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Kyle Webster
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.
’Tunde Olanrewaju Across Europe, retail banks have digitized We estimate that digital transformation will
only 20 to 40 percent of their processes; 90 put upward of 30 percent of the revenues of
percent of European banks invest less than a typical European bank in play, particularly
0.5 percent of their total spending on digital. in high-turnover products such as personal
As a result, most have relatively shallow loans and payments. We also estimate that
digital offerings focused on enabling basic banks can remove 20 to 25 percent of their
customer transactions. cost base by leveraging this digital shift to
transform how they process and service. Put
Neither customers nor digital upstarts are together, the economics of a digital bank will
likely to wait for retail banks to catch up. give it a vast competitive edge over a tradi-
Recent analysis shows that over the next tional incumbent. It’s fair to say that getting
five years, more than two-thirds of banking digital banking right is a do-or-die challenge.
customers in Europe are likely to be “self-
directed” and highly adapted to the online So why are European banks not aggressively
world. In fact, these same consumers already moving in this direction? One of the reasons
take great advantage of digital technologies for the slower transformation in banking is
in other industries—booking flights and that bank executives have tended to view
holidays, buying books and music, and digital transformation too narrowly, often as
increasingly shopping for groceries and other stand-alone front-end features such as mobile
goods via digital channels. Once a credible apps or online product-comparison charts.
digital-banking proposition exists, customer Commonly lost in the mix are the accompany-
adoption will be breathtakingly fast and ing changes to frontline tools, internal
digital laggards will be left exposed. processes, data assets, and staff capabilities
37
Takeaways
digital share and the success rate of digital ment of tools like e-forms and work-flow
products in the front book. The future systems, which can be implemented rela-
replacement rate of these annuity streams tively rapidly, sometimes without deep
will be increasingly dependent on digital integration into complex legacy architectures.
capabilities. In essence, it’s about securing The relationship managers and underwriters
the future and not being lulled into a false at one bank, for instance, got together with
sense of security based on the back book. IT to design a stripped-down and user-friendly
online loan application. The form auto-
matically adapts to input data and guides
How to go digital underwriters on which risk processes to
without going crazy follow. Another European bank sped up
mortgage decisions by tweaking its existing
Going digital doesn’t have to mean millions application to follow standard rules, such
in new investment dollars or convulsive as minimum down-payment thresholds
upheaval in IT. Sizable investment will no and rating data, which allowed applications
doubt be necessary in some areas, but in to be scored and routed faster, with less
general, many of the elements banks need manual intervention.
to exploit this opportunity may already be
in place. Banks just need to leverage them Place a few selective big bets. There
better and invest in these targeted ways. will be places where you need to pursue
more sweeping transformation investments.
Maximize the use of existing technology. However, instead of trying to automate
Many banks have widely deployed imaging every aspect of a given process or product,
and work-flow systems, online servicing, home in on the few that drive the most
capacity-management software, interactive- capacity consumption and give the greatest
voice-response systems, and other connectiv- return. Do not build a gleaming digital empire
ity and work-management technologies. But for the sake of it. One European bank that
they’re not using them widely or well enough. went through a systematic mapping of its
One European bank, for instance, installed processes for automation potential found
a new high-resolution-imaging platform but fewer than ten processes that represented
never fully enforced its use. Customer-service the bulk of full-time-employee capacity.
representatives continued to send documen In these targeted areas, the bank embarked
tation by fax, and the poor image quality led on more radical investments, retiring old
to significant inefficiency in downstream platforms, deploying new digital solutions,
processing. Addressing this problem requires and reinventing the way the process works.
systematic evaluation of existing capabilities,
their usage rates, and barriers to adoption.
Address the people dynamics
Apply lightweight technology interven-
tions. Banks can generate significant perfor- No amount of technology will help if you
mance gains with surprisingly small targeted don’t address the people issues driven by
investments. Examples include wider deploy- digital. Success requires more than rethink-
The rise of the digital bank 39
ing technology; it requires rethinking the Formulate and implement a people vision.
organizational model, too, especially when Finally, you need a vision for the role of
it comes to skills, structure, incentives, and employees in the new digital reality. This takes
performance management. The following two forms: expectations of how they spend
steps can help. their time and how they work alongside the
new technologies, and clarity on what tech
Set the right structure and incentives. nology competencies they need to develop.
There’s more than one way to organize around Digital transformation will clearly diminish
digital. Some European banks appoint a head the importance of some roles, which is why
of digital with profit-and-loss responsibility. many employees will view it as a threat and
Others use a center-of-excellence (COE) be resistant to the change that digital brings.
model to develop offerings that the rest of the However, it also shifts the focus of many
business can take and deploy. Either model workers’ time toward higher-value tasks,
can work, but you must make concerted creating exciting new opportunities for develop-
efforts to realign incentives to ensure collabo- ment. For example, relationship managers will
ration. For instance, creating a COE but not spend less time capturing customer details and
giving the business digital targets often leads more time giving valuable advice. Additionally,
to a lot of technology being successfully built, deeper awareness of the technical capabilities
but with limited drive and pull for adoption. available and how they can affect processes
In extreme cases, the wrong functionality is will be a prerequisite to effectively manage
built—it’s exciting to demonstrate to senior in this new world. Business leaders need to be
leaders and wins awards externally but conversant in how technology can be leveraged
ultimately creates no bottom-line impact. to address commercial challenges. You cannot
rely on bringing in new talent from digitally
Increase the focus on business out- savvy industries to transform your bank. New
comes, not digital activity. Too often, talent provides an important stimulus, but
banks manage the progress of their digital digital needs to become a new management
transformations by tracking activity metrics, competence across the organization.
such as the number of app downloads and
log-in rates. Such metrics are inadequate
proxies for business value. Banks must set
...
clear aspirations for value outcomes, looking Digitization will change the traditional retail-
at productivity, servicing-unit costs, and banking business model, in some cases radically.
lead-conversion rates, and link these explicitly The good news is that there is plenty of upside
to digital investments. Only then will the awaiting those European banks willing to
collective focus be on shaping the right actions embrace it. The bad news is that change is
to fully capture the value available. coming whether or not banks are ready. •