Banks are investing vast sums into digital programmes but are not yet reaping the benefits. Joy Macknight examines where banks are focusing on in order to create – and capture – value in digital.
The value of digital banking is well understood from the customer’s perspective, and can be measured in convenience, choice and price. With digitisation, financial services are on tap 24/7 and can be accessed through multiple channels; customers expect enhanced and more personalised products and services.
However, capturing the value of convenience and choice is proving difficult for banks, particularly with new competitors entering the market. While most financial technology (fintech) start-ups typically focus on a narrow offering, they can offer services for a fraction of the price as they do not have to deal with the same legacy or regulatory issues incumbent banks face. Across many different business lines, fintechs are effectively unbundling the financial services value chain.
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This has created a profit conundrum for banks, particularly when they are ploughing millions of dollars into digital transformation projects at the same time. “There is a risk that most of the value will be passed to consumers in the form of better service and greater convenience but may not translate into additional value and profit for banks,” says David Dab, head of innovation at ING Belgium.
A better experience
David Ebstein, head of digital for Europe, the Middle East, India and Africa financial services at EY, believes that in the future banks will be able to capture value from improving the customer experience. “Digital provides a greater choice of channels and flexibility in relation to where and when customers can interact with their bank. It can also reduce costs for the bank because it automates operations and moves clients to self-service channels, as well as manage risks more effectively,” he explains.
However, to date the cost-to-income ratio has not shifted in the banks’ favour. “For now it continues to drive up cost for two reasons,” says Yannick Grécourt, partner of strategy, customer and operations at EY. “First, many banks are rolling out developments on existing legacy systems where the processes are not fully automated or digitised. Second, there are still a significant number of people who view digital as just one of many banking channels.”
Despite these challenges, Mr Grécourt believes that there is no alternative to going digital. “Today the economic equation is not yet proven but it will be in the future, as long as banks look at the entire digital chain, and not just the front-end investment to improve the customer experience that has happened so far,” he says.
Instead of converting existing processes and products to digital, banks should rethink their entire offering, as well as the product delivery system, according to Mr Dab. “Through digitisation it is possible to produce and distribute in an entirely new way,” he says.
Marc Raisière, chief executive of Belfius, a Brussels-based bancassurance firm, advances new ways of engagement. “[Banks] need to engage in a real digital transformation and change their vision with regard to sourcing, fintech and digital players. The debate is not so much ‘banks versus fintech’, but how to collaborate, build partnerships and create win-wins,” he says.
Mr Dab agrees, saying: “The world is opening up through APIs [application programming interfaces], which allows banks to mix together resources and assets from different places and combine them in an open environment.”
Head of client and customer experience at Barclays, Matt Hammerstein, zeroes in on the UK Competition and Markets Authority’s “open banking revolution” in the UK, as well as the second iteration of Europe’s Payment Services Directive and the recent European Data Protection Regulation. “My expectation is that those three taken together will fundamentally transform the way customers think about what they want from a bank and ultimately the way banks have to think about how to go to market to serve them,” he says.
A new way of working
Felimy Greene, regional head of customer franchise at Citibank’s Asia-Pacific and Europe, Middle East and Africa business, also emphasises the capacity of APIs to usher in a new way of working for banks. In November, Citi published a set of APIs that opens up 80% of its banking functionality to third-party developers. In less than a week, Citi had more than 1000 developers from around the world registering to gain access to functioning APIs in a sandbox environment, with artificial data to build working prototypes, Mr Greene reports.
Within a week, several start-ups had built working applications integrated with Citi APIs and exhibited on the bank’s stand at the Singapore Fintech Festival. “The imagination and creativity that we can harness by opening our doors to the outside is extraordinary,” says Mr Greene. “We believe that banks can’t build, own and operate everything by themselves anymore – the world is clearly no longer working that way. We want to partner, collaborate and play a scale-enabling role in the fintech revolution.”
Likewise, HSBC is investing in making it easier to work together with third parties, moving beyond a world where banks build everything in house. The bank is also moving away from multi-year IT change programmes, according to Josh Bottomley, chief digital officer at HSBC, and is looking to release deliverables based on minimum viable products and regular iterations. “That means we can deliver benefits faster for our customers and fine-tune our investment priorities and delivery roadmaps,” he says.
The right skills
Mr Bottomley touches on one of the biggest challenges banks face when going digital: pivoting the whole organisation to an agile way of working. As Mr Dab says: “An incumbent bank hasn’t been designed for innovation. And to make it more innovative is a big transformational challenge, with changes to processes, culture, mindsets, behaviour, incentives, performance management, organisation skills and so on.”
Mr Dab believes that opening up the bank to the outside world will solve a big part of the culture challenge. ING, for example, launched its innovation bootcamp in 2014, and the bank benefits from developing great ideas, but also experimenting with new ways of working in a risk-free manner. ING Belgium also launched a fintech village, where it hosts selected external fintechs for three or four months. “We believe that much of our innovation in the future will come from outside,” he says. “Therefore we work, collaborate and partner with fellow providers, start-ups, fintechs, and so on.”
And by changing the culture and modernising the way they work, banks may just have a chance at attracting top talent to fuel further transformation. “Many banks tour Silicon Valley looking for inspiration for their management teams. But banks must also promote a culture of innovation throughout their firms to retain the best and brightest,” says Antony Jenkins, ex-group CEO of Barclays and current executive chair of 10x Future Technologies, a cloud computing firm.
“That doesn’t just mean hiring people who can come up with new ways to trade financial derivatives; it means encouraging all employees to find ways to contribute to the business as a whole, whether it’s internal processes or new products,” he adds.
“As part of Citi’s pivot to an agile way of working and being more customer-centric, we are hiring people from a wide range of non-financial backgrounds and putting design at the centre of what we do,” reports Mr Greene. It has integrated in-house design teams into all the bank’s customer experience activities. The bank has also incorporated legal and compliance experts into project ‘scrum teams’ to flag and resolve any potential regulatory issues at the earliest opportunity.
Value in the community
In the future, Mr Ebstein envisages a new style of banking that goes beyond the current situation. “Banks are well placed to play a bigger role in their customers’ lives than just providing a mortgage or a credit card,” he says. “They should be looking at providing broader services that help their clients to manage multiple aspects of their lives. And while the banks themselves may not provide all the products and services, they could develop and manage a trusted partner ecosystem.”
“With many banks trimming their workforce, one could imagine a bank starting large-scale education programmes to retrain people and address the industry’s skill shortage, something like a university,” he suggests. “Moreover, instead of closing branches, banks could use them to help local communities, for instance by supporting new entrepreneurs.”
Barclays is doing the latter. It has launched nine Eagle Labs in the UK, converting branches into physical spaces to help small businesses and those in the local community who have digital or other technology-based capabilities to do rapid prototyping and come to market. “We help new businesses engage with the local community, which in turn will help them to become unicorns of the future,” says Mr Hammerstein.
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