The Rise Of The Digital Bank

As European consumers move online, retail banks will have to follow. The problem is that most banks aren’t ready switch to digital bank.

Cross Europe, retail banks have digitized only 20 to 40 percent of their processes; 90 percent of European banks invest less than 0.5 percent of their total spending on digital. As a result, most have relatively shallow digital offerings focused on enabling basic customer transactions.

Neither customers nor digital upstarts are likely to wait for retail banks to catch up. Recent analysis shows that over the next five years; more than two-thirds of banking customers in Europe are likely to be “self-directed” and highly adapted to the online world. In fact, these same consumers already take great advantage of digital technologies in other industries — booking flights and holidays; buying books and music, and increasingly shopping for groceries and other goods via digital channels. Once a credible the digital bank proposition exists; customer adoption will be breathtakingly fast and digital laggards will be left exposed.

Getting the digital bank right is a do-or-die challenge.

We estimate that digital transformation will put upward of 30 percent of the revenues of a typical European bank in play, particularly in high – turnover products such as personal loans and payments. We also estimate that banks can remove 20 to 25 percent of their cost base by leveraging this digital shift to transform how they process and service. Put together, the economics of the digital bank will give it a vast competitive edge over a traditional incumbent. It’s fair to say that getting the digital bank right is a do-or-die challenge.

So why are European banks not aggressively moving in this direction? One of the reasons for the slower transformation in banking is that bank executives have tended to view digital transformation too narrowly; often as stand-alone front-end features such as mobile apps or online product-comparison charts. Commonly lost in the mix are the accompanying changes to frontline tools, internal processes, data assets, and staff capabilities needed to stitch everything together into a coherent front-to-back proposition. Although the journey may begin “digitally” on an online form or payment calculator, it does not remain so for long, as anyone who has taken on a mortgage can attest. Instead, the onerous documentation requirements and significant manual intervention that characterize the typical bank’s mortgage process soon emerge. This can seem jarring to customers accustomed to more seamless interactions with nonbanking services.

Some banks point to security and risk concerns as justification for their slow approach; but this is a contrast to other industries. The airline industry, arguably beset by even stronger risk concerns; has automated just about every aspect of its customer experience in the last ten years; boosting customer service without compromising safety. Banks can do the same. What’s more, the effort is likely to pay for itself—and then some.

Where exactly is the value in the digital bank?

Our modeling indicates that European retail banks that pursue a full digital transformation; pulling all improvement levers. Can realize improvements in earnings before interest, taxes, depreciation; and amortization of more than 40 percent over the next five years. Almost two-thirds of this potential value comes from the impact of digital on the cost base and loss provisions rather than from revenue uplift; which is why a focus beyond front-end investments is critical.

While the cost-saving opportunity for banks comes in many forms and touches every area of the bank. There are two areas that are especially significant and represent the bulk of the value: automation of servicing and fulfillment processes and migration of front-end activity to digital channels. On automation, European banks can realize 40 to 90 percent cost reductions in a range of internal processes through careful deployment of work-flow tools and self-servicing capabilities for customers and staff. On front-end transformation, beyond diverting existing branch activity into digital channels; digital tools can also be used to augment front-line servicing. (Ex: with iPad forms rather than paper forms); or video conference access to specialists to maximize their utilization. Easily doubling staff productivity and enhancing the customer experience.

The future replacement rate of these annuity streams

The potential for revenue uplift is not quite so concentrated. Rather, European banks need to pursue a broader range of opportunities; including improved customer targeting via digital marketing and microsegmentation, more dynamic, tailored pricing and product bundling, third-party integration (Ex: with Facebook); product white-labeling, appropriate distribution via aggregators. Of course, establishment of distinctive mobile and online sales offerings.

In the near term, we expect shorter-tenure, high-turnover products like credit cards, loans, and payments to see the most digital transformation. In fact, these are the areas most under attack from new digital entrants. Looking further ahead, bank accounts and mortgages; which together drive more than 50 percent of many banks’ revenues and usually provide “sticky” annuity streams. Given this development, European banks will need to carefully watch the evolution of their digital share and the success rate of digital products in the front book. The future replacement rate of these annuity streams will be increasingly dependent on digital capabilities. In essence, it’s about securing the future and not being lulled into a false sense of security based on the back book.

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