Digital Ecosystems: Why Are They the Future of Banking?

3 min read
Apr 17, 2024 8:12:01 AM
Unleashing Growth: How Digital Ecosystems are Transforming Banking

Singapore, 2013. Digital companies such as Alibaba dominate much of the online payment and lending market. At the same time, other digital giants are achieving historic profit margins while thousands of users, including older people, feel increasingly comfortable purchasing goods and services over the Internet.

In this context, Piyush Gupta, the CEO of DBS (Development Bank of Singapore), is faced with a dilemma. On the one hand, he can continue to focus DBS’s efforts on serving small and medium-sized businesses while digitizing each part of its value chain. On the other hand, he can embark on a much more ambitious digital transformation. 

The idea is simple: Following the model of companies like Amazon, Google, and Apple, DBS can build a digital ecosystem where the bank brings together various companies and services around customer needs. If it succeeds, the bank can go far beyond transactional services and begin to hold a completely new place in the daily lives of its customers. 

Shortly after, DBS’s commitment to building a digital ecosystem caused it to be awarded the best bank in the world in 2018. But, beyond recognition, the question is: What precisely is a digital ecosystem and why should financial institutions make efforts to build one?

Recently, we have seen how many neobanks, which were born as disruptive proposals, have lost steam or even disappeared completely. The causes of this phenomenon are complex, but without a doubt, the belief that transactional dynamics, totally isolated from other types of services without taking advantage of the network effect that digital ecosystems bring, poses obstacles for many of these businesses. 

To create a digital ecosystem, you should have a mindset focused on solving the customer’s daily needs. From there, a coherent network of services is built, in which, in addition to the bank, other companies participate to provide users with new services. With this, instead of growing vertically, financial institutions can achieve horizontal expansion that increases contact points with users, exponentially improves the number of transactions, and allows the network economy to grow.

Now, we must remember that the growth of a digital ecosystem must be supported by two pillars to be sustained over time. 

First, there is the transactional pillar. It will contain all the channels we design to facilitate interactions and exchange value within the ecosystem. Here, we should make a distinction: In a digital ecosystem, we will find value creators, that is, service-providing companies, and value consumers, who are “ordinary” users.

This pillar seeks to minimize the cost of this interaction and guarantee a minimum user experience that reduces friction, which applies to both B2B and B2C relationships. 

The other pillar that we must consider is knowledge. Part of the success of this strategy lies in the fact that each actor that joins the digital ecosystem through its services must obtain benefits that go far beyond getting a new commercial window. 

Faced with this challenge, financial institutions have a significant advantage. They can build ecosystems that take advantage of the knowledge that they have accumulated over the years about their users—their needs and behaviors—and complement it with technologies such as data analysis and modeling, artificial intelligence, and any resources at their disposal to get insights that enable the actors in the ecosystem to remain in a constant cycle of learning and evolution.

As I said recently, all these efforts aim to allow users to find a valuable solution to their daily needs in the ecosystem. This is a compelling strategy if we consider that, by implementing it, neobanks that Pragma has assisted have managed to go from 2 million to 14 million customers in just three years. The key to this growth is understanding that, in this context and with their technological resources, financial institutions are called to leave their comfort zone to offer much more than credits, financial transactions, savings, and payment systems. 

Today, we are faced with a unique opportunity to serve users better, to become an essential part of their daily lives, but, above all, to improve their lives, promoting economic development and making available the services they need in the right form and at the right time.

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