7 digital issues for the future of banks

BearingPoint. Institute 7 digital issues for the future of banks Although banks are spending billions of euros upgrading back-office functions and customer services to digital in an attempt to improve return on equity and remain an attractive customer experience, they also face a perfect storm from expensive regulations and more competition from new entrants to the market. After analysing 48 European banks we suggest how they can leverage digital more effectively to cut costs, boost growth and better satisfy customers. Four major challenges that impact the banking industry Tougher regulations Perhaps the biggest regulatory challenge is Basel III. It requires banks to set aside more capital against losses. Banks have expanded their capital buffers to comply with regulations by mainly cutting the size of their balance sheets. But shrinking balance sheets haven't been accompanied by a proportionate fall in costs. Interest income Interest rates in western developed economies are at a record low, which is bad news for banks as profit margins are squeezed. Now banks need to work harder to increase profits– by making bigger returns on their investments, making more money on products sold to customers, or by cutting their costs. Interest income by bank size* Operating costs by bank size * **** ** *** ** * Medium-sized banks Medium-sized banks Small Large banks Small Large banks banks banks 2010 EUR 27.2bn EUR 45.2bn EUR 348bn 2010 EUR 37.7bn EUR 38.8bn EUR 324bn 2011 EUR 25.9bn EUR 44.3bn EUR 350bn 2011 EUR 34.2bn EUR 39.5bn EUR 328bn 2012 EUR 24.8bn EUR 44.2bn EUR 329bn 2012 EUR 33bn EUR 40.3bn EUR 330bn 2013 EUR 25bn EUR 42.2bn EUR 313bn 2013 EUR 34.9bn EUR 39.2bn EUR 325bn Growing competition New competitors are entering the traditional banking market, using digital and mobile technology to attract austomers without the cost of running hundreds of high-street branches. Demanding customers Customers are demanding more digital products and services from their banks. Research suggests that customers will switch banks if they're unhappy with digital banking services. One in four customers in the United States who changed banks did so partly because they wanted a better digital banking app." 36% of banking executives 57% of German internet users expect fintech' companies to be their biggest competitors by 2020. *** regularly bank online; in Switzerland, France and the UK it's between 60 and 70%; and it's up to 98% in the Nordics. **** 1 Why are banks investing in digital technologies? Respondents are more inclined to seek a return to growth via digital channels and differentiation, then profitability through operational gains, rather than entering new markets. 53% 51% 41% 38% 30% 32% 27% 20% 8% Enter new markets Grow revenues Save costs Hardly applies Mostly applies Completely applies What is digital for banks? 95% of banks surveyed said being the first to introduce innovative digital technology gives them 'first mover advantage.' Digital pioneers, mainly 'direct banks' (online banks without high-street branches), aim to increase their revenue and enter new markets. The majority of banks, however, described themselves as 'second movers'. 100% Internet and mobile platforms Start-ups 38% as a new fom of organisation Where banks see the impact of digital + Automation of processes 93% New structures and 73% corporate culture 个 New IT infrastructure 89% New employee 75% skills 3 How are banks facing new digital competitors? So far, banks have struggled to produce technology that's quicker and smarter than telco or fintech giants, such as Apple and Google, which have already started payments services. The question is, should banks compete or co-operate? Global fintech funding over the past five years, USD billions + USD 2.7bn USD 4.0bn 2012 2013 USD 2.4bn 2011 USD 12.0bn 2014 USD 1.8bn 2011 54% 46% of banks said they want to collaborate with new say they plan to compete + entrants to banking + 4 How do banks' digital performance compare? Characteristics of respondents according to their degree of digital adoption 大 ) Digital leaders "Direct banks' (7 banks). Digital shy Digital laggards Regional banks and local branches of foreign banks (20). These banks exhibit a "passive" behaviour; they let their environment drive their own Major commercial banks and These banks have digitised cooperative banks (17). Even though major commercial banks have launched start-up programs etc. they still suffer from legacy systems and much of their business and some have created their own technology start-ups. digitalisation. It may be because of conservative cultures they are reactive rather than active (following their austomer). They're good at digitising retail banking. Room for improvement: digitising corporate banking. but also mostly because they don't have the means to improve their digitalisation. 5 Why do some digitisation projects succeed? What does a successful digital project look like? The hallmarks of a success project, according to the banks surveyed, are: corporate culture, customer inclusion, good implementation planning and organisational implementation of digital management. + 95% corporate culture 86% 86% good implementation customer inclusion planning 7 The future of digital banking Top tips for digitising your bank Banks expect a medium-to-high degree of digitisation in all their departments, but believe the following areas of their business will benefit most from digitisation. Digitalisation should be considered across all 79% 91% business areas of banks and all links in their value Security-related Retail business chain. 81% services Private wealth 61% I management Deposit business Digital should be seen as an opportunity for growth and value creation rather than only as a means of cost saving. Banks should engage in collaborative activities with new market entrants to foster digitalisation and stay competitve. Digital innovation should be decentralised and supported by an enabling corporate culture of openness and receptiveness. Check your IT seaurity. Your ground-breaking technology can become a liability if it leaks customer data or is hacked, Sources: * BearingPoint - Bayerisches Finanz Zentrum survey, 2015 * BearingPoint Institute, The eye of the storm: Bank sustainability reaches a tipping point, Frank Hofele and Robert Bosch, June 2015, http://inst.be/006BIB ** SNL Financial's February 2015 survey, SNL Financial, March 2015, http://bit.ly/1WOAFPB *** 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://bitly/1 RigFHU + Silicon Valley Bank - Investment Trends in Fintech, January 2015 https://www.svb.com/News/Company-News/2015-Fintech-Repart-Investment-Trends in-Fintech/?site-uk BearingPoint. Institute | |I| ||