only of banks have reached a high level of digital in retail... yet 67% of banks say digital is very important to this area of their business (note 3)
Our survey with the Bavarian Finance Centre (BFZ) of 48 European banks reveals what they think about the impact of digital and their adoption profile
Over 2 million news pieces have been published on ‘digital banking trends’ (note 2). Why has the ‘D-word’ come to epitomise the ‘perfect storm’ banks face? (see infographic).
Digital technologies have both the potential to help banks cut costs and seize new growth opportunities whilst at the same time being a vector for new competitors to challenge them.
To find out how banks approach this dual nature of digital – a threat and an opportunity – BearingPoint and the Bavarian Finance Centre (Bayerische Finanz Zentrum, BFZ) have surveyed 48 banks in Europe, representing a cross-section of bank types in Germany, Switzerland, Austria, France and other countries.
only of banks have reached a high level of digital in retail... yet 67% of banks say digital is very important to this area of their business (note 3)
Almost all banks are now keen to show off their technological prowess as digital technology transforms how we work, play and manage our money. Asking why banks are so keen to go digital may seem like a naïve question, but the answers go to the heart of banks’ purpose, their financial health and their role in society.
The most common reasons for digitising are higher sales and lower costs. Growth is expected to come from giving customers more digital products, more efficient operations, and improved product differentiation and market penetration rather than entering new markets.
Consumer pressure is the most pressing digital issue for banks, with all banks surveyed saying internet and mobile platforms for banking services are vital.
Digital technology is becoming increasingly important for banks’ retail businesses, helping them attract and retain customers and improve efficiency, as indicated by 67% of banks surveyed. Despite this, only 17% of banks surveyed say they have achieved a high degree of digitalisation for their retail business.
There is a digital hierarchy within bank service lines: retail banking and private-wealth management are priorities for digital technology, with M&A business the least
There’s a digital hierarchy within bank’s service lines. Banks surveyed said retail banking and privatewealth management are priorities for digital technology (91% and 81% respectively) and M&A business the least.
By business function, banks said that, unsurprisingly, IT was the most important function to digitise, followed by marketing, sales, and risk management.
The need to grow top-line revenue through sales and customer conversion rates is driving investment into digital channels. Due to this, the areas that will see the greatest spending in 2015 are mobile and online banking, with 52% and 51% of banks respectively seeing their budgets grow.
Kieran Hines, practice lead, financial services technology ovum (note 4).
Most banks plan to spend ‘high amounts’ on digitising their business. Deutsche Bank said it plans to spend up to EUR 1 billion on digital technology until 2020 (note 5). About half (EUR 400-500 million) will be allocated to private and business clients.
According to Celent analyst, Gareth Lodge, banks in North America, Europe and Asia-Pacific are expected to spend USD 196.7 billion on IT in 2015, up 4.6% from 2014 (note 6).
Even so, are banks too cautious and complacent about digital technology? Nearly all (95%) banks we surveyed said being the first to introduce innovative digital technology provides ‘first mover advantage’ but, apart from the ‘direct banks’ (online banks without high-street branches), the majority of banks described themselves as ‘second movers’.
For example, BPCE Group, France’s second-largest bank, wants over 80% of its services to be available online by 2017. One of its subsidiaries, Caisse d’Epargne, has turned the nation’s favourite ‘piggy bank’ account – the traditional ‘Livret A’ – into an instant savings account where parents or relatives can make a deposit online into a child’s account and leave messages, even if the adults are not clients themselves. Cédric Mignon, Head of Development at Caisse d’Epargne, says ‘[Our online savings product] proves that with digital innovation even the most traditional products of the classic French brands, which are cherished by the French, can be spruced up and given a new lift at any time’ (note 7).
Our survey also suggests that most banks have a passive attitude to digital technology and customer services: 61% of banks surveyed develop digital services in response to customers rather than using their initiative and developing technology they think will be popular with customers.
According to Ovum analyst, Kieran Hines, ‘a major focus of digital channel investment is enhancing the customer experience and providing greater functionality. Enabling greater customisation in digital channels is a top investment priority for 21% of banks, but enhancing platform functionality is the leading objective for digital channel investment. This includes the ability to offer statement searches or to set-up payments, and 53% of banks have indicated this is an investment priority’ (note 8).
Our survey also found an apparent gap between what banks say and what they actually do. Take new technology and how to develop it. Seven in ten (69%) of the biggest commercial banks recognise that start-ups are an important new form of organisation. But only 38% of banks BearingPoint surveyed said creating tech start-ups was important.
All the banks that think they are digital pioneers are aiming to increase their revenue and enter new markets rather than make cost savings.
Our online savings product proves that with digital innovation even the most traditional products of the classic French brands, which are cherished by the French, can be spruced up and given a new lift at any time.
Cédric Mignon, head of development, caisse d'epargne (note 7)
Established banks are facing growing competition from hundreds of ‘fintech’ companies, telecommunication companies and technology giants, such as Apple and Google, which have recently started payment services.
Compete or co-operate? A small majority (54%) of banks surveyed say they want to cooperate with new entrants in banking, 46% say they plan to compete with them.
Although banks have some advantage over new rivals (for example, large and well-established customer bases, experience of complying with regulations), they also have some possible disadvantages. They are much larger and more complicated organisations than newer and smaller rivals, which are often not weighed down by much old IT kit and bureaucracy. So far, banks have struggled to produce technology that’s quicker and smarter than fintech rivals.
There are signs, however, that this balance of power is changing. Some banks are partnering with fintechs to improve their technology and keep up with customer demands.
Deutsche Bank, for instance, plans to meet 500 fintechs each year and sign several agreements to co-operate with some of them via its ‘Deutsche Bank Labs’.
Another example is Crédit Agricole which, like other major banks, has launched a joint-venture initiative. ‘The Village by CA’ is a start-up incubator, with office hub space in Paris (with expansion into French regions planned), aiming to co-create new products and services (note 9).
Cooperating with fintechs give banks access to innovative technology, saving them from having to invest in it themselves. In return, fintechs get access to capital and to a large customer base, which enables them to achieve economies of scale and turn a profit.
So far, banks have struggled to produce technology that’s quicker and smarter than fintech rivals. But there are signs that this balance of power is changing
Each bank is different in its approach to digitisation, but some patterns emerged in our survey. The European banks fall into three broad categories:
Digital pioneers (direct banks/online only)
These banks, such as ING DiBa (the successful online banking operation of German bank ING), have digitised much of their business and some have created their own technology start-ups. They encourage innovation, and their organisational structure and culture helps drive digitalisation across the business. Online technology, mobile apps etc. are integral to their business.
Major commercial banks and cooperative banks are in the digital mid-table. They offer a lot of different services. They are good at digitising retail banking although there’s still a long way to go before they’re fully digitised. Most of their processes are automated. Online technology is part of their daily business.
These banks in the survey (often regional banks and small banks) rely predominantly on old legacy IT systems. A significant number of business processes are paper based and/or performed manually.
Digital technology is a surprisingly slippery concept. Online technology is reaching into and transforming almost all parts of our life and work. The technology, like a lens, is even changing how we see and understand the world. Think of digital technology as five lenses.
The first lens is intelligence and instant analysis. For example, just as consumers now have access to price comparison sites, employees can gather information on all their projects and suppliers. Smart analytics is creating an unprecedented data trove not only for a few executives, but enabling and empowering everyone in the value chain.
Lens two is the intelligent machine. Machines are also increasingly connected and autonomous. Examples of this so-called Internet of Things range from tracking your pet through a microchipped collar connected to an app on your smartphone to ‘smart’ energy grids. As devices generate and act on information with ever less need for human intervention, so new opportunities are created for efficiency improvements and service delivery.
Lens three is technology that enables new approaches to staffing and workforce management. Increased availability of mobile and low-to-zero cost online services is changing the way people work and interact. Consequently, job-for-life posts, which were common until a few decades ago, are being replaced with a more fluid workforce in which employees may have three of four careers in different sectors and have higher expectations for their careers.
The fourth lens is that technology platforms (such as social media, communication systems and free opensource software) allow vast numbers of people with shared interests and goals to connect and share views. In effect, these information ecosystems are shrinking the world. These platforms create opportunities for companies as well as challenges, such as how to communicate round-the-clock with more demanding consumers and citizens.
The fifth and final lens is trust. We put increasing trust in machines and data but, at the same time, collectively we are increasingly sceptical of corporations and governments, placing them under great scrutiny. Access to data has to be balanced against the right to privacy.
What does a successful digital project look like?
The hallmarks of a success project, according to the banks surveyed, are corporate culture, customer inclusion and good implementation.
Barclays bank, for example, has trained thousands of its staff as ‘digital eagles’ to help customers understand online technology over ‘tea and tech’ sessions in the UK (note 10).
Factors that hinder digital projects include lack of financial resources and staff (particularly for cooperative and regional banks). For regional banks and local branches of foreign banks a bigger problem is management’s lack of awareness of digital technology and its reluctance to take risks.
Within five years most of the banks surveyed expect a medium-to-high degree of digitisation in all their departments. Banks reckon the parts of their business with the highest level of digitisation will be sales, business operations, risk management, IT and private banking. The M&A business is expected to be the least digitised part of banks.
Automating areas such as deposit business and capital-market trades is fairly straightforward. Business tasks that are more complicated and require more human intervention, however, such as the acceptance and implementation of a loan, may be trickier. It may only be possible to automate these functions partly.
The bottom line for banks is that they need to invest heavily in digital technology. Our survey suggests that despite some digital pioneers, many (perhaps a majority of European banks) have to refine their digital strategies and become more ambitious and bold in their use of technology to help them cut costs and increase profits, compete against fintechs and satisfy increasingly tech-savvy customers.
And as banks digitise more of their business they may finally replace old back-office systems (a major organisational challenge, potentially at a cost of hundreds of millions or even billions of euros) to gain better value from new digital technology and stop information getting stuck in IT silos.
In the present study, three degrees of digitalisation were defined to determine the level to which companies integrated this topic into their daily business operations.
This study – Digitalisation in Banks – was based on the results of a survey conducted jointly by the Bavarian Finance Centre (Bayerische Finanz Zentrum, BFZ note 17) and BearingPoint between September 2014 and March 2015. The survey concentrated on financial institutions in Europe and was completed by respondents using a written questionnaire.
The data came from the analysis of 48 responses from banks. The respondents consisted of managers in European financial institutions: 37% of them are based in Germany, 19% in Switzerland, 15% in France, 2% in Austria, 2% in Liechtenstein and 2% in Spain (23% of the respondents did not state their country of origin). Broken down by type, 27% are major commercial banks, 23% private banks, branch of foreign bank or other, 23% regional banks, 15% direct banks, 6% saving banks, central institution, 6% cooperative banks, central institution, 4% capital investment companies, 4% mortgage banks and 4% banks with special function (multiple answers possible).
* BearingPoint Institute, The eye of the storm: Bank sustainability reaches a tipping point, Frank Hoefele and Robert Bosch, June 2015, http://inst.be/006BIB
** SNL Financial’s February 2015 survey, SNL Financial, March 2015, http://bit.ly/1W0AfPB
*** 2015 Fintech Report: Investment Trends in Fintech, Silicon Valley Bank, 30 January 2015, http://bit.ly/1KhOFie
**** Anteil der Personen in ausgewählten Ländern Europas, die Online-Banking nutzen im Jahr 2014, Statista, 2015, http://bit.ly/1RigFHU
Felix Offermann, Lena Mazzoleni, Marie Witter and Ludovic Leforestier at BearingPoint, Adrian Wende at the Bavarian Finance Centre (BFZ).
The authors would also like to express their gratitude to all the survey participants; and thank Prof Dr Wolfgang Gerke at the Bavarian Finance Centre (BFZ), Dr Robert Wagner, Philippe Roubin, Neil Whittaker and Damien Coffinier at BearingPoint, Nick Huber for his editorial support, Sharon Springell and Tanja Schwarz at the BearingPoint Institute for their flexibility and dedication, Michael Agar for the graphics, Chris Norris for editing and Angélique Tourneux for the layout.