Traditional banks are launching or acquiring digital retail arms in order to accelerate modernisation across their organisations. Joy Macknight explores the various ways these institutions are making the most out of the new entities.

Caixa imaginBank

Banks are looking to speed up their digital transformation, under pressure from fintech start-ups and major non-industry players looking to capture market share via digital entry points. As a result, many are creating separate digital entities to overcome legacy issues, whether IT or cultural.

Recent research by retail banking association Efma and EdgeVerve Systems, a subsidiary of Infosys, found that about one in five banks are now launching or considering launching a digital bank as a parallel bank to their existing operation. A small minority (5%) are acquiring or considering acquiring a digital-only banking business.

Reaching out

The study found that 85% of the new digital-only banks will offer different products and services, and eight out of 10 will have different channel applications, back-office technology and processes from the core bank. The results, published in the report Innovation in Retail Banking: The Emergence of New Banking Business Models, are based on 158 respondents to an online survey, representing more than 56 countries.

The vast majority, according to the report, will use the same banking licence as the parent company. Other commonalities include targeting the millennial demographic, the so-called ‘digital natives’, in order to understand the needs of the next generation of banking clients. In addition, they usually start out with a single proposition, such as savings/current account, with plans to add more products later.

“The combination of starting a simple business with new processes, products, IT and staff, free of legacy considerations, and then rebranding in a way more appealing to younger people can sometimes be seen as more attractive than renovating the existing bank,” says Ben Robinson, ‎chief strategy and marketing officer at banking software vendor Temenos.

However, the way in which these new entities are being deployed to further banks’ digital agenda differs. “When we talk to bank executives, we are hearing a wide range of perspectives as to the role the new digital bank will play in the transformation of their business,” says Aurélie L'Hostis, analyst at research firm Forrester, which is currently compiling a digital banking strategy playbook to be released in early 2017.

Forrester’s and Efma’s research highlights the different approaches. For example, some banks are building separate IT platforms for their digital arms, while others are using the parent bank’s core system to power a snazzy front end. Some are launching challengers in their home markets, others are using new digital subsidiaries to expand into new markets.

Some banks want to keep the new organisation at arm’s length without much cross-fertilisation, while others have plans to progressively migrate customers across to the digital subsidiary. Some incumbents are partnering with challenger banks to launch a joint digital entity, while others are interested in purchasing or investing in challenger banks.

What does not seem to be happening is a wholesale migration of the legacy bank onto its new digital bank platform. “It would make strategic sense despite the cost, but I haven’t seen anyone doing it,” says Dr Leda Glyptis, director of marketing at consulting company Sapient.

Caixa’s digital lessons

Recognised as a digital leader in its home market of Spain, at the beginning of 2016 CaixaBank launched imaginBank, a mobile-only bank aimed at millennials. “We are seeing that the ideas behind the project – including different client behaviour, simple financial necessities, products specifically tailored to the millennial generation and the necessity to launch a new digital initiative – have all been confirmed over the past 10 months,” says Benjami Puigdevall, head of CaixaBank digital business. 

The new bank sits on CaixaBank’s IT platform but Mr Puigdevall emphasises that it is not a traditional core system. “Caixabank is committed to innovation and has made large investments in IT to develop innovative digital services,” he says. “The common IT platform is not the same as other banks – it is quite advanced.”

The parent bank uses imaginBank as a test bed to determine when a product is ready to be launched across the organisation, according to Mr Puigdevall. For example, both peer-to-peer payments and digital wallets were trialled, found to be popular with the millennial client base of imaginBank and are now being rolled out to CaixaBank clients.

“We incorporate the lessons learned in imaginBank into the CaixaBank offering. This strategy is useful and profitable for the bank because instead of launching something general, we can focus on concrete use cases and be more effective in communicating new products,” says Mr Puigdevall.

It is too early to tell if the model of imaginBank will converge with the omnichannel model of CaixaBank’s clients, says Mr Puigdevall. “Millennials are just the first wave of the new digital generation, but behind them are generations that are 10 times more digital than millennials,” he explains. “The next generations will push digitalisation to new bounds, which is an opportunity for the bank to continue to be agile and evolve.”

CYBG's migration

From the outset, the UK's Clydesdale and Yorkshire Bank Group (CYBG) decided to give existing customers the option to move onto its new banking platform, B. Launched in May 2016 specifically for tablets and smartphones, B is a brand licensed under CYBG but built as a separate digital platform.

B provides a retail current account and savings product, and CYBG is planning to build in predictive capability in order to provide insights into clients’ future financial status based on history and activity. “We built B because we wanted to use artificial intelligence, which couldn’t be done with our existing system,” says Helen Page, propositions and marketing director of CYBG.

As a separate brand, B allows CYBG to engage with individuals who may not have considered Clydesdale Bank or Yorkshire Bank in the past because the banks were not present on their high street or the brand did not appeal to them. “B doesn’t talk or act like a traditional bank, so we can engage new, younger audiences,” says Ms Page. “B is all about interacting with a customer as a normal person, not as a bank client.”

Existing customers that elect to do so are being migrated to the new bank. “This is a far superior digital experience and is a much better, slicker way to manage money – customers can open a B current account online in 11 minutes,” says Ms Page.

As a full-service banking group, CYBG plans to bring B to business banking customers. “They are highly underserved with this type of offering, so it is on our agenda,” says Ms Page.

DBS enters new markets

Similar to CaixaBank, DBS is seen as a digital innovator in its home market. So instead of creating a digital bank in Singapore, it launched Digibank in India in April 2016. It is a mobile-only bank, with an artificial intelligence-powered virtual assistant. Customers have the option to begin with an electronic wallet or a full savings account.

According to DBS’s group head of digital bank, Olivier Crespin, the bank selected India as the first location for Digibank because DBS had a relatively small existing physical footprint and could disrupt it digitally without threatening an existing business. In addition, India is actively fostering digital through its Aadhaar identity card programme and associated regulatory framework. With Indian consumers’ rapid uptake of smartphones and their ready adoption of innovative digital services, the market is “perfect” for a solution such as Digibank, according to Mr Crespin.

Digibank is an integral element to DBS’s digital strategy and serves two key purposes: the delivery of a new digital banking platform and acting as a change agent across the bank. “The digital assets, capabilities and processes arising from the digital banking programme are being shared across the DBS group and serve as a catalyst for our overall digital transformation,” says Mr Crespin.

DBS expects to continue to expand its offering and footprint for Digibank, planning to go live with Digibank in Indonesia by the end of 2016, subject to regulatory approval. In addition it will continue to roll out more digital capabilities across both India and Indonesia next year.

ADIB's partnership approach

Instead of creating its own digital arm, Abu Dhabi Islamic Bank (ADIB) has teamed up with German challenger Fidor Bank. In October they announced plans to launch a community-based digital smart bank in the first quarter of 2017. It is aimed at millennials and digitally connected customers, according to ADIB CEO Tirad Al Mahmoud.

“Our partnership with Fidor fits into our strategy of creating the right products and services to meet our customers’ needs rather than trying to fit customers to our products, regardless of their needs,” he says.

The new proposition will aim to serve most of its customers’ banking needs online in a simple and intuitive manner, according to Mr Al Mahmoud. In addition, it will include an online community where members can exchange financial advice with each other and with financial experts.

“Customers can take part in co-creating banking products with us, based on a dialogue about their financial needs,” says Mr Al Mahmoud. He believes this is a critical element of the new platform. “It will help engage us more deeply with our most active customers, and provide us with a ready-made forum for testing our ideas and suggestions about future banking services and how we deliver them,” he adds.

Unlike many other banks that are reducing their branch networks, ADIB will continue to provide a human touch, as well as virtual capabilities. “ADIB believes in the power of human contact first, with the option to use digital channels if that is the customer’s preference. While banks race to digitise, providing the best of both worlds will be our differentiating factor,” says Mr Al Mahmoud.

He believes that branches of the future will no longer be transactional locations. Instead they will become places where customers come for financial planning consultancy and advice on investments, while transactions will take place on digital platforms due to the speed and efficiency offered.

Separate roles for BBVA

Spanish banking group BBVA is part of the minority identified in the Efma study due to its strategy of buying or investing in digital-only banking businesses. Following the acquisition of US digital banking company Simple in 2014, BBVA acquired Swedish banking start-up Holvi and a 30% stake in UK challenger Atom Bank in early 2016.

BBVA’s strategy is to keep acquisitions at arm’s length from the legacy bank. “We’ve made investments in digital businesses – Spring Studio and Madiva are other examples – because they’re doing a great job in their particular market, and we want to let them continue doing that without having to deal with day-to-day BBVA business,” says Derek White, global head of customer solutions at BBVA. 

“Of course, we collaborate and help one another – Simple uses BBVA Compass APIs [application programming interfaces] for its new account openings, for example,” adds Mr White. It also acquires talent, such as Shamir Karkal, co-founder of Simple, who is now head of open APIs at BBVA.

The bank sees the stake in Atom Bank as a way to enter UK retail banking. “We believe that Atom’s mobile-first, low-cost model backed by a team with a history of successfully disrupting the banking market represents a great investment. Again, we think that its autonomy is hugely important,” says Mr White.

Temenos’ Mr Robinson sees the advantages of maintaining a division between entities. “If two businesses are in flight and one is dramatically different in terms of agility, then it is probably best not to reverse-engineer into the old company,” he says. “But the question remains: will banks such as BBVA at some point be willing to move business to these new entities if they continue to grow much faster than the incumbent bank?”

The profitability dilemma

Ms Glyptis of Sapient queries where the profitability is found in these new entities, a question rarely raised when talking about digitisation but nevertheless important, particularly when customers’ expectations are going up while their willingness to pay for those services is going down, not just in retail but across the board.

She believes that a more fundamental change is happening within the financial industry than many realise, one that is challenging profit and organisational structures in every department. “The banks that built their own digital bank or invested in challenger banks expected that banking would feel different but work similarly. But now we are in situation where banks’ revenues are unbundling in the back end at the same time they are trying to jazz up the front end,” she says. “The profit structure is going to look different; the way banks are allowed to interact with clients, the way they sell and cross-sell, will be different. Profit margins will continue to shrink. This means that the problem that banks are solving today is not the problem they needed to solve.”

However, Mr White disagrees. “Digital’s essential nature is to disrupt,” he says. “Rather than see it as a challenge to profit and organisation structures, we see it as an opportunity – with the right products, focused on the customer, we can become more profitable and work better.”

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