Banks: How to move from the "imaginary Internet" to the "real Internet"?

This article provides an in-depth look at the "digital native" dilemma that banks face in their digital transformation. The article first reviews the attempts and failures of banks to build their own e-commerce platforms, and points out the fundamental differences between banks and Internet companies in terms of genes and business footholds. Subsequently, several important shifts in the bank's digital path are discussed, including from tracking Internet companies to innovation based on the essence of finance, to the exploration of open banking and non-financial scenarios. According to the authors, banks' digital dilemma stems from a lack of understanding of the Internet, including foresight, accuracy, and comprehensiveness. Finally, the paper looks forward to three future trends of the Internet: the deepening of 5G and digitalization, the wide application of artificial intelligence, and the transformation of service focus, and proposes that building a digital-native bank and realizing the organic integration of people and the Internet is the fundamental way for banks to get out of the predicament and realize digital transformation.

It has been more than ten years since the first cross-border e-commerce of domestic banks to march to the Internet. But over the years, we have found that banks are still banks, and Internet companies are still Internet companies. Banks are still in a dilemma in the process of connecting with the Internet, which is also described by some banks as "how to evolve from the Internet imagined by bankers" to the "real Internet".

01

The native dilemma of banking digitalization

"Digital native" is an extension and extension of the concept of "cloud native" in the field of IT and Internet technology, which means that banks should eliminate the natural barrier between their own behavior and the Internet, and use Internet thinking and logic to think and behave. But realistically, this is difficult for banks.

In May 2022, ICBC announced that its e-commerce platform "Rong e-Purchase" will stop personal mall-related services and corporate mall public sales, business district sales, cross-border trade and other related services at 24:00 on June 30, 2022. In addition to the Industrial and Commercial Bank of China's choice to shut down, the "Xingnong Mall" operated by the Agricultural Bank of China was operated by ABC Financial Technology Co., Ltd. in early 2022; From April 25, 2022, the operating entity of CCB's "Shanrong Commerce" platform will be changed to CCB Financial Services Technology Development Co., Ltd.; Minsheng Bank's Minsheng Mall has been officially closed on May 31, 2022; China Merchants Bank's online mall has also been spun off and operated by Shanghai Jiuying. The offline and transformation of bank e-commerce such as "financial e-purchase" basically announced the end of the era of bank e-commerce, which is of symbolic significance. Because building a self-built e-commerce scenario platform and promoting the integration of financial services and Internet scenarios is precisely the beginning of banks exploring customer acquisition scenarios. To some extent, the rise and fall of bank e-commerce is a microcosm of China's banking industry's difficult exploration of digital customer acquisition in the past decade.

In 2012, CCB launched the "Shanrong Commerce" e-commerce financial service platform, which was also the first cross-border e-commerce platform for banks. In 2007, Alibaba established cooperation with China Construction Bank and Industrial and Commercial Bank of China (ICBC) to launch "e-Loan" and "Easy Financing" loan products, mainly serving small and medium-sized e-commerce enterprises. In this cooperation system, Alibaba is equivalent to a bank's sales channel and information provider, helping banks assess credit risks, while also helping e-commerce companies to raise funds and promote the overall development of the e-commerce ecosystem. But the above cooperation did not last long. Alibaba has successively established Zhejiang Alibaba Microfinance Company and Chongqing Alibaba Microcredit Company. In 2012, CCB established the industry's first bank-based e-commerce - "Shanrong Commerce". Immediately afterwards, Bank of Communications' "Jiaobohui", Agricultural Bank of China's "e-Business Butler", Bank of China's "Bank of China E-Shang", and Industrial and Commercial Bank of China's "Rong e-Purchase" were launched one after another. It has given birth to a wave of cross-border e-commerce of traditional banks.

Since banks started to build their own e-commerce, China's banking industry has begun to implement the strategy of tracking Internet companies in the field of digitalization. However, banks and Internet companies have completely different genetic endowments, and both parties also have different business footholds. In this case, the "follow the strategy" comes at a significant opportunity cost to the bank. In 2013, when Alipay and WeChat bet on QR code payment and entered the offline market, China's banking industry was busy making up for the shortcomings of e-commerce, developing mobile banking and WeChat banking (mobile version of online banking), and developing bank version of fast payment (online payment). It was not until 2016 that the mobile payment habits and "duopoly" pattern of major cities have been formed, and the strategic position of offline mobile payment has been promoted to the level of financial service entrance by some banks, and they have begun to actively promote QR code payment, which has become the mainstream mode of the industry. But at that time, the banking industry had missed the opportunity to move into the future.

However, since 2016, fintech innovation in mainland China has been accelerating, providing a new vision for the digitalization of the banking industry beyond the innovation of Internet companies' network business models. Domestic banks have finally begun to get rid of the passive tracking and imitation of Internet companies, re-based on finance, and think about the field and path of integration of finance and scenarios. In this case, some banks have increased the development of big data inclusive financial quick loan products such as government affairs, taxation, and electricity consumption. In 2018, the concept of open banking emerged, and banks tried to embed their own services into external scenarios in the form of application programming interfaces (APIs) or software toolkits (SDKs). Not only that, some banks are also trying to obtain access to financial services by enabling the informatization and digitization of government affairs and public services. At present, by promoting rural informatization and digitalization, creating a "non-financial scenario-comprehensive finance" platform has become a new focus of competition between new and old rural financial entities.

At the same time, bank branches actively promote the O2O model of branch services, such as the "CCB to Home" service launched by CCB branches, which reconstructs the relationship between bank branches and the Internet, and promotes the operational reform of the back-end business of bank front office. The banking app promotes the integration of the banking app through the platformization of financial self-scenarios.

However, in general, there is still a large distance between the effectiveness of the bank's great efforts to connect with the Internet and the original intention of the bank. There is still a gap between the experience of bank Internet services and the requirements of customers, and the Internet platforms represented by banking e-commerce still do not seem to have the business logic of the platform, and still cannot act as a scenario ecology for banks to reach customers. The transformation of outlets and apps still does not give them the ability to actively acquire customers. Bank branches and banking apps are still in a recession.

It has been ten years since the earliest cross-border e-commerce of domestic banks and their march to the Internet. But we found that banks are still banks, and Internet companies are still Internet companies. Banks are still caught in a dilemma in the process of connecting to the Internet, which has also been described by some banks as "how to evolve from the Internet imagined by bankers" to the "real Internet". In the eyes of these banks, the system, culture, and endowment of banks are naturally deficient in their genes compared with innate Internet companies—a lack of agile organizational ability and Internet thinking. But after more than a decade, banks still need to shout for the abandonment of the "Internet imagined by bankers", which shows that banks still haven't found the crux of the problem.

In fact, for a long time, what we have overlooked is what exactly is the Internet gene? What is digital nativeness? Is a bank repeating the strategy and experience of an Internet company? Is it integrated into the Internet gene? Can the same be achieved with the past success of Internet companies? And after the banks gradually realize strategic autonomy, will they grasp the essence of the Internet? Things need to go back to the source of logic, that is, how to understand the Internet, how to dynamically understand the evolution of the Internet and the implications and impact of it on the digitalization of banks.

02

Rethinking the Internet

The understanding of the Internet, including the understanding of the cross-border finance of Internet giants, has a profound impact on the concept and play of bank digitalization. For China's banking industry, the Internet and its connotations have gone through several stages.

The first stage is computerization and online exchange. For banks, the Internet is an infrastructure. Overall, it belongs to the background category.

The second stage is the stage of online banking and mobile banking. It breaks through the limitations of time and space on banking services, greatly improves the efficiency of banking services, and the development of mobile Internet has undoubtedly further improved the above efficiency. At this stage, banks regard the above-mentioned online channels as the replacement and development of traditional channels - branches, and its internal driving force is the replacement rate of traditional branches by online channels within the bank. The consideration is to reduce costs, not to external competition. Not only that, when mobile finance has become a more convenient development trend of digital banking, banks are investing more resources in the development of e-commerce and online fast payment to make up for the disadvantages in the competition with Internet giants. Not only that, banks are focusing on the NFC mode when developing mobile payment, and they have missed the QR code payment outlet. It can be seen that the original dilemma of banks at this stage arises from the lack of forward-looking insight into the Internet and the lack of accurate grasp of Internet trends.

Phase 3, Platform Framework/Channel. While Internet giants are building financial service entrances through scenarios and ecological strategies, banks are also building a wide range of platforms. However, the business logic of these attempts is obviously flawed, and it lacks the business spirit that it should have. Taking bank cross-border e-commerce as an example, banks often emphasize the attractiveness of finance to e-commerce platform merchants, but the problem lies in the success of e-commerce platforms, and the core is to attract traffic to the C-end. However, banking and finance are not the key to C-end drainage. Of course, judging from the rise of Pinduoduo and Dongfang Selection, new institutions are not unable to intervene in the field of e-commerce through differentiated and characteristic operations, but bank e-commerce rarely has the above-mentioned innovations. And when they do, they often lack strong execution and in-depth operations to create a real advantage. In fact, for banks, e-commerce only exists as a channel for bank customers to attract traffic and develop financial business, and the banking e-commerce platform is not an independent business entity with complete business logic.

In the fourth stage, we attach importance to the marketing and promotion of the platform, but ignore the overall operational support. In recent years, banks have developed rapidly in platform construction, and they have begun to pursue the "real Internet" in terms of concept, gradually abandoning channel thinking. Invest heavily in platform marketing, but the overall effect is still far from the original intention of the strategy. The reason for this lies in the period of rapid development of platform companies in the past, which corresponds to the traffic era of domestic Internet development. During this period, the scale of netizens grew rapidly, and a large number of blank market segments were staked, and market education was accompanied by market growth. Flow thinking, capital and "burning money" logic, and winner-take-all phenomena are all the rage. The subsidy-based Internet marketing method and the agile and efficiency-oriented customer experience have become the main theme of market competition. But times have changed, and the so-called "true Internet" strategy that some banks are now emphasizing and striving for has actually changed. As of 2021, the scale of mainland netizens has reached 1.032 billion, the Internet has been highly popularized, the traffic dividend has peaked, consumer education has been basically completed, and the consumption mentality of netizens has become very mature. In the stock game, the homogeneous service involution is becoming more and more serious, and the early Internet marketing characterized by subsidies and "burning money" has lost its power. However, in the stock game, the platform practice of banks is more biased towards the front-end of business, and the comprehensive reform of the banking service system is rarely touched. The digitalization grafted on the system based on offline logic, system stacking, logical conflicts, line segmentation, and process fragmentation is also the key to the experience of banking services that has not fundamentally changed.

More importantly, the connection between banks and the Internet is based on the attributes and characteristics of financial services. However, the dotted crossover of some Internet giants often blurs the understanding of Internet finance by domestic banks. Unlike some Internet platforms that start with young, long-tail, small and micro enterprise customers, as well as small, high-frequency financial services, the overall connection between the banking industry and the Internet is bound to include the full customer dimension and full business system of elderly customers and large customers, and as a special industry, the security of financial services is of fundamental significance. However, the market positioning of specific customers and specific businesses and specific business models reduce the constraints of financial attributes on the behavior of Internet companies (and also reduce the intensity of financial supervision), and maximize the value of Internet marketing.

Objectively speaking, the cross-border finance of Internet giants has had a huge psychological impact on the domestic banking industry, but in this process, we often tend to ignore the specificity and particularity of their models. In the past, we emphasized learning from Internet finance, but in fact, they did not provide us with an industry-wide digital solution. What's more, the Internet itself is evolving, including Internet companies. In this sense, the so-called "real Internet" that bankers are struggling to pursue is actually difficult to get banks out of the native dilemma of digitalization. In this case, banks need to find a holistic digital solution suitable for finance itself while fully absorbing the strengths and advantages of the Internet and technology companies.

In short, the bank's digital native dilemma does not lie in the lack of ability to replicate the marketing methods of Internet giants, but in the three deficiencies of understanding the Internet, namely, forward-looking, accurate and comprehensive.

It is precisely the above-mentioned deviation in the understanding of the Internet that makes the digital behavior of banks deviate from the essence of business and lose the business spirit that it should have. Forward-looking, accurate, and comprehensive is the basis of our methodology for understanding the Internet, so how do we view the future evolution direction of the Internet? What will be the next trend of the Internet? There are three trends:

First, with the improvement of infrastructure such as 5G and the deepening of economic and social digitalization, the connectivity and accessibility of the Internet will be further enhanced, and all customers of banks will inevitably embark on the Internet (although the requirements of different customers for service forms are different).

Second, artificial intelligence is widely used. Compared with the application of artificial intelligence in the past, the application of a new generation of strong artificial intelligence represented by large models can not only strengthen the existing artificial intelligence application of banks, but also further expand the application and empowerment of artificial intelligence in the entire banking system. The application of artificial intelligence and artificial intelligence decision-making will not only reconstruct the operation system of banks, but also change the theoretical basis of bank operation and management, thereby completely changing the face of banks.

Third, with the change of artificial intelligence to the way of Internet interaction and driving, especially the online of all customers, the focus of Internet services and customer experience demands will undergo major changes. Following efficiency and function, the perspective of the Internet will be a return to the main value of people, and the emotional appeal of banking services will continue to be highlighted under the launch of full customers and the wide application of artificial intelligence. Banking services with "popularity", warmth and empathy will become the core embodiment of the original nature of bank Internet services. Therefore, the innovation of service forms that organically integrate "people", artificial intelligence and the Internet has become a requirement of the times for banks to create digital originality. Of course, this new demand is not to abandon the efficiency and function of the past, but the organic integration of efficiency, function and temperature.

Looking at the history of bank docking with the Internet, if in the past, the banking connection to the Internet was divided into technology and infrastructure innovation, channel innovation, business model innovation (platform) and other stages, then in the next 5-10 years, the financial innovation required by the evolution of the Internet is the innovation of service forms and the overall reform of the banking system behind it.

To sum up, building an integrated digital bank with complete online logic - digital native bank is the fundamental way for banks to get rid of the dilemma of digital native, with the innovation of service forms that organically integrate people and the Internet as the main line.

03

Build a digital native bank that organically integrates people and the Internet

Digital native banking is the service form and operation system of banks in the era of deep digitalization of the economy and society, and it is an integrated enterprise-level digital intelligent banking system dominated by online logic. Integration, enterprise-level, digital intelligence, and organic integration of people and the Internet are the fundamental characteristics that distinguish digital native banks from the digitalization of banks in the past. Building a digital-native bank is essentially the evolution and upgrade of the bank's digital paradigm. Different from the past's gradual, partial, and grafted digital paths, digital-native banks provide a different digital paradigm for banks.

The first is from the gradual development of digitalization to the logical consistency of digitalization based on top-level design. It emphasizes the construction of a digital banking system of "one bank" from the top-level design, and the construction of a unified underlying logic of bank operation dominated by online logic.

The second is the expansion from partial digitalization to overall digitalization. In order to promote the expansion of digitalization from the front-end of business to the overall digital operation of the bank, it is necessary to incorporate the middle and back office links and more organizational systems into the digital operation, and to achieve the overall efficiency of the bank's operation and a consistent and unified enterprise-level customer experience. It is necessary to integrate all employees and the whole organization into the digital operation of the bank, and establish an enterprise-level and integrated digital operation. Promote organizational changes that adapt to digitalization, intelligence, and platformization, establish lightweight, ecological, and innovative and entrepreneurial organizations, adjust organizational functions in the context of digitalization, and promote process reengineering in the context of digitalization and intelligence. Establish an institutional mechanism that adapts to digitalization and digital intelligence, and stimulate people's innovation and entrepreneurship. Improve the digital literacy of employees, establish the adaptability of all employees to digitalization, and improve the adaptability of bank employees to digitalization through humanistic care.

The third is from online and offline opposition, limited linkage, limited assistance to the deep integration of people and digitalization. Following the evolutionary direction of the Internet, we will build a unified and integrated digital service form and service system for "full" customers that organically integrates people and the Internet, embed service temperature and humanistic care into the digital services of the bank, establish a unified online and offline integrated platform system with outlets as the fulcrum, and establish a team of account managers armed with deep digital intelligence and manual services supported by strong artificial intelligence.

Fourth, the operation of the banking system has changed from manual drive to intelligent drive. Through the application of artificial intelligence, we will establish an intelligence-driven banking system based on big data operations. Establish an operating mechanism based on automated decision-making, and establish a real-time, enterprise-level customer service and enterprise operation response mechanism

*This article is quoted from Digital Native Banking