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Emerging opportunities in the digitization of the financial industry  

With the start of the financial crisis in 2007, the secular trend of implementing state-of-the-art technology to improve operating efficiencies came to an abrupt end. While the digitization of standard work processes is progressing everywhere, the financial sector currently lags behind other industry sectors in terms of digitization. Across Europe, on average, only about 30% of processes are digitized, while elsewhere across the globe the ratios are even lower. So far, the attention on a digitized banking world has focused around basic transactions such as payment registration, etc.

The banking industry is, after the nuclear industry, the most supervised and regulated industry sector. This fact has been reinforced during the past decade, as a number of regulatory changes have required banks to focus on reinforcing compliance, higher capital solvency ratios and the payment of fines and penalties for mis-selling products, rigging, and for other liabilities they were deemed to be responsible for. It is estimated that since 2007 up until the end of this year, European and American Banks will have paid fines and penalties totaling in excess of USD 125 billion.

Clearly the new requirements and the payment of the sometimes excessive penalties, can partly explain the under-investment with respect to digital projects, and the subsequent low level of digitization.

Some banks have argued in the past that digitization is a short-term phenomenon that will not last because customers always prefer personal contact over interacting anonymously with a computer. Yet, traditional industry sectors such as travel and the retail industry for consumer goods have shown the opposite. In fact, massive numbers of consumers have been taking advantage of online offerings in the travel industry, and booking a flight with multiple stopovers is frequently done online now. Similar examples can be seen in the online shopping industry where previously non-standardized products have suddenly become online compatible.

The longer the traditional banking industry takes to come up with a valuable digital solution for its clients, the more the industry is exposed to the risk that a third party  may be able to deliver the same service in a more standardized and competitive manner. A number of examples exist where established operators were reluctant to change and all of a sudden, a third party entered into the same market (one of the most recent cases being Uber, which has entered the taxi market with a mobile app that connects passengers with drivers of vehicles for hire and ride-sharing services). The demonstrated willingness of consumers to accept change should be ringing alarm bells in the financial sector, especially as cost savings in the region of 40% to 90% can be achieved by transforming a standard service.

Rumour has it that a number of fully fledged self-directed banking applications do exist, but no one wants to expose himself as the first mover just yet! 

Analyses show that a fully fledged self-directed banking application can improve a bank’s profitability by 40% over a five year period. Up until now, and in order to achieve profitability, financial institutions have focused on achieving higher portfolio turnover e.g. selling higher yielding products, and cross-selling related products. Yet, these efforts came at a huge cost, i.e. required more personnel. Tomorrow, more than 60% of the revenue increase will come from higher efficiencies; therefore it is important for institutions to focus on mission critical applications which take the full process into consideration.

The majority of improvements can be made in the front and middle office segments where digitization would deeply transform working practices. Examples include: on-demand video services discussing investment opportunities, self-directed portfolio construction, self-directed asset allocation processes, key word related investment selection processes, etc.

Historic providers have argued that providing digitalized asset management services is not possible because of the workflow management and the required level of interaction (to cover regulatory and security hurdles) between relationship managers and clients. Some of which is obviously true; nevertheless, customer satisfaction analyses vary greatly from one client relationship manager to another. Ever more demanding clients will obviously prefer the “help yourself” approach over the “get what you do not want” approach. New entrants will obviously try to capture business with an “anything, anytime, and anywhere” approach, but in essence their focus will be on high profile and recurring revenue streams obtained from asset management mandates. Incumbent operators argue that this process appears to be too complex to fully digitize! But we believe that, once a clear cut work process with precisely established restrictions is built, the digitization of such service is within reach, and what is more, the outcome would be much better than the manual process. Furthermore, we argue that citing security concerns such as hacking or regulatory concerns as a barrier to implementation, is in this case, a false appropriation of the problem, because the fact is that digitizing the process makes the investment activity less exposed to vague personal interpretations, and therefore investment performance is most often better.

Making information available in a digital manner requires a different mindset. The commonly used concept of hiding away part of the information or providing information only upon request, does not persuade digital consumers to continue clicking. Digital consumers have higher average requirements than traditional banking customers, but in contrast to the former are better yielding customers. In this context, tracking activity metrics per customer (e.g. navigation cycle, login rates, downloads, etc.) is as inadequate as providing sparse information which is distorting the behaviour analysis and the customers’ experience. Marketing strategies must clearly be productivity driven; a digital consumer wouldn't expect it to happen any other way.

Stay tuned - You can read the continuation of this article next wednesday