7 digital questions for banks

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.

1 Why are banks investing in digital technologies?

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).

2 What is 'digital' for banks?

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)

3 How are banks facing new digital competitors?

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

4 How do banks’ digital performance compare?

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.

Digital shy

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.

Digital laggards

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.

5 When are digital projects successful?

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.

6 What is the future of digital banking?

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.

 7 Which tips for digitising your bank ?

1. Digitalisation should be considered across all business areas of banks and link in all their value chain. Have a broad and holistic view of digitisation: it’s about the bank as a whole, not just retail. Digitisation includes not only interactions with suppliers and customers but also back-office functions such as human resources and finance, the corporate business and security trading.
2. Digitalisation should be seen as an opportunity to boost growth and improve service rather than only as a way of cost saving. It’s also about educating customers about how digital technology can make banking more convenient for them. It’s more about educating the customers than following them (note 14).
3. Banks should engage in collaborative activities with new market entrants to foster digitalisation and to stay competitive. They have much to gain, including helping them to bridge the gap with fast-moving technological evolutions and rapidly getting new product and services to market by leveraging a partner ecosystem.
4. Digital innovation should be decentralised and supported by an enabling corporate culture of openness and receptiveness. In addition, make someone responsible for your bank’s digital technology – perhaps a digital officer with their own budget, or make your chief technology officer responsible.
5. Check your IT security. Your ground-breaking technology can become a liability if it leaks customer data or is hacked. Review your security software and security policies. Fraud-detection and analytics technology can help prevent intruders from breaching your network and highlight suspicious transactions at an early stage. The ubiquity of digital technology in banking makes security a much bigger issue.