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10. 19. 2017

Wake-up call: Why it’s time for banks to embrace digital transformation

Digital transformation in banking

Financial institutions with a blind spot for new digital trends could already be losing money.

And it’s not just us saying it. According to McKinsey, new revenue in most banking products coming from mobile or online channels will rise to 50% or more in Western Europe and other markets by 2018. At the same time, global mobile e-commerce revenues are expected to more than triple to a whopping $669 billion by next year, with e-commerce champion Amazon alone cashing in on an estimated $158 billion in net revenue.

The big question remains: how can banks tap this growth? And will they ever catch up with Amazon or eBay in digital sales?

Digital transformation: adapt and adopt

The technological environment is changing faster than you can say bitcoin. In our latest white paper, The digital wake-up call: Why banks are lagging behind in sales, we look into the challenges and opportunities banks are facing today, and weigh up all the factors they must consider if they want to stay ahead of the game and boost digital sales.

Some financial institutions are already on the right track. Spanish bank BBVA recently broke the one million digital sales per month barrier: it completed 1.17 million sales transactions worldwide in July 2017 online, through mobile banking apps and ATMs. And, to top it all, the overall volume of its digital sales rose by more than 40% in the past six months.

How did they do it? BBVA prides itself on rolling out new services to drive up digital customer engagement in 2017, including:

  • a mobile and web tool allowing clients in Spain to easily group insurance policies together
  • a solution in America helping non-customers take out loans digitally
  •  an AI-powered mobile voice assistant, Mia, customers in Turkey can speak with.

Constant and rapid technological changes in the financial services sector often come across as challenges. However, as W.UP’s white paper points out, they can become the main driver of bridging the gap between what banks offer and what customers actually need. So when it comes to digital transformation in banking, what should industry players pay attention to?

Great expectations

It’s old news that digital convenience is something millennials and post-millennials take for granted. Meaning they avoid good old brick-and-mortar branches whenever they can and would like to go completely mobile. But it’s not just them whose expectations have changed. According to a PwC survey of banking executives, banking customers, regardless of age, increasingly demand interaction whenever and wherever they want. What’s more, 42% of them prefer to buy services or products on their own without any help of representatives.

Customers are also more willing to share their personal data with banks in return for benefits, whether it’s in the form of reduced interest rates, recognition or other rewards, Accenture says. Speed and convenience are king. About 71% of those surveyed wouldn’t say no to entirely computer-generated support when choosing a bank account, for example.

PSD2: Make or break

We’ve all heard that as of January 2018, the EU will introduce PSD2, a brand new set of rules on payment services aimed to standardize, integrate and improve payment efficiency. So what is it all about? To foster innovation and cut industry costs, PSD2 will require banks to give third-party service providers access to their customers’ data through open application program interfaces or APIs. In other words, innovative service providers will be able to build financial services on top of the data and infrastructure owned by banks.

But what does this really mean? “Banks that don’t embrace PSD2 as an opportunity to more effectively tap into their own data will only be more easily commoditized down the road,” US-based ATM and financial services firm Diebold Nixdorf explains. And the whole world will be watching. PSD2 may only affect transactions in Europe, banks operating outside Europe “will have a front row seat to understand how the emerging trend of open banking can affect their business”.

Frenemies in the banking sector

Who are these third-party service providers? Disruptive fintech companies who cause concern with taking away revenue and market share from traditional banks. Like those specializing in consumer lending: with their speed and user-friendly applications, they have already set the bar high for traditional banks.

But fear them not. As many lenders and insurers have already realized, there are plenty of opportunities to build partnerships with the newcomers. According to a recent survey by KMPG, half of bank executives have already teamed up with third-party service providers for specific projects to better cater to consumer needs. But there’s a lot to be learned. It’s quite telling that 16% of executives were not even sure if their banks had such alignments or joint ventures.

Fintech firms are more and more considered as partners, not competitors. And what a win-win it is! Capgemini’s list of top banking trends for 2017 cites the lack of leadership support, regulatory burdens and infrastructural limitations as the main brakes on in-house innovation in banks, while fintech companies lack the capital and customer confidence of traditional financial institutions.

Traditional players are quickly turning current challenges into growth opportunities by joining forces with fintech firms, acquiring start-ups or establishing new subsidiaries to catch up with the innovation revolution. Getting a grasp of changing customer needs, using the latest fintech solutions, keeping up with new know-how and reimagining the way they work are becoming a must rather than something nice to have for staying ahead of the game.

Digital wake-up call