For decades, the banking sector ranked amongst the most stable in the world, with consistent returns on equity (RoE). Not anymore. The emergence of fintechs and the entry of technology giants into the sector has revolutionized the way it works. These digital native organizations have leveraged technology effectively to address customer pain points and paved the way for a new era of hyper personalization, tailored services, and intuitive banking. In many instances they have already integrated banking functionalities seamlessly to accelerate spending in areas like e-commerce, social networking, gaming, digital entertainment, travel, health, and home-buying. As customers increasingly shift loyalties, traditional banks are unable to maintain or improve their ROE. According to McKinsey, global banking ROE was at 10. 5 percent in 2018 and 56 percent of banks across the world were not generating their cost of equity (CoE). What can traditional banks do to counter the disruption caused by the new entrants and how can they improve their RoE even under these circumstances?
The Age of Innovation
The annual reports of some of the largest banks in the world like Bank of America, HSBC, Citigroup, BNP Paribas, and Wells Fargo mention the terms “innovation / innovative” 76 times in 2019 compared to 49 times in 2015. Clearly, the banking community has realized that the only way to beat the march of the digitally empowered entities is to invest in innovation themselves. Banks across the world are investing in emerging technologies like machine learning, artificial intelligence, robotics, virtual and augmented reality, to usher in a new wave of productivity and to scale up quickly and effectively without impacting margins. The Spanish bank BBVA launched an app called Bconomy that helps customers set goals, save money and track the progress of their savings. It also helps customers shop smarter by suggesting tips for saving money and comparing prices on utilities and groceries. In the first three weeks of launching Bconomy, it had half a million users. NedBank in South Africa offers merchants business insights through market intelligence services and UBS offers a real-time personalized portfolio analytics services to their high net worth clients. Idea Bank of Poland offers a comprehensive banking ecosystem that ranges from cloud-based internet banking to an Uber-styled ATM.
This wave of innovation is not limited to banking products alone. Banks are actively working to offer value added services to their customers and create a comprehensive ecosystem of support. For example, KBC Bank of Belgium has introduced a blockchain based product to facilitate a seamless end-to-end car loan experience. And mBank of Poland has introduced the mPower Business Starter, which integrates government, bank and accounting services for SMEs. This reduces the new business establishment process from at least 10 days to less than 10 minutes.
Banks are also looking to improve customer experience by integrating technology into the way they function. Chase Bank has introduced Kiosks and Express Branches with an advice bar for digital products or new accounts in a bid to streamlines transactions. Idea Bank of Poland makes its products available on the go with branches and co-working spaces on commuter trains while BMO Harris Bank opened a “Smart Branch” to combine the best features of interactive technology and human advice.
The Roadmap to Innovation
Innovation is no longer a long-term initiative with benefits being reaped over an extended time frame. Given the current market pressures, banks must get the innovation juggernaut rolling quickly and effectively. Unfortunately, existing banking infrastructure is not only dated, but also highly complex. In its current form, it does not lend itself to agile innovation strategies. Yet, complete digital overhaul of the banking core is a complicated, expensive, and a risky undertaking. One way of addressing this is to align with best-in-class vendors to bring in middleware that is powerful enough to provide the agility needed to innovate. From better customer segmentation to smart pricing, these middleware solutions can help banks launch out-of-the box products and services and improve customer loyalty. They can also help reduce operating costs which will contribute to better margins.
Strategic partnerships between traditional banks and fintechs are also gaining traction. Despite their innovative offerings, digital native fintechs lack the expertise to manage the complete financial lifecycle. Traditional banks bring a wealth of experience in managing the customer lifecycle across different segments and have a far wider geographical reach than the new entrants in the field. A strategic partnership would benefit both the players by successfully bridging the gaps in their arsenal and providing great omnichannel customer experiences to increase margins. Ultimately success will depend an effective operating model that connects innovation to business needs. Reports indicate that about 50 percent of the top 100 global banks have corporate venture capital arms, about 80 percent have at least one fintech partnership. A significant number have internal innovation units, and many of the largest banks are doing all of the above. A number of such partnerships are yielding good results. For example, Commerzbank partnered with IDnow to launch a mobile based app for its banking services resulting in 50% increase in conversion for customers for the bank. CurrencyCloud offered FidorBank a payment engine that they integrated into their services without any investment in additional infrastructure resulting in huge reduction in forex costs for the bank’s customers. Some banks choosing to invest in fintech start-ups can up their innovation quotient and drive mutual growth. ANZ, Westpac and NAB have each invested in Australian start-up Data Republic – a data hub through which enterprises can store, share, and collaborate on combined data projects in a safe environment.
To thrive in the current market context, banks must focus on technology driven innovation. To innovate quickly, effectively, without incurring massive costs and while meeting regulatory requirements is no mean feat. But, as countless banks are proving, this is not impossible to achieve. Success will depend on their ability to build a comprehensive and strong ecosystem by collaborating with market utilities, e-commerce players, fintechs and managed service providers. A sharpened focus on innovation can help them gain significant market share in the four fast growing business segments – retail banking, wealth management, SME lending and transaction banking. As the business scales up banks should focus on improving their ROE with clear technology powered processes and policies to consistently innovate and stay one step ahead of customer expectations.
“The views or opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of SunTec’’.