Traditional banks have launched separate digital banking arms – referred to as spin-offs – to compete with digital challengers and fintech companies offering smoother digital experiences and innovative products. However, spinning off a digital bank also presents challenges and many incumbents fail in their endeavor due to legacy technology, outdated business models, traditional mindsets, and core cultural incompatibility, a blog post by Gazi Yar Mohammed, a C-level bank executive and fintech entrepreneur, says.

The post, titled “Can Traditional Banks Compete with Digital Banks Through Spin-Off Strategies?”, discusses the potential of traditional banks to compete with digital banks by creating their own digital banking arms. It also explains why many banks fail in their spin-off attempts.

According to Mohammed, a number of incumbents make the critical mistake of viewing spin-offs as extensions of their existing businesses. Hence, many spin-offs are constrained by established procedures, preventing them from adopting the innovative approaches necessary to compete in a digital landscape.

Spin-offs can also be hampered by legacy technology. Burdened with outdated systems, they struggle to match the agility of fintech startups.

Thirdly, a traditional mindset is another major hindrance. The lack of fresh perspectives makes it difficult for these ventures to disrupt the status quo and meet evolving customer needs.

Lastly, there is an incompatibility with the core culture of the parent bank. Operating within the existing framework stifles the customer-centric culture and agile work practices crucial for success.

A successful strategy

To overcome these challenges, Mohammed advises incumbents to establish a truly separate entity for their spin-off ventures. This new entity should have a dedicated team with a distinct mission. This team should consist of both experienced bank personnel and individuals with forward-thinking digital expertise.

The business model should rely on a highly efficient and low-cost operation. This can be achieved by adopting a lead organizational structure and relying on cloud-based technology, automated processes and a remote workforce.

The foundation should involve a cloud-native, API-enabled technology stack which facilitates rapid innovation, seamless integration, and easy scaling. Key components of this technology stack should include a modern core banking system that handles deposits, lending, and other essential functionalities; a data and artificial intelligence (AI) platform that centralizes transaction and customer data, and which enables AI and machine learning (ML) models for personalization, fraud detection, and advanced analytics; DevOps and micro-services that utilize agile development practices and a containerized micro-services architecture, ensuring flexibility and scalability; and open banking capabilities with standard APIs that enable data sharing and integration with third-party service providers, fostering embedded finance opportunities.

Digital bank spin-offs should also adopt efficient client acquisition methods, including digital onboarding, social media marketing, self-service tools, and data-driven outreach strategies. Premium value-added services should be offered, including premium accounts with enhanced features, commission revenue from product cross-selling, and revenue sharing from partnerships.

Finally, the product roadmap should balance innovative offerings with traditional banking services. This can include mobile-first checking and savings accounts, peer-to-peer (P2P) payments, high-interest savings products with robo-advisory capabilities, digitized loan products for mortgages, cashback programs or integration with buy now, pay later (BNPL) platforms.

The growing popularity of digital bank spin-offs

Over the past years, digital-only spinoffs have become an increasingly popular way for incumbent banks to target new demographics, expand their reach, and test new products and technologies. According to Mohammed, more than 50 digital banks have been spun off by incumbents.

Bank Jabo by PT Bank in Indonesia is among the most successful ones. The venture, launched in 2021, has rapidly grown to reach 10.2 million customers, becoming one of the few profitable digital banks globally.

Bank Jago’s consistency in innovation and collaboration with the digital ecosystem has played a vital role in its customers’ growth. One of Bank Jago’s strategic initiatives is GoPay Tabungan by Jago, launched in October 2023. Through its collaboration with GoPay, part of GoTo Financial, GoPay Tabungan by Jago is a savings account product for daily transactions that can be accessed directly via the GoPay and Gojek Apps.

The bank has also inked partnerships with other leading brands including Atome, Tokopedia, Bibit, and Stockbit, allowing it to offer a unique value proposition and reduce customer acquisition costs.

Furthermore, Bank Jago has achieved successes in implementing AI and analytics to enhance customer experience, personalize services and adapt to user needs. An example of the bank’s innovative features is the “pockets” and “shared pockets”, inspired by the Indonesian “amplop” system in which a person uses envelopes to save money for different purposes. Bank Jago’s pockets allow users to digitally manage money for different purposes and share these pockets with others, aligning with local financial management practices.

Another successful digital bank spin-off is Chase UK, the digital banking arm of US banking giant JP Morgan. Launched in 2021, Chase UK has grown to serve two million customers and manage some GBP 15 billion in deposits.

Chase UK is winning over customers through a slick digital experience and high standards of customer care. It’s benefiting from JP Morgan’s brand recognition and deep pockets to invest in building out its UK digital banking capabilities rapidly.

Featured image credit: edited from freepik