A new wave of digitalization and the response ideas of commercial banks

From the Internet to mobile intelligence, from big data to cloud computing, the wave of digitalization is higher than the wave. The unprecedented pandemic has further accelerated the rise of the digital economy, and when the virus blocked the close contact between the real world, more and more production, consumption and social activities jumped into the digital world.

Today, a new wave of digitalization marked by technological upgrades such as AR, VR, MR, and digital twins, known as the "metaverse, has arrived. If the pre-AR era is the virtualization of the real world, the real world is the master, and the digital world is the servant, then this round of digital wave means the realization of the virtual world, the digital world will become the "master", people's production, life and social behavior, first based on the digital world as the native place, and then migrate to the real world. This shift in coordinate systems will be disruptive.

Although the concept looks very grand and elaborate, in fact, the industrialization of meta-universe technologies such as AR, VR, MR, and digital twins is proceeding very quickly, and many technologies have blossomed on the basis of existing ones. Governments at all levels have also issued a series of policies to encourage and support the development of the meta-universe industry, such as the Shanghai 14th Five-Year Plan clearly regards the meta-universe as the direction of local emerging industry development, Beijing has issued the "Eight Measures on Accelerating the Development of the Meta-Universe Innovation in the Sub-Center of Beijing City"; the central bank's latest "Financial Technology Development Plan (2022-2025)" proposes, "The visual technology such as augmented reality (AR) and mixed reality (MR) will be deeply integrated with the banking scene, and the physical outlets will be promoted to multi-modal, The upgrade of immersive and interactive smart outlets"; the Ministry of Industry and Information Technology also clearly pointed out at the recent conference on the development of small and medium-sized enterprises to "cultivate a group of innovative small and medium-sized enterprises that have entered emerging fields such as meta-universe, blockchain, and artificial intelligence".

As an industry that processes information and data, banking is inherently digital. From Internet finance, financial technology, to open banking, smart banking, in the past wave of digitalization, China's commercial banks have taken the initiative to attack, try first, and walk in the forefront. However, in this new wave of digitalization, commercial banks, especially some small and medium-sized banks, have not yet understood the significant impact of deep digitalization on the financial industry, and have not yet fully found a specific path to apply cutting-edge technologies such as AR, VR, and digital twins to their businesses and products.

But some banks have already taken the lead, thanks in large part to the fact that they have always retained the sensitivity of digital genes, accelerating the pace of digital upgrading around customer centricity, and taking customer experience and scenario applications to a new level. In particular, the idea of digital transformation is more strategic and forward-looking, the planning and measures are more pragmatic and effective, and a comprehensive digital management system that organically combines short-term economic benefits and long-term strategic values has been formed.

In the course of our research, the Bank of Chongqing is one of the typical cases of successfully coping with the new wave of digitalization. The bank established a "comprehensive digital management system" earlier, paying attention to the technical transformation and upgrading of the front, middle and back office trinity, paying more and more attention to the application of digital technology in the middle and back office management and support ends, and completed major digital technology projects such as the "wind chime intelligent risk control" system, digital supply chain finance, digital credit online litigation, and smart people's livelihood, which raised the digital level of the entire bank to a new level.

The main feature of the new wave of digitization

The pandemic is a disaster for mankind, but it is also accelerating the process of technological progress and institutional change. Just as SARS in 2003 accelerated the development of e-commerce platforms, known as the "first year of e-commerce", the new crown epidemic in 2020 also accelerated the development of digital technologies, especially accelerated the rapid upgrading of AR, VR, quality twins and other technologies, the concept of "meta-universe" came into being, and 2021 was called "meta-universe first year".

As the fourth industrial revolution, the wave of the information technology revolution is higher than the wave. From informatization to digitization, from the Internet to the Internet of Things, from the data processing center to the blockchain, from the network world to the metaverse, it has brought not only the iterative upgrading of technology, but also the profound changes in social systems, cultures and thinking. The application of digital technology in resource integration has contributed to the birth and rise of the platform economy, and the application of organizational management has formed a more flexible small and micro combat unit. In this process, the Internet, blockchain thinking and concepts such as equality, sharing, participation, distribution, and decentralization have been further popularized. The digital network world is no longer a simple world composed of physical technologies such as binary code, ipv6, tokens, and data elements, but a complex social and humanistic ecology.

If the past three industrial revolutions have a clear line of technological evolution, the fourth industrial revolution we are currently in has significantly different complexities and uncertainties. It's even hard to define it as an "industrial revolution," because it was primarily intangible software technologies and digital assets that created the fourth industrial revolution compared to previous tangible industrial technologies and devices such as steam engines, electrical, and computers. Of course, the information industry and the digital industry also need tangible infrastructure such as terminal equipment, telecommunications networks, and servers, but more importantly, software such as invisible data and algorithms. When we say digitalization, we mainly do not refer to the emergence of hardware and network infrastructure, but the development of software such as big data, blockchain, artificial intelligence, and cloud computing. Because compared with hardware, the software world represents the real digital world, which has the technical characteristics of zero marginal cost, infinite replication, high-speed propagation, and infinite space that are different from the previous three industrial revolutions. It is also because of this invisibility of digital technology that the wave of the fourth industrial revolution has shown a continuous trend, a wave superimposed on a wave, a wave faster than a wave, showing a unique Moore's law curve.

After the new crown epidemic in 2020, a new wave of digitalization has arrived, showing different characteristics. In general, it has the following five characteristics:

1. The main battlefield of digitalization has shifted from the consumer end to the production end, from stimulating demand to empowering supply, and from digital industrialization to industrial digitalization. Smart factories, industrial Internet, smart cities, unmanned driving, etc., have become new technology agglomeration hotspots.

2. From improving experience to improving efficiency, being more calm and pragmatic, from idealism to realism, from pursuing sexy visions and concepts to pursuing realistic business models and scientific value chain management. The old days of holding a PPT and getting financing by talking about concepts and visions have passed, and entrepreneurs and investors have become very mature.

3, AR, VR, quality twins and other meta-universe technology upgrades have become the mainstream track, brewing a new round of milestone-level Internet revolution. From reality virtualization to virtual reality, the relationship and boundaries between reality and virtual need to be redefined. If AR and VR in the past were the virtualization of the real world, the real metacosm is the extension and construction of the virtual world to the real world. It can be argued that the metacosm is the "Declaration of Independence" of the digital world. Of course, the metacosm, as a stage culmination in the digital revolution, needs to continuously advance from the low level to the high level, and may be in a preliminary stage at present. It can be said that before the brain-computer connection technology has evolved to a certain extent, the metaverse cannot truly achieve the "parity" between the virtual world and the real world. The current digital twin is mainly based on the real world as a template, which is a digital twin reality. When reality begins to "twin" numbers, it is truly the other side of the metaverse. Inevitably, every major technological progress will bring bubbles and hype, and even many institutions carry out false propaganda and illegal fundraising in the name of meta-universe, which requires investors to be highly vigilant. To this end, the Banking and Insurance Regulatory Commission issued the "Tips on Preventing the Risk of Illegal Fund-Raising in the Name of "Meta-Universe"", which is very worthy of vigilance by regulators and investors.

4) The degree of uncertainty and uncontrollability has increased greatly, the ecosystem has become more complex and unstable, and the emergence of new things is often outside the time schedule and traditional business forecasting models. The direction of technological evolution is generally clear, but it is not certain what innovations will emerge on the way forward.

5. The high uncertainty of technology and business formats, especially the challenge to the authoritative management model, has triggered vigilance and uneasiness at the policy level, and formal industrialization and product certification will face more policy risks and administrative interventions. A new wave of digitalization is triggering a new wave of digital monopoly platform supervision around the world.

Will the new wave of digitalization really touch the nerves of commercial banks?

An essential concept that needs to be recognized is that China's commercial banks are "social enterprises" that need to assume various social responsibilities, rather than complete commercial financial enterprises. Therefore, first of all, policy constraints rather than technical constraints constitute the main contradiction in the operation and development of commercial banks. There is still market-oriented competition among Chinese banks, especially in the field of retail banks and private small and medium-sized enterprises, which have basically achieved a high degree of specialization and marketization. However, after the subprime mortgage crisis, especially the outbreak of local government debt after 2013, commercial banks have collectively entered a "low-risk arbitrage" model that relies on asset scale expansion, and has formed a serious path dependence. This model is not very sensitive to the wave of technology.

The current wave of digitization may be really hitting banks' balance sheets and income statements, touching the nerves of banks. Mainly because: the big cake of the financial and fiscal credit delivery model has become difficult to become the core driving force for commercial banks to do large-scale and maintain profits. Needless to say, even if there is no strict governance and restriction of policies, its own cyclical power will expand to a critical value and then go to a crisis, or it will clear itself out of the way to recession, in short, it is difficult to maintain. A new round of local debt governance is also brewing, and the debt repayment pressure in many regions is very large.

It can be said that the space created by commercial banks around finance and land credit in the past has been very tight. Even without taking into account policy tightening, asset creation built on these credits has reached the end of the cycle, not only growing weaker in increments, but also paying for past asset quality. If commercial banks were to move out of this area, which had been dependent on for more than a decade, where would they move to find a new place to settle down?

The answer is to shift to more market-oriented retail banking, wealth management, technology finance, supply chain finance, investment banking and other high-tech intensive, intellectual-intensive, low-scale dependence and capital-consuming fields. Once turned to these areas, the technology and talent that used to lie in narratives and concepts will truly become the core drivers supporting and driving a new round of asset-liability expansion and profit growth of commercial banks. Especially in digital technology, the value transmission between input and output will no longer be blurred.

Therefore, putting aside abstract concepts and facing the reality, commercial banks, especially some small and medium-sized banks with a scale of about 600 billion yuan, are currently in a critical period of China's economic and industrial transformation. To get rid of this "curse", from the perspective of international experience, it is necessary to seize the commanding heights of new technologies. Especially when a new round of technology wave "starts", when it has not yet lost at the starting line, saturation investment is made in a local field to form a local differentiation advantage. Therefore, in the face of a new round of digitalization, small and medium-sized banks must not blindly join the "arms race" of science and technology as in the previous times, but rationally analyze their own advantages and shortcomings, based on the local industrial structure and unique endowments, focus on forming a situation of local more and less in a certain field, and shape their own unique differentiated competitiveness.

Fortunately, in the new round of digital wave, small and medium-sized banks can break through the economies of scale constraints of technology investment in the previous rounds of digital waves, and realize an intensive asset-light model through the supply chain management of digital technology. We know that the bank's investment in science and technology is highly "burning money", and burning small money does not work, it is to rely on large investment and then go to the amount to share the cost of fixed assets, there is a risk of operating leverage, that is, the fluctuation of revenue will bring greater fluctuations in profits. The existence of this problem is very detrimental to the response of small and medium-sized banks with small budgets for technology investment to the wave of digitalization.

Why is this time different? Because the current digital industry has been very mature, the supply chain of the entire industry has been very independent and stable, the cost of talents and technology has also dropped significantly, suppliers have achieved full competition, and the agglomeration effect is obvious, almost every region can find software companies "get together" industrial parks, you can find fair prices of suppliers. Moreover, in addition to the core system, some of the bank's customized system requirements are not cutting-edge, and the cost of small and medium-sized programs that can really bring value to customers is not high. It can be said that the technology cost curve of the banking industry under the new round of digitalization has got rid of the dependence on scale effects, and small and medium-sized banks can find inexpensive suppliers to achieve their own "light technology" strategy. This is from the perspective of the cost curve, the feasibility of small and medium-sized banks to seize this round of digital wave.

If small and medium-sized banks with strategic vision and long-term development want to get out of the balance sheet expansion path that relies on financial finance and truly embark on the road of high-quality and sustainable development, they must put aside the "flower shelf" that used to take science and technology as a decoration, enter the digital technology battlefield of real knives and guns, or occupy the commanding heights in the original battlefield, and turn the original "false battlefield" based on the requirements of investors and regulators into a real battlefield that truly creates profits. If a bank no longer relies on government platforms and state-owned enterprises with low financial technology requirements, but relies on retail banks, small and micro finance and supply chain finance, the investment in science and technology must become the top priority in the budget, and the impact of the digital wave will definitely touch the nerves of banks.

Moreover, doing government finance is now also a serious "internal volume" on the battlefield of scientific and technological investment, and state-owned banks and large joint-stock banks with deep pockets have built a "smart government" system for local governments to seize other profitable government financial businesses through free construction. If this competitive model becomes the new normal, this wave of digitalization will touch the nerves of some banks even more. Because in their traditional cognition, government finance relies on traditional models rather than financial technology. However, all this has undergone obvious changes, because the days of large-scale bond issuance by local governments have passed, and high-quality financial management models such as smart cities and smart government affairs are becoming the next development direction, which are the results of a new round of digital wave.

The "five cultivations" to seize the opportunity of the new round of digitalization – take the Bank of Chongqing as an example

When China's economy enters a stage of high-quality development mined by stock value, the differentiation of regional economies will become more and more serious. As a local corporate bank rooted in the local industrial structure and economic characteristics, it can be regarded as a reflection of the regional economic structure and characteristics, and there will also be greater differentiation. If each city is regarded as a listed company, then the local corporate bank that invests in the city is equivalent to buying the future appreciation space of the city. As a corporate bank directly under the Central Government of China, the asset allocation structure of Bank of Chongqing is closely related to the economic development and industrial structure of the Chongqing area and even the entire Chengdu-Chongqing twin-city economic circle, and also has great potential for development.

In the past ten years, Chongqing has been paying attention to the development of high-tech industries, getting rid of the excessive dependence on real estate and land finance in advance, focusing on the development of emerging strategic industries, and trying to grasp the core technology of each digital wave. This development idea is reflected in the Bank of Chongqing, which also makes it have the same development model as Chongqing: it pays attention to the combination of industry and finance, and has a high degree of scientific and technological sensitivity. At the same time, coupled with the technical support of the local digital industry, Bank of Chongqing has embarked on a unique financial technology development path in the city commercial banks earlier. A high degree of scientific and technological sensitivity also enables it to better grasp the dividends of each digital wave, obtain more significant output effects with more economical inputs, and embark on the road of "light technology" development that is in line with its own strategic value.

Through in-depth research, we summarized the comprehensive digital management strategy of Bank of Chongqing into the following five key points, which can be used as the "five cultivations" to seize this round of digital wave:

1. Research first. Research on economic cycles, policy trends, industry and regional characteristics, strategic transformation, product innovation, etc., are the main areas of R&D investment of commercial banks, and doing a good job in these studies can not only create profits in the current period, but also have long-term strategic value. In recent years, the R&D department of Bank of Chongqing has increased its investment and taken a two-pronged approach, on the one hand, based on solving the practical problems of the first-line business in the bank, on the other hand, it has strengthened the research on cutting-edge topics such as digital finance, while focusing on improving brand influence. Bank of Chongqing regards digital transformation as the main research direction, on the one hand, it studies the basic trend and evolution route of the new round of digital wave, so that the bank's large digital strategic direction is consistent with the entire wave of science and technology, and on the other hand, it accelerates the research of new digital technologies. Based on basic research and extensive research, Bank of Chongqing has developed a comprehensive digital management system earlier, overlooking the entire digital transformation from the perspective of "one bank". Through research first, rather than blindly investing in construction first, we can see the general direction in advance, find a development path suitable for ourselves, and prevent the strategic risk of poor actual results after a large amount of budget investment.

2. Value-driven. High-quality and intensive development is the current new trend of China's banking industry, but also the inevitable requirements of the new stage of China's economic development and the mature cycle of the banking industry, whether it is internal economic capital or external market space, it can no longer support the high-speed and extensive development of commercial banks. In this context, commercial banks that are no longer rich and extravagant, in order to seize the development opportunities of a new round of digital wave, must have their own value proposition and strategic determination, can not be digital for digital transformation, all transformation should be centered on creating value for customers. Bank of Chongqing recognized this earlier, from the beginning of the digital technology strategy is value-driven, first clarify what the purpose of scientific and technological investment, to solve what problems, what kind of strategic value, and then according to the value map "upside down" to calculate the budget matrix, the project is completed and then carried out benefit evaluation. This strategic concept of science and technology has strengthened the refined management of scientific and technological needs from the beginning, so that every penny invested in digital technology projects in the early stage will "bear fruit" in the later stage, and at the same time avoid the situation of blindly following the trend and the "arms race" of large banks.

3. Focus on features. Fighting a battle in the position, engaging in heavy science and technology, covering all aspects, and attacking in an all-round way are the major taboos in the science and technology strategy of small and medium-sized banks. Small and medium-sized banks should base themselves on the characteristics of the local regional economy and industrial structure, and serve the differentiation and characteristic strategy of scientific and technological input. Therefore, in the face of a new round of digitalization, small and medium-sized banks should focus on a certain technology for saturation investment, forming the advantage of "clenching their fists to beat people" and locally hitting more and fighting less, which tests the strategic wisdom of banks in digital transformation. There are so many cards in hand, how to play to gain a competitive advantage, this is a problem that small and medium-sized banks need to think deeply about in the new wave of digitalization. Bank of Chongqing in this regard is more prominent, in other banks are still the focus of science and technology investment in the front desk to obtain customers, short and fast access to "invalid traffic", Bank of Chongqing has opened its own "supply-side reform" through science and technology investment, began to shift the focus of science and technology investment to the middle and back office. Why? This is determined by the core business of Bank of Chongqing, which is rooted in the manufacturing characteristics of Chongqing and has done a lot of science and technology financial business, and the key to these businesses is asset quality, and risk control is the key. In this context, Bank of Chongqing has developed three major systems using cutting-edge big data, artificial intelligence, cloud computing and other technologies: the "Wind Chime Wisdom Evaluation Industry Wisdom Chain" system with correlation relationship identification and group risk mining as the core, the "Correlation Wisdom Check" system with enterprise risk profile as the core, and the "Financial Wisdom" system with intelligent analysis of enterprise financial reports as the core, which together constitute a set of enterprise full-link risk management system. These middle and back office technology investments provide a strong foundation for products and services in the front office.

4, people-oriented. Under the new wave of digitalization, the bank's technology investment should be "people-oriented", and the "people" here include two groups: one is external customer-centric, comprehensively improving customer experience and optimizing application scenarios, and meeting various needs of customers in a timely manner; the other is internal employee-centered, implementing "employee digitalization" projects, and improving employees' operational experience in the work process. Bank of Chongqing has always adhered to this concept in the process of technology investment in each round of digital wave, in addition to continuing to increase investment in science and technology in retail banking lines, improve customer experience and staff operation convenience, and has also made obvious results in segments such as the disposal of special assets. For example, the digital credit online litigation system pioneered and landed is convenient for both customers and in-bank staff, which can be said to be a typical application of digital technology in banking.

5. Take into account both length and shortness. A new wave of digitalization is full of uncertainty, banks' technology investment on the one hand to solve the current problems, through digitalization to improve efficiency and reduce costs, to achieve clear financial returns; on the other hand, to focus on the long-term, for the next five years, ten years of strategic development to reserve a good innovation momentum, because many cutting-edge projects in the early stage can only be used as a "cost center", after a period of time or combined with other businesses to achieve financial benefits. At the beginning of the digital transformation of Bank of Chongqing, the basic principle of balancing short-term financial benefits and long-term strategic value was established, and the information technology department implemented the commissioner embedding system, allowing technology research and development personnel to be embedded in the business department, so that the system construction and demand management personnel who originally belonged to the middle office were front-ended, directly perceived the needs of the market and customers, and improved the response sensitivity of science and technology. At the same time, the Institute of Finance strengthens the basic and cutting-edge research in digital technology, keeps pace with the future trend, takes the digital technology strategy as an important module of the 14th Five-Year Plan, conducts in-depth research on the research topic of the digital transformation of banks under the new situation, and makes strategic reserves for the development of the bank in the next decade.

(The author is president of the Caesar Research Institute)