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May 31, 2023

A conventional bank can never turn into a 'digital bank': City Bank MD

Cheap paid-up capital requirement and low threshold enticed investors from different sectors including banks, insurance, telecom, and mobile financial service providers to join in the race to

Cheap paid-up capital requirement and low threshold enticed investors from different sectors including banks, insurance, telecom, and mobile financial service providers to join in the race to establish Digital Bank.

A total of 52 domestic and foreign entities have filed applications for licences to set up digital banks and the majority of conventional banks are on the list. Now, the topic of how a digital bank can vary from a regular bank and why conventional banks are competing for a license as digital banks has been posed.

Mashrur Arefin, Managing Director and CEO of City Bank and Vice Chairman of the Association of Bankers, Bangladesh (ABB), discussed the novel idea of a digital bank with The Business Standard in an interview. He addressed the distinction between traditional banking and digital banking explaining why a conventional bank can never turn into a "digital bank."

How do you see the mad rush for a Digital bank license?

I think the mad rush has been caused by four factors. One is the low initial paid-up capital requirement, which is only Tk125 crore, and the low threshold of Tk50 lakh for individuals to become sponsors.

Secondly, we are a nation of truly entrepreneurial people, which is evident in the growth of our GDP from $90 billion to $460 billion in just 15 years.

Third, the success of the MFS business in Bangladesh has acted as a major motivation. BKash has turned mobile money into a kind of alternate currency. That's a groundbreaking milestone achieved.

Fourth, the recent successes of Internet banking have been truly eye-catching. Internet banking apps of, say, City Bank, BRAC Bank, and EBL have significantly contributed to changing the run-of-the-mill banking landscape. This has motivated people to think that, if City Bank's Citytouch app on mobile phones can generate Tk41,000 crore transaction volume in a year, then if we can offer a good product suite with good security etc, customers will love to do digital banking.

Why does City Bank want to set up a Digital Bank when it already has a massive footprint in digital banking with its conventional banking license?

There is such a huge misconception about Digital Banking vis-a-vis conventional banks going digital. It pains me. The fact is, a conventional bank with its conventional mindset, its physical presence related to cost structure, its culture of necessary bureaucracy, its knack for financing large-size projects, etc can never turn into a digital bank. Never.

At most what it can do is offer its full suite of retail banking, small and micro-finance and card products through people's phone sets.

That's classical "internet banking" — where a brick-and-mortar conventional bank basically creates a complementary channel for its product and service offerings to individual people, not so much to business houses. So, it's basically an extension of its conventionality by other means – that is by technological means.

What advantages do you foresee in adopting digital banking, both for the bank and its customers?

Customers will get bank accounts opened instantly sitting anywhere on earth with only an internet connection – they will get chat services, money transfers and hundreds of other services the same way. Customers will get access to loans or credits based on how they behave on the deposit and transactional sides.

As long as that conventional cost base arising out of paying salaries to many thousands of staff, maintaining branch networks, ATMs, POS machines, multiple offices for credit and sales, etc, remains – the luggage and baggage of traditional banks will remain. With that luggage and baggage, a traditional bank is bound to stay as a traditional bank at its balance sheet level. That's a fact.

Digital Bank is a different thing altogether, which is essentially free of a conventional bank's most conventions, free of all its traditional cost baggage, which is essentially mass segment focussed, and runs on a service platform that's customer's personal preference based, and—from balance sheet point of view—which entails a different capital requirement due to loan ticket sizes being small, hence an altogether different financial planning.

So you want to say a Citytouch or a Brac Bank Astha or an EBL Sky cannot emerge as digital banking?

If you have heard me saying what I said above, it's clear that Citytouch can never force us to do all those things including the cultural change or mindset level change that's required to build a digital bank.

Citytouch, even with its best level of capabilities, is nothing but an extension of a traditional bank's service channel – which is good, but the thing is, the digital potentials of a bank can't be achieved by putting your foot into the traditional mud at the same time.

Then what will be the main differences between digital banking and CityTouch?

I will use another set of phrases this time to bring home the scale of the difference.

Citytouch comes as a new corridor for existing bank's transaction banking services which are digitised and are offered on digital channels like mobile banking applications or internet banking web portals. So, Citytouch is basically a perfect complement to our physical banking.

Whereas, Digital Bank is a new kind of banking, the most prominent feature of which is that the operation of the bank is housed in a digital sphere, and it doesn't have any presence of physical branches or physical touch points. The day-to-day operation is managed digitally by deploying certain core infrastructures. I mean, there is no physical back office operation of the bank either.

What advantages do you foresee in adopting digital banking, both for the bank and its customers? Customers will get bank accounts opened instantly sitting anywhere on earth with only an internet connection – they will get chat services, money transfers and hundreds of other services the same way. Customers will get access to loans or credits based on how they behave on the deposit and transactional sides.

Look at it this way. Banking via digital channels is the core USP of any digital bank, whereas transaction banking in some digital platforms like Citytouch is not City Bank's core. Now all customers of City Bank are similarly served at a generic level, whereas a digital bank will offer its millions of customers separate digital banks after tailoring its banking offerings as per each customer's separate and unique needs.

So, I mean, a true digital bank is a personal banker or a financial advisor of its customers, and that's not in a common-for-all sense, that's at an individual level for each and every individual entity who is a customer of a digital bank.

Another matter is that conventional banks are all centralised functions at their top structural level. We are all "closed loop" banks. We begin with us and we end with us too. Whereas digital bank is truly decentralised.

In the sense that they grow by enabling trusted third-party platforms such as e-commerce websites, retail stores, online marketplaces, and data-heavy institutions. It basically meets its lending need by sharing its APIs with other such data-heavy institutions. It expands its service horizon also by doing the same. It's an "open loop" that way. It's truly a full range everywhere-every moment "always open" banking without any Eid holidays or even weekends. That's its horizontal breadth, which is immense.

What advantages do you foresee in adopting digital banking, both for the bank and its customers?

Customers will get bank accounts opened instantly sitting anywhere on earth with only an internet connection – they will get loans, credit cards, debit cards, remittance services, chat services, money transfers and hundreds of other services the same way.

Customers will get access to loans or credits based on how they behave on the deposit and transactional sides. They will have their transactional data pitted against their behavioural and lifestyle data. The marriage of these two will enable them to have financial freedom in a never-before-seen way.

And, as I said before, each customer will have his or her own separate digital bank based on his or her unique choice and preference. They will get all this at three levels—design, credit availability and interaction with third-party platforms. This last thing will be a totally new thing.

It's like, for example, a Daraz, Pathao or Robi customer will be able to avail a digital bank's full service including bank account opening and loan on the apps of Daraz, Pathao and Robi itself – if a digital bank and these three companies choose to connect in terms of API specification.

This, however, will be the customer's permission dependent. That's another beauty about it. I mean, the opt-in and opt-out functions, where the more the customers trust your digital bank, the more they will opt-in to have their data shared with third parties and vice-versa.

What specific digital banking services and products a digital bank can offer that will differentiate one digital bank from the others in the current competitive digital landscape?

Almost everyone will have similar offerings because the same technologies are there on the shelves for everyone to buy and deploy. I think the main difference will lie at the capital adequacy level. Without getting into loans underwriting and credit card issuance where the interest rate is 20% annually, only the earnings from deposits, remittances and services will fail to make a digital bank financially sustainable.

So the players with deep pockets will sail through more smoothly if they can ensure a good credit risk management culture. Here the bank consortiums will be more powerful than many other applicants for license. One, banks have deeper pockets that will enable them to inject more equity. Two, they are already supposedly good at risk management.

Another important thing must be mentioned. Most digital bank players will be good at new customer acquisition or onboarding. But few will be good at making the "customer journeys" smooth, personalised, and enabling for business upscaling. The success, I mean, will not lie in your ability to onboard millions of customers (which you may in any case naturally have in a country of 180 million people), but in the post-onboarding phase, that is, at the relationship retention and relationship deepening level.

Having access to potential customers' data by shaking hands with many third parties is easy – mining those data with the help of many available tech engines is also easy, but making those data talk meaningfully for your business is not. That will not come easy, I mean your ability to build foundations for Big Data and make them meaningful for you with the help of AI etc won't come easy, as the fresh capital injection for building bigger loan books won't come easy.

What steps will be taken to address potential cybersecurity concerns and protect customer data in the digital environment?

Cybersecurity management is usual stuff. That challenge is already there for all of us (the banks) and for all our Internet bank offerings like Citytouch etc. I will not go into details about what to do on that front.

I believe the arrival of digital banks in the scene will further strengthen the cyber security management situation because fear is a great motivator, everyone will be under fear to protect their investment, and they will also be concerned about gaining customer trust over the new outfit.

I am much more anxious about data protection here. Digital banking runs its algorithms based on data. And your data is you. We have an ethical responsibility to protect your finances in a confidentiality sense, as well as your dignity, and honour.

So there is no option but to go for things like implementing privacy standards which include anonymisation of data and consent management, meaning collecting data only based on consent from customers.

The data consent layer is a critical element of the decentralisation of banking, of enabling banking everywhere. Having a consent layer will allow you a collection of 360-degree data about a customer via open APIs from third parties. There we must adhere to data privacy acts.

One of the challenges here is to earn people's trust in opting in to provide their data. That means technology without strategy is nothing. Therefore, significant educational activities must be carried on with regulatory or government endorsement.

I am also concerned about data accuracy including the accuracy of our national ID data. Validation of who is really who with the government's "Porichoy" portal level is perhaps the key to managing fraud losses or other operational losses as a digital bank grows.

What investments are needed to set up technology infrastructure and talent acquisition to support the digital banking initiative?

Initially, 6-7 things will be needed in order to start the business. For example, a core banking system, a card management system, a digital onboarding system, a loan origination system, a credit scoring engine, a customer relationship management engine, a front end of all these things which customers see and use (ie an interface like Citytouch).

I am not talking about your investments in Big Data here, or AI capabilities or security systems. That's a lot of things already. The initial capital of Tk125 crore will go just into buying and implementing these.

And on talent acquisition, I am faced with the biggest challenge. Systems are out there on the shelves, I said already, but brains are not always available in the heads of people we work with.

How do you plan to ensure a smooth transition for existing customers who are accustomed to traditional banking services?

Why should I talk about luring existing bank customers to digital banks rather than offer them more on Citytouch-like mobile banking platforms and retain them there?

It's a large economy so you better go hunt for new customers for your digital banks. Look at the customer base of BKash which is about 6 crore people. Look at the buying and selling activities that are happening at retail and small business levels across the 495 upazilas and 88,000 villages. That's like another Bangladesh, which the traditional banks have not necessarily looked into in a meaningful way.

Bring those people in. Onboard them first as digital bank deposit customers, and then help their money grow, give them access to credit, give digital loans to recipients of remittance dollars too, and focus especially on women customers and so on. I mean, make financial inclusion your number 1 priority if you are launching a digital bank. Rest will follow in time.

Tell us about what prompted City Bank to become the lead bank in forming this 10-bank consortium.

It's a wrong idea going around as if City Bank was the lead bank in the proposed DIGI10 BANK PLC consortium. There is no lead bank concept here. All 10 banks are exactly equal in this.

The idea first came from Dutch Bangla Bank CEO Mr Shirin, and I felt convinced – I being the youngest of the 10 CEOs in age and especially passionate about the digital banking thing, took up the charge of coordination among 10 banks.

We are basically a group of like-minded CEOs here, and 90% of us go a long way back having started our careers in some foreign bank long ago. For example, I have known six of these 9 other CEOs for 29 years now; and that's true for others about me too. So it's some similar mindsets coming together.

It's just that City Bank gave to media the first Price Sensitive Information after holding the first board meeting amongst the 10, hence people thought it was City Bank-led. It can't be anybody-led. It's a consortium of exact equals.

However, what mostly pleases me about this consortium is that regardless of us getting a license or not getting it, it was a hugely fun-filled, against-time, seriously exciting race towards a mammoth goal in which all of us enjoyed participating in – which proved that even in our divided kind of culture actually some of us in the banking industry are truly together.

digital banking / City Bank / Mashrur Arefin / Bangladesh Banking Sector