• Chinese banks are leaders in digitalization in banking through investment and innovation but there are still areas where more impact could be made.
  • To accelerate digital transformation in the banking sector, banks must: incentivize customers over their personal data rights, synergize digitization with green development and safeguard the interests of disadvantaged groups.
  • The international banking industry can advance digital transformation in banking by opening and sharing software solutions, regularizing the application of digital technology across jurisdictions, and by recognizing and mitigating against the process's inherent risks.

It’s not hard to see that digital transformation is a dominant trend driving development in banking, with Chinese banks leading through continuous investment and innovation.

However, even the Chinese banking sector has some way to go before the full power of digitalization in banking is realized. There are three key areas where significant digital transformation can take place.

Accelerating digitalization in banking

1. Returning control over personal data

Ensuring consumers’ data rights can be complex. Traditional brick-and-mortar banks have accumulated extensive data through digital transformation, which can be used freely by the bank or commercial parties, while customers are excluded from reaping the economic benefits their data yields.

As customers become increasingly savvy about the overuse of personal data, Chinese banks risk losing the potential to expand their pool of data assets and retain their positive relationships with customers.

One solution in the industry to this problem has been to create data accounts, allowing customers to store their data as currency. Banks can then use the data in these accounts at a price decided by the market.

[Safeguards] are needed for digitalization in banking to protect the financial rights of disadvantaged groups.

—Gang Peng, Chairman of China Construction Bank (Europe) S.A. and Vice Dean and Secretary General International Institute of China Construction Bank

2. Synergizing digitalization in banking with green development

While digital technology can promote green development, the two initiatives are not always in sync. For instance, digital equipment and services have been the largest source of energy consumption for banks.

According to a report by Galaxy Digital in 2021, the banking industry consumes 263.72 terawatt-hours per year of power, of which bank data centres use 238.92 terawatt-hours per year. By China Construction Bank's calculation, by 2025, the total electricity consumed by bank data centres worldwide will be equivalent to that of the world’s 10th largest economy in 2021. The electronic equipment used by these centres usually has a life span of about five years, so e-waste disposal presents another enormous challenge.

No bank should focus on technology alone; banks should also consider the negative environmental impact of digitalization in banking. The Chinese banking industry sees coordination between digitalized and green development as a priority, evidenced by green data services becoming an essential criterion for Chinese banks to select their suppliers.

No bank should focus on technology alone; banks should also consider the negative environmental impact of digitalization in banking.
No bank should focus on technology alone; banks should also consider the negative environmental impact of digitalization in banking.
Image: Galaxy Digital

3. Fair digitization

One crucial outcome of digital transformation is that banks have been able to meet the financial needs of long-tail customers – the unbanked and underbanked – to reconcile, to some extent, broader economic inequity. Digitalization, however, may also bring about new forms of unfairness.

For example, ensuring banking access to those at the lowest end of the financial spectrum remains challenging. The proportion of internet users worldwide still only accounts for 62.5% of the global population. If banks provide financial services mainly through digital channels in the future, it will deny access to nearly 3 billion people. Any user would need at least an electronic device and network connection to carry out their banking, adding a premium to being able to bank.

Banking in this way, therefore, imposes multiple burdens of being financially literate while having technical and operational knowledge, an implicit threshold that may turn many away. Thus, safeguards are needed for digitalization in banking to protect the financial rights of disadvantaged groups.

Greater international collaboration and broader participation of the global banking industry could accelerate progress in the digital transformation project worldwide, however, in three ways.

Advancing digital transformation

1. Open-source digital technology

Traditional banks are not known for their expertise in digital technology. So, in many ways, open-source solutions are the pragmatic path to following the rapidly evolving trend of digitalization in banking.

Openness and sharing can pool ideas across sectors to identify problems and innovate solutions. In particular, the cutting-edge digital technology out there needs dialogue, research, and buy-in. Those who work in IT tend to be more open-minded about sharing technology – the open-source software platform GitHub is a testament to that.

Traditional banks should follow this example by strengthening peer exchanges about digital technology and exploring possible ways to make their data and technology available to the public.

2. Regularize application of digital technology in banks

The rules governing the application of digital technology vary from country to country, bank to bank and even within the same bank. For example, some apps adopt near-field communication (NFC), a set of short-range wireless technologies. Others don’t and are instead compatible only with certain smartphones. Neither is the scope of customer information gathered by banks consistent.

These differences hinder banks’ promotion and extensive use of digital technology while making it more difficult to regulate the banking industry. Currently, the global banking sector lacks a relatively unified framework governing technology adoption. Hence, establishing an international alliance spearheaded by the people-oriented and tech-for-good principles and that explores establishing a set of consensus-based technical application standards or guidelines could better steer traditional banks through the digital transition.

3. Recognize potential risks of digitalization in banking

Digital technology is a double-edged sword. In 2021, there was an all-time high number of distributed denial of services (DDoS) attacks – a common way to hack networks – in the global financial industry. While banks need to protect themselves from traditional financial risks, they also need to gear up earlier for model risks, algorithm vulnerabilities, data security threats and hidden dangers.

Currently, traditional banks are not sufficiently considering the risks of the digitization process and could learn from the international banks that have gained a reputation for leading digitized operations. However, such risks could already be in the process of being mitigated through a new regulatory framework that meets the risk characteristics of digitalized banks based on the Basel Accords – the international agreements set in the 1980s around the capital, market and operational risk.

If banks take heed of these areas to accelerate and advance digitalization in banking, they could further reap its abundant benefits.