The value of digital banking is well understood from the customer’s perspective, and can be measured in convenience, choice and price. With digitization, financial services are available 24/7 and can be accessed through multiple channels; customers expect enhanced and more personalized products and services.
However, capturing the value of convenience and choice is proving difficult for banks, particularly with new competitors entering the market. Financial technology (FinTech) startups can offer services for a fraction of the price and are effectively unbundling the financial services value chain.
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.
David Ebstein, Head of digital for EMEIA financial services at EY, believes that in the future, banks will be able to capture value from improving the customer experience:
However, to date, the cost-to-income ratio has not shifted in the banks’ favor. Digital continues to drive up cost for two reasons:
Despite these challenges, there is no alternative to going digital. “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,” says Yannick Grécourt, Partner of strategy, customer and operations at EY.
Instead of converting existing processes and products to digital, banks should rethink their entire offering, as well as the product delivery system.
Marc Raisière, CEO 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.
Dab agrees, saying: “The world is opening up through application programming interfaces (APIs), which allows banks to mix together resources and assets from different places and combine them in an open environment.”
Matt Hammerstein, Head of Client and Customer Experience at Barclays, zeroes in on:
Taken together, he expects these three will fundamentally transform the way customers think about what they want from a bank, and the way banks have to think about how to serve them.
Felimy Greene, Regional Head of Customer Franchise at Citibank’s Asia-Pacific and EMEA business, also emphasizes the capacity of APIs to usher in a new way of working for banks. In November 2016, 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 1,000 developers from around the world registering to gain access to functioning APIs in a sandbox environment, with artificial data to build working prototypes. Within a week, several startups had built working applications integrated with Citi APIs and exhibited on the bank’s stand at the Singapore FinTech Festival.
HSBC is also 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 programs and is looking to release deliverables based on minimum viable products and regular iterations.
One of the biggest challenges banks face when going digital is pivoting the whole organization to an agile way of working. As 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, behavior, incentives, performance management, organization skills and so on.”
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.
By changing the culture and modernizing the way they work, banks may just have a chance at attracting top talent to fuel further transformation. Banks must promote a culture of innovation throughout their firms and encourage all employees to find ways to contribute to the business as a whole.
In the future, 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. 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 programs 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, for instance, has launched nine Eagle Labs in the UK, converting branches into spaces to help small businesses and those in the local community who have 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 Hammerstein.