 1992, wasn't always a digital frontrunner. Recognising the changing financial landscape and the growing demand for tech-driven solutions, the incumbent bank embarked on a bold transformation journey.
Launched as a digital brand in mid-2021, Bank Jago has rapidly grown to over 5.5 million customers, becoming one of the few profitable digital banks globally.
Jago is not just about banking; it’s about life centricity. Jago’s focus is not on basic banking products, but on a solution that helps people get closer to their dreams and aspirations.
The bank's success can be attributed to its strong tech partnership with Dkatalis, which has offices across Asia and employs remote teams. Bank Jago leverages an "ecosystem" integration with key partners like Gojek, Atome, Tokopedia, Bibit, and Stockbit, allowing it to offer a unique value proposition and reduce customer acquisition costs.
Additionally, the bank has achieved successes in implementing AI and analytics with a focus on customer experience (CX) through a product-led organization and close collaboration with data scientists during the design phase. Key CX initiatives include bootstrapping data by releasing features to internal staff first and using modern language models like ChatGPT-based tooling for contact center engagements.
They launched a user-friendly mobile app designed for a life-centric approach to money management. This app went beyond basic transactions, offering budgeting tools, collaborative features, and seamless integration with popular e-commerce platforms.
Bank Jago's transformation is a testament to the power of embracing technology and prioritizing customer experience. By shedding its traditional skin and embracing a digital future, Jago has positioned itself as a leader in Indonesia's rapidly evolving financial landscape.
In essence, by cultivating a purpose-driven culture, prioritising exceptional customer experiences, leveraging advanced technology, and harnessing the power of data science, incumbent banks can create a self-reinforcing cycle that propels their digital bank towards success. Additionally, by learning from the product leadership of established digital players, banks can tailor their offerings to capture specific market opportunities.
The key lies in rapid iteration and launching core products to gain traction while continuously expanding into innovative data-driven, AI-powered, and open ecosystem-enabled services. Partnering with fintechs is crucial for accelerating product development.
The digital bank spin-off model offers a path for established banks to transform and thrive in the digital age. However, meticulous planning around the business model, technology stack, product strategy, and internal cultural change is paramount. Success hinges on getting these elements right to reap the rewards of higher growth, lower costs, and deeper customer engagement.