Digitization in banking: how to really reap the benefits

  • Chinese banks are leaders in digitizing the banking sector through investment and innovation, but there are still areas where greater impact could be achieved.
  • To accelerate digital transformation in the banking sector, banks must: encourage customers to respect their personal data rights, combine digitalization with green development and protect the interests of disadvantaged groups.
  • The international banking industry can advance digital transformation in banking by opening up and sharing software solutions, regularizing the application of digital technology across jurisdictions, and recognizing and mitigating the risks inherent in the process.

It is not hard to see that digital transformation is a mainstream trend driving the development of the banking industry, with Chinese banks leading through continuous investment and innovation.

However, even the Chinese banking sector still has a long way to go before the full power of digitalization in banking is realized. There are three key areas where significant digital transformation can take place.

Accelerating digitalization in the banking sector

1. Restore control over personal data

Ensuring consumer data rights can be complex. Traditional physical banks have accumulated a lot of data through digital transformation, which can be freely used by the bank or business parties, while customers are excluded from reaping the economic benefits their data brings.

As customers become increasingly aware of the overuse of personal data, Chinese banks risk losing the potential to expand their pool of data assets and maintain positive customer relationships.

One solution in the industry to this problem has been to create data accounts, allowing customers to store their data as currency. Banks can then use the data from these accounts at a price decided by the market.

[Safeguards] are needed for digitalization in the banking sector to protect the financial rights of disadvantaged groups.

—Gang Peng, Chairman of China Construction Bank (Europe) SA and Vice Dean and Secretary General of the International Institute of China Construction Bank

2. Synergize digitization with green development

While digital technology can foster green development, the two initiatives are not always synchronized. For example, digital equipment and services have been the main source of energy consumption for banks.

According to a report by Galaxy Digital in 2021, the banking sector consumes 263.72 terawatt hours per year of electricity, of which banking data centers use 238.92 terawatt hours per year. According to calculations by China Construction Bank, by 2025 the total electricity consumed by banking data centers worldwide will be equivalent to that of the world’s 10th largest economy in 2021. The electronic equipment used by these centers typically has a lifespan of around five years, so e-waste disposal presents another huge challenge.

No bank should focus solely on technology; banks should also take into account the negative environmental impact of digitalisation in the banking sector. The Chinese banking industry sees coordination between digital development and green development as a priority, as evidenced by green data services that are becoming a key criterion for Chinese banks to select their suppliers.

Breakdown of electricity consumed by the global banking sector.

Breakdown of electricity consumed by the global banking sector.

Image: Digital Galaxy

One of the crucial results of digital transformation is that banks have been able to meet the financial needs of long-term customers – unbanked and underbanked – to reconcile, to some extent, broader economic inequalities. However, digitization can also lead to new forms of injustice.

For example, ensuring access to banking services for those at the bottom of the financial ladder remains difficult. The proportion of Internet users in the world still represents only 62.5% of the world’s population. If banks provide financial services primarily through digital channels in the future, they will deny access to nearly 3 billion people. Any user would need at least one electronic device and a network connection to do their banking, which would add a premium to the ability to do banking.

Banking in this way therefore imposes multiple burdens of having financial knowledge while having technical and operational knowledge, an implicit threshold that can turn many away. Thus, safeguards are needed for digitalization in the banking sector to protect the financial rights of disadvantaged groups.

Greater international collaboration and broader participation from the global banking industry could accelerate the progress of the digital transformation project worldwide, however, in three ways.

Advancing digital transformation

1. Open source digital technology

Traditional banks are not known for their expertise in digital technology. So, in many ways, open source solutions are the pragmatic way to keep up with the rapidly changing digitalization trend.

Openness and sharing can pool ideas across sectors to identify problems and find innovative solutions. In particular, advanced digital technology needs dialogue, research and buy-in. Those working in IT tend to be more open-minded about sharing technology – the open-source software platform GitHub is proof of that.

Traditional banks should follow this example by strengthening peer-to-peer exchanges on digital technology and exploring possible ways to make their data and technology available to the public.

2. Regularize the application of digital technology in banks

The rules governing the application of digital technology vary from country to country, from bank to bank and even within the same bank. For example, some applications are adopting Near Field Communication (NFC), a set of short-range wireless technologies. Others do not and are only compatible with certain smartphones. The extent of customer information collected by banks is also inconsistent.

These differences hinder the promotion of banks and the intensive use of digital technology while making it more difficult to regulate the banking sector. Currently, the global banking industry lacks a relatively unified framework governing technology adoption. Therefore, the establishment of an international alliance led by the principles of people and technology for good and exploring the establishment of a consensus-based set of standards or technical application guidelines could best guide traditional banks in the digital transition.

3. Recognize potential risks

Digital technology is a double-edged sword. In 2021, there were a record number of Distributed Denial of Service (DDoS) attacks – a common way to hack networks – in the global financial industry. While banks need to protect themselves from traditional financial risks, they also need to prepare earlier for model risks, algorithm vulnerabilities, data security threats and hidden dangers.

Currently, traditional banks do not sufficiently take into account the risks of the digitization process and could learn from international banks that have gained a reputation for leading digitized operations. However, these risks could already be being mitigated through a new regulatory framework that responds to the risk characteristics of digitized banks based on the Basel Accords – the international agreements established in the 1980s around capital risk, market and operational.

If banks consider these areas to accelerate and advance digitalization in banking, they could further reap its many benefits.

Melvin B. Baillie