Which keys pave the way for the evolving digital banking system?

The development of digital banking system in Vietnam has become the top concern for many large banks across the country, and this is also one of the first steps in implementing the digitalization of banking activities to bring the best user experience.

Although Digital Banking and Online Banking are interchangeable to the layman, there are fundamental differences between the two - in essence, online banking focuses on individual core aspects of banking such as money transfer, bill payment or basic online account management..

In digital banking, all functions and activities are digitized in an integrated manner to allow customers to perform most common banking transactions seamlessly via the Internet or some unique applications (mobile app, web app, ..). Through digitalization, banks are able to collate data and glean insights into customer behavior to improve the products and services and enhance customer service. Traditional banks lack the tools to capture and harness useful data to serve customers better.

The development and application of digital technology and tools for banking has led to a mass adoption of cashless payment in many countries around the world. In Sweden, 4 out of every 5 transactions are processed via credit card or e-wallet. In China, about 68% of the population make payments via smartphone apps.

Currently in Vietnam, banks have begun digitalization in a limited set of banking activities, focusing mainly on deposit, money transfer and payment. For activities that involve more complex risk profiling, such as borrowing money or issuing credit cards, customers still have to physically queue up at bank branches to conduct such activities because of the lack of an optimal infrastructure and technology to create an integrated digitalized banking interface and operations.

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Benefits of Digital Banking

Digital Banking can help to unleash a risk-adjusted lending boom that can help to grow the economy and boost banks’ profitability:

1. Banks can scale and expand rapidly without investing heavily in physical presence (e.g. building and maintaining bank branches, recruit and maintain staff) - thereby enabling them to reach more customers, even the unbanked population in rural and remote areas;

2. Consumers have ease of access to a larger proportion of their wealth and can spend them more freely;

3. Better risk profiling due to data analytics which will enable banks to adopt better risk management approaches to lower exposure to high-risk customers and increase lending activity to high-yielding, risk-adjusted customers;

4. Better risk profiling allow low-risk businesses and individuals to obtain bank loans more easily, thus generating more revenue for banks, and also growing the economy as businesses and individuals who obtain loans spend and invest the money and stimulate the economy;

5. Creates a digital trail for governments to collect tax revenues and prevent tax avoidance.

How to accelerate adoption of digital banking in Vietnam?

There is no denying that the convenience and the long-term benefits that digital banking brings. However, the convenience comes with risks, such as the risk of the customers' sensitive banking account data being stolen (e.g. transaction data, personal information, data on assets).

The obstacle to the development of the digital banking system in Vietnam is the lack of a regulatory framework, resulting in continuing cybersecurity vulnerabilities in digital banking and lack of customer knowledge and consumer protection in financial services. 

Firstly, on the bank's side, when converting operations from the traditional banking model to the digital banking model, the bank has to transfer the service delivery method onto the new technology platform management system. Elements of banking operations must also be tailored to suit the digitalized banking model to create the best user experience.

In addition to challenges in optimizing banking operations to suit the digitalized banking model, digital banking services are susceptible to high-tech crimes. If not well-managed, banking IT infrastructure will be vulnerable to hacking and theft of user information, compromising customers’ data privacy and customers’ assets.

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Secondly, for the bank’s interface with customers,, modern digitalized banking systems will still require interaction customers in controlling the input of information, consistently maintaining a robust security system to prevent malicious intrusion. A single cybersecurity breach will erode trust from customers (and lose customers to competitors) that will be difficult to regain. 

Therefore, it is necessary to create a regulatory framework to address cybersecurity risks in online banking activities and to protect consumers, especially to safeguard personal data. Such a regulatory framework will form the foundation to create a new era - an era of cashless transactions.

Currently, policymakers and regulators are working to develop a draft bill on the confidentiality of information for digital banks to strengthen the legal system’s ability to deal with risks or disputes. Although Vietnam has made some progress on building a regulatory framework for e-payment, card payment, licensing and supervision of non-bank organizations providing intermediary payment services, there remains regulatory obstacles that obstruct the growth of digital banking to provide convenience for customers. The regulatory obstacles in banking preserves restrictive procedures that result in significant pockets of unbanked people in rural and remote areas. However, it is understandable that the evolution of a digital banking regulatory framework will take time and will need improvements along the way.

In terms of potential, Digital Banking holds tremendous potential, which is why banks in Vietnam are eager to adopt Digital Banking. However, the difficulties in addressing security risks and protection of customers' information systems is a challenge that must be overcome, and why is this so difficult to achieve? Together with Digibank.vn, we will come to the next article: Why must there be tools to protect the banking system, protect user information?