If there is one industry vertical for which it is absolutely essential to embrace digital, it would be the financial services and banking industry.
There is no debate here. Almost 86% banking executives believe digital will change the economics and competitive landscape of the industry, according to a recent Boston Consulting Group (BCG) survey. That’s a pretty big vote of confidence.
As such, retail banking has been quicker to embrace digitization but initiatives are still limited to internet based banking channels for end consumers and other smaller levers. And that has seemingly had an effect. There were 7,700 bank branches fewer in the United States in 2017 when compared to 2010.
Digital transformation in banking, however, needs much more. Digitization is supposed to lead to a reinvention of banking and finance, as is the case with any other industry.
But, to what end? Is it just about the customer experience? Is it just about making transactions faster and simpler for consumers?
We are definitely past the stage when digital transformation in banking was just a means to provide a better customer experience or making it easier for consumers to access services. We are at a stage when digital is meant to accomplish all of these things and help institutions create more value out of less investment. Digital is a means to help deliver more with less.
We’ve talked about how Netflix wiped out Blockbuster, about how Amazon is giving Walmart tough times, about how Uber revolutionized transport and so forth.
But banks and financial institutions are different animals altogether. A financial institution is much more consequential than a movie subscription service. Which means that digital transformation in banking will become a slow process considering that consumers might not be as open-minded as they would be while using Uber or Spotify. To a large extent, it depends on the risk attitudes of end consumers, be it in retail or corporate banking.
Despite banks offering digital services, end consumers are hesitant to migrate. The situation would be much more stark in the case of corporate customers.
Unlike many other industries, the risk profile in banking is high which means that customers would like stick to status quo and not expect or demand a brilliant experience and ease-of-use as long as they are able to get work done safely. Financial services analyst Bob Meara found that 66% consumers still do business at a branch because they felt comfortable talking to someone and because they had questions.
In several cases, financial institutions notice that digital channels are not being effectively used by customers. Recently, Dutch finance major ING found that, in the United States, more than 54% continue to depend on legacy bank branches to manage their finances. In Europe, this number stands at 58%. Recently, ING launched corporate banking services online but chose to do it sequentially.
Clearly, there has been reluctance and a shortage of appetite for digital. This could either be because of their risk attitudes, as already mentioned, or because of their inability to use digital channels immediately. Because the probability of the latter is pretty high, financial institutions need to help consumer adopt the digital means they are offer. This could be accomplished by a Digital Adoption Platform guiding consumers on how to carry out digital operations in realtime as they do it.
A lack of digital appetite is a good excuse for maintaining status quo and avoiding a full-scale digital transformation. But one that should not be made.
Digital transformation in banking should be more than just a customer experience initiative. For both the financial institution and the customer, it should be more about value creation. Especially for corporate banks which are already under immense pressure to perform. In 2017, almost 50% of all the banks had returns below their hurdle rate, according to a BCG study. The situation is worse in the North American region and more so for the larger banks.
In the age of the customer, when competition is at its peak, value creation is the prime focus of digital transformation in banking, even ahead of the customer experience and experience simplification.
But how do you create value? Netflix created value by chucking stores and rerouting that investment into analytics and home delivery. Value isn’t just plain ROI here but also the associated intangibles. In banking and financials, digital is still just an additional feature, a good to have alternative. It’s understandable. With a risk averse audience, this is a safe bet. But safe bets can’t help create value.
Almost five years ago, Poland’s mBank launched a fully digital banking platform for its retail customers. mBank offers several personalized financial solutions through its online platform and made help available to customers through video calls, chat and other channels. In effect, the bank reduced its physical footprint though it still operates light branches for basic services in places like shopping malls.
There is no doubt that going full throttle on digital and analytics can deliver higher value on investments for financial institutions. More so, in the corporate banking sector.
Even risk averse customers can be encouraged to go digital if there is enough value in it for them. Data analytics can lead on this front helping banks analyze customer behaviors, spending and withdrawal patterns, requirements and so on to create tailored and personalized financial experiences for each end consumer and then inform them about the opportunities they have. All of this can only be done through the digital channel.
But that’s not all. Financial institutions need to use digital to find new ways of creating value by designing new products and services in the digital medium. Be it retail or corporate banking, the purpose of banking digital transformation is to create enough incentive, in form of short or long term monetary savings, even conservative audiences would be willing to adopt digital.
Of course, it would take a bit of end user training but that’s part of every digital transformation initiative.
Research by Gartner owned CEB Global says that, by 2019, banks and financial institutions will need to make half of their sales based on digital capabilities that doesn’t exist yet.
Clearly, banks and financial institutions are in a race against time. On one side, the expectation is that digital transformation in banking will change the competitive landscape. On the other hand, there is a clear imperative for financial institutions to adopt digital from the survival perspective.
BCG analysts out a few reasons why digital is an imperative right now for banks and financial institutions. One of them is that enterprises around the world are gunning for digital transformation initiatives of their own. As such, a digitally transformed enterprises would obviously be unwilling to have a legacy banking entity within its ecosystem.
Another bright spot is for financial institutions is that, like other enterprises, banking digitization helps them open up new channels of revenue. As pointed out multiple times, digital enables banks to design and develop new products and services which can be leveraged to improve revenue.
But that’s not all. Banking companies also need to be careful to diverse in their product offerings. Not all audiences are the same. For instance, what mBank did in Poland may not be suitable for replication in Bulgaria. What millennial customers want may not be suitable to the older generation.
Digital transformation in banking provides the opportunity to segment audiences and create a product and services portfolio with offerings catering to each individual segment of audiences and then continually improve upon them. This can’t be done in legacy model.
The imperative for digital transformation is clear. But how do banks move forward?
To be fair, financial institutions can’t completely do away with brick and mortar presence. But, a digital first phygital model certainly aligns well with banking objectives. Coined by McKinsey, the phygital approach calls for a digital approach with limited brick and mortar presence, basically serving as the visible face of the financial institutions.
But what does phygital mean? Accenture breaks phygital down to three parts:
Digital Interactions which are powered by digital technology, including AI and ML, in order to have intelligent conversations backed by learnings from data analytics in order to predict and suggest.
Digital Operations which is again led by digital in order to automate processes and enable both employees and customers.
Digital Organization which is agile and compatible with the digital age working to develop and design products for the digital channel.
Obviously, data plays a critical permeating role across these three layers. Kumar Srivastava, VP of Product and Strategy at Bank of New York Mellon Corporation had led several of these defining digital initiatives. He opines the key is in instrumenting every customer facing interface to capture and produce data and then using that data to derive insights.
These insights, in turn, need to be leveraged to deliver a seamless omni-channel experience across both phygital medium where the physical branches serve as secondary channels while the digital ones drive the banking experience. Some of the larger banks like Barclays, DBS and ING have witnessed success in fusing the physical and digital channels but the real challenge is faced by the smaller financial institutions.
Digital transformation in banking is not straightforward but banks and financial institutions need to do everything in their power to make it happen. There is no time to waste.