Dissertation on Digital Banking by Alba Céspedes. Master in International Finance (IEB)

1. DIGITAL BANKING:
Reshaping the business model
ALBA CÉSPEDES IZQUIERDO
Master in International Finance 2014

2. INDEX
1. Executive Summary………………………. 3
2. Introduction ……………………………….. 4
3. Digital Banking ……………………………. 6
3.1. Products ……………………………....... 8
3.2. Clients ………………………………....... 12
4. Current reality in Spain ………………….. 15
5. Conclusions ……………………………….. 17
6. Outlook …………………………………….. 18
7. Bibliography ………………………………. 19

3. DIGITAL BANKING : RESHAPING THE BUSINESS MODEL – CÉSPEDES, A. 3
1. EXECUTIVE SUMMARY
The future keeps getting in the present’s way whether
you are prepared for it or not. In view of a digital era
as the one we are living in, which has shaken the
foundations of all industries − from wholesale to retail
− over the past decade, it is time for the banking
sector to confront the new challenges that this new
situation is presenting, and it must be done without
delay. Because the Internet and digital devices are
rapidly changing everything and reshaping the
business model as we know it. It is a boat that the
banking sector must not miss if it wants to survive.
The « BIT Industry » − concept covering Banking,
Information and Technology (Francisco González,
December 2013) – is announcing the arrival of a new
financial ecosystem. This ecosystem will result from
the current banking marketplace being transformed by
mass consumer adoption of current
technology waves. One of the last most disruptive
waves corresponding to smartphone adoption
is already hitting 90% penetration rate with an
unprecedented speed in developed countries.
Forecasts indicate that in two or three years only 5%
of consumer interaction will be carried out through
branch offices, and that in two decades we will go
from 20,000 “analogue” banks to no more than a few
dozen “digital” banks worldwide.
This technology disruption is also creating more
radical initiatives like Bitcoin – a software-based
currency without a central repository or single
administrator − recently legalized in California (Jerry
Brown, June 2014), or Crowdfunding platforms, with
the “crowd” collectively funding initiatives like “Star
Citizen” which has raised up to $40M to create this
video game (Chris Robertsand, March 2014).
There is no doubt we are facing a drastic change in
the way the financial sector is shaped, but why is this
happening? The two main causes for this impact on
financial services would be:
Consumer behaviour changing dramatically.
Customers now prefer on-the-go and on-demand
services rather than traditional ones. Mobile phones
are changing the way that customers consume
financial services, the way in which they are
accessing their financial products, and the whole
relationship with their banks.
The second impact is caused by the access of new
players to the market: mostly technology-enabled
startups − creative and innovative companies − which
are creating new added-value products like mobile
payments services and cash management tools, but
also big installed technology firms like Apple or Google.
Some cases worth mentioning are Pay-Pal, which is
currently dominating internet transactions; Vodafone,
deploying M-PESA mobile banking in Africa, the Middle
East and even some European countries; Apple
creating “Apple Pay” app for mobile payments;
Amazon, starting to loan capital to sellers to help them
grow their businesses, and Tesco, a multinational
retailer now marketing mortgages.
So, what can banks do?
In response to this paradigm shift, banks need to react
quickly and transform what could happen to be a
potential threat into an opportunity, in three steps:
1
st
Omnichannel strategy. Focusing on mobile, online
and social media. Digital has to be one of the many
channels that banks offer customers to access their
current accounts.
2
nd
Create value-added products in addition to these
new digital channels. Not just giving customers access
to their bank accounts, but understanding their needs
and offering products and services suited for them.
3
rd
Customer relationship maintenance in the
transition from a human-based interaction to a more
digital one. Customer knowledge − “Big Data” − is the
greatest asset banks have and a competitive
advantage over technology firms. Thus, banks cannot
afford to lose their connection with their customers;
otherwise there is a danger that banks may become a
mere utility, without owning the customer relationship
anymore.
Digital banking is a hot topic and will continue to be for
the following years, this is why I have undertaken it as
my dissertation. Because when the future is knocking
at your door, you should try to stay on top of things and
be ready to open it.
− Alba Céspedes
“The BIT Industry: The Future is here”
IEB Magazine (#18 December 2014)
“Change is the only constant in life”
− Heraclitus of Ephesus

4. 2. INTRODUCTION
This is what Jeremy Rifkin, advisor to the European
Union heads of state for the last decade, senior
lecturer at Wharton School and bestselling author,
explains on his most recent publication: “The Zero
Marginal Cost Society: The Internet of Things, the
Collaborative Commons, and the Eclipse of
Capitalism”.
Here, Rifkin argues that this is the first economic
paradigm to emerge on the world scene since the
advent of capitalism and socialism in the early 19th
century. We are facing a remarkable historical event,
with long-term implications for society and economy.
Rifkin also gives a name to the reason behind this
emerging economic system: the zero marginal cost.
As traditional economic theory explains, marginal
costs are the costs of producing an additional unit of a
good or service after fixed costs are covered.
Although most of the public is still not familiar with this
concept, the zero marginal cost idea is going to
dramatically affect every single person in the world in
the upcoming years.
There is a paradox deeply embedded in the heart of
the capitalism that has been responsible for the
tremendous success of this system over the last two
centuries. But now, it’s also leading to an endgame
and a new paradigm emerging out from it: the
collaborative commons.
In a traditional market, sellers are constantly probing
for new technologies that can increase their
productivity and reduce their marginal costs so they
can put out cheaper products, win over consumers,
beat competitors and bring profit back to investors. So
business people have been increasing productivity
and reducing costs without expecting that there would
be a technology disruption so powerful that it might
reduce those margins of cost to near zero, making
goods and services essentially free, priceless and
beyond the market exchange economy.
That is now beginning to happen in the real world. The
first inklings started with the inception of the World
Wide Web in 1990. All of a sudden millions of people
and now 40% of the human race had very cheap
phones and computers, and were sending audio,
video and texting each other without cost.
Millions of consumers have become prosumers with
the advent of the Internet: producing and sharing their
own videos, news blogs, entertainment and
knowledge with each other in these lateral networks,
essentially for free, bypassing the capitalist market.
As it invaded the information industries, zero marginal
cost phenomena made a huge impact on big
industries: Newspapers and magazines went out of
business. Publishing industry, for example, has been
wracked by free e-books, knowledge and information.
At first, a lot of industry watchers thought that it would
be a good thing, expecting that as more information
goods were produced and shared for free, these
freemiums would stimulate people’s appetite to want
premiums and upgrade their products, but this didn’t
happen. For example, musicians started giving away
their music for free, hoping that they would get a big
loyal fan base and then their fans would be engaged
enough to buy their merchandise and go to their
concerts, paying premiums in order to be there in
person.
It is true that some people had moved from
freemiums to premiums, but not on any large scale.
There was no incentive to go for premiums as more
and more music, film, arts and information goods
were out there nearly free shared with each other.
Now the near zero marginal cost phenomenon is
passing the firewall into the world of physical goods
and services. There is a new technology revolution
coming online that’s making it possible for millions
and eventually billions of people to not only produce
and share their own information goods but energy
and physical goods as well. It’s called the Internet of
Things. This is the expansion of the Internet and it’s
all happening in the last 12 months.
“We are just beginning to glimpse the bare outlines of an
emerging new economic system: the sharing economy
and the collaborative commons”

5. DIGITAL BANKING : RESHAPING THE BUSINESS MODEL – CÉSPEDES, A. 5
The traditional Internet is now converging with an
energy Internet and a nascent logistics and transport
Internet – we can see this happening for example in
the creation of a software-powered driverless car by
Google.
As these 3 Internets come together, they are creating
a single operating platform, sort of intelligent brain.
And they are taking this brain and attaching sensors
across the entire value chain of the economy to feed
into these 3 Internets: energy, communication and
logistics.
Historically economics platforms in society have
always contained 3 elements: a form of
communication, a form of energy and a form of
mobility to move economic activity.
In the 19th century during 1
st
Industrial Revolution,
communication was based on steam power printing
and later the telegraph. The form of energy was coal
and steam power. The form of mobility was the
locomotive and the railroads.
In the 20th century we had these 3 engines as well.
The communication was centralized electricity and
especially the telephone, later radio and television.
The form of energy was oil, and the mobility was the
internal combustion engine. That platform then
allowed us to experience a great economic
development in the 20th century with the 2
nd
Industrial
Revolution.
This latest expanse of Internet, this Internet of Things
brings us to a 3
rd
Industrial Revolution. The form of
communication is the Internet, the form of power is
renewable energy, and the form of mobility is
driverless automated vehicles, logistics and
automated drones.
The intelligent 3
rd
Industrial Revolution infrastructure
—the Internet of Things — will connect everyone and
everything in a seamless network. People, machines,
natural resources, production lines, logistics
networks, consumption habits, recycling flows, and
virtually every other aspect of economic and social
life will be connected via sensors and software to the
platform, continually feeding Big Data to every node
—businesses, homes, vehicles, etc.— in real time.
The Big Data, in turn, will be analysed with advanced
analytics, transformed into predictive algorithms, and
programmed into automated systems, to improve
thermodynamic efficiencies, dramatically increase
productivity, and reduce the marginal cost of
producing – using inventions such as 3D printers,
industrial robots capable of manufacture three
dimensional solid objects out of a digital file – and
delivering a full range of goods and services to near
zero across the entire economy.
Right now we have 13 billions sensors out there
connecting appliances and things with human beings.
IBM says in 2020 we’ll have 30 billion sensors
connecting everything with every being. And by 2030
the most recent forecast, we’ll have a hundred trillion
sensors connecting all of us in one vast lateral
neural network.

6. A rising challenge
Recent analysis from McKinsey&Company (‘T Olanrewaju, July 2014) shows that
over the next 5 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 digital banking
proposition exists, customer adoption will be breathtakingly fast and digital laggards
will be left exposed.
Despite these trends, retail banks across Europe have only digitized 20 to 40% of their
processes so far, and 90% of European banks invest less than 0.5% of their total
spending on digital, mostly focused on enabling basic customer transactions.
So why are European banks not aggressively going digital yet?
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, forgetting
about the changes in frontline tools, internal processes, data assets, and staff
capabilities needed to stitch everything together into a coherent front-to-back
proposition. 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 has
automated just about every aspect of its customer experience in the last 10 years,
boosting customer service without compromising safety. Banks can do the same, and
the effort will pay for itself and probably more.
Value creation from digital banking
McKinsey research estimates that digital transformation will increase 30% of the
revenues of a typical European bank, particularly in high-turnover products such as
personal loans and payments. McKinsey also predicts that banks can remove up to
25% of their cost base by leveraging this digital shift to transform how they process
and service. Thus, European retail banks that pursue full digital transformation can
realize an increase of more than 40% in EBITDA over the next 5 years.
3. DIGITAL BANKING
Automation of
processes
Front-end activity
to digital channels
Cost
saving
Customer targeting
Mobile & online
sales offerings
Revenue
uplift
25%
30%

7. DIGITAL BANKING : RESHAPING THE BUSINESS MODEL – CÉSPEDES, A. 7
Banks worldwide are on the move. Not moving
at the same pace, though. Regional
environments are defining each country’s
readiness for digital banking.
The study held by AT Kearney and Efma (2014)
light on the regional differences in how ready the
markets are and the approaches banks are
taking. 27 countries formed the panel with the
following weights:
Taking into account banking capabilities,
market dynamics, customer readiness, and
regulatory factors, the most developed
environments are in the United Kingdom,
Singapore, Denmark, Sweden, the Netherlands,
the United States, and Australia. These regions
offer forward-thinking and favourable
environments for digital banking.
The Netherlands, Australia, and Singapore show
strong banking capabilities, including advanced
digital offerings, strong financial positions, and
digital structures while the United Kingdom
strongly benefits from a very dynamic market
with an attractive financial sector and aggressive
technology-oriented companies.
From a customer perspective, the markets in
Singapore, Sweden, and Denmark are the most
advanced with many digital natives, high
smartphone penetration, and strong e-commerce
shopping behaviour.
Within Europe, there is a different mix of
readiness. In some regions, banks are pushing
digital topics, but other factors are not following
at the same pace. In Spain, for example, digital
banking offerings are already advanced but
customers and the regulatory environment are
lagging behind.
In Eastern Europe, especially in Poland and the
Czech Republic, some banks are actively
pushing digital banking and are making good
progress. Customers are embracing the trend
and using new options such as mobile banking
and crowdfunding. But overall, it’s happening on
a small scale.
In Russia, banks are less euphoric about digital
banking and focus more on consolidating and rationalizing
existing platforms.
The environment in Western Europe, including Germany,
France, Switzerland, and Austria, is slightly less ready. Banks
are looking into digital options but have not yet made step
changes, with bolder moves such as BNP Paribas’ Hello
bank! or Axa’s Soon being the exceptions. Here, the branch
network is still seen as important because of an older
population that has more traditional beliefs.
North America is rich in digital exploration and innovation,
particularly in the areas of mobile banking and payments.
However, in both Canada and the USA legacy technology
environments and organizational structures stifle banks’ ability
to transfer digital innovations from the laboratory to the
marketplace.
Southern Europe and the Middle East are also actively
exploring digitization, in particular investing strongly into
improving CRM (Client Relationship Management)
capabilities and value-added services. Nevertheless, the
environment is less ready, given the constraints of the
financial crisis and a population that lacks trust. In summary,
there is north-south decline of digital banking readiness in
Europe down to the Middle East.
= Target ≠ Readiness
Digital Banking Readiness Index

8. Mobile apps
All major banks have already launched their own app suites
for all devices. Customers use them essentially to check
their balances and recent transactions, to find near ATM’s
and branches, pay bills and transfer funds.
Mobile payments
The rise of mobile has huge implications for how we
manage our money. For banks to remain competitive, it’s
essential for them to adopt a mobile-first strategy centred
on consumer experience.
Personal finance tools
Banks are offering personal financial management tools
(PFM) online and on mobile to help their customers get a
better handle on their spending and saving. These tools are
experiencing an increasing popularity among customers.
Crowdfunding
Stands for the practice of funding a project or venture by
raising many small amounts of money from a large number
of people, typically via the Internet. Crowdfunding is
becoming a real headache for the industry. Because of its
lack of regulation, it belongs to what we call shadow
banking.
First steps on the digital banking journey have been primarily focused
on adding new technology-enabled services and products to the existing
offering to increase the value for customers. Although few solutions on
the market are fully mature, here are some of the most prominent
examples available today:
3.1. DIGITAL BANKING : PRODUCTS
Bitcoin & Virtual Currencies
Bitcoin is a digital currency that is disrupting the world of
online payment. Not backed by any governmental institution
and operated by an unknown decentralized authority, its
future position and relevance in the payments field remains
to be seen.
Bank services
Non-bank services

9. DIGITAL BANKING : RESHAPING THE BUSINESS MODEL – CÉSPEDES, A. 9
For example, Vodafone and Safaricom
created M-PESA to serve the largely
unbanked Kenyan population. Users pay
cash into their account at an agent, such
as a gas station or supermarket, and then
use their mobile phone to pay retailers or
other individuals. M-PESA serves as an
alternative to bank accounts and credit
cards, which is especially appealing to the
rural population. In 2012, about a third of
the Kenyan population used M-PESA.
Another focus point will be more effectively
leveraging crowd intelligence to support
existing advisory offers, using renowned
industry experts and incorporating the
opinion of several thousand customers.
Similar to Amazon’s automated next-best-
product decision support systems, banks
will use the purchase decisions of peers to
help customers make a decision.
In relation to social investing: There are
already several financial technology
companies offering social trading or
investing services that allow customers to
trade synchronously with top traders based
on their track record and the number of
followers. Although banks have not gone
that route yet, they are positioned to take a
leading role in the advisory-driven
investment business. Depending on the
success of the new players, banks will
have to react in a timely fashion and adjust
their offerings accordingly.
More than 80% are revisiting their complex
product portfolio and radically rationalizing
the product suite, from more complex
product groups within loans to simple
categories such as deposits. One Dutch
bank, for example, has reduced savings
products from more than 20 to just 3, and
Singapore-based OCBC Bank has tailored
an offering entirely to students. FRANK by
OCBC offers a simple, three-product
portfolio: customized credit and debit cards,
savings accounts, and tuition loans.
In the following survey data (AT Kearney
and Efma 2014) we can see which are the
most relevant products for banks: mobile
apps, e-wallet solutions, and personal
finance management (PFM) tools. In
particular, mobile banking and PFM are well
received by consumers, with download rates
reaching 60% of the customer base in most
regions.
Other solutions such as artificial
intelligence, video and chat functions for
advisory services, crowdfunding, P2P
payments, and social investing are
acknowledged but not considered mature.
Some banks have more interest in these
topics and have collaborated with technology
companies to explore possible new business
models. For example, Citigroup, Royal Bank
of Canada, and Australia’s ANZ Bank have
all announced plans to work with IBM’s
Watson, the robot that made its name by
beating humans on the television quiz show
Jeopardy, to enhance customer advisory
experiences.
Video advisory service is among the most
controversial topics: While the United States
and Nordic and Benelux countries strongly
believe in this technology and customers are
welcoming it, other regions such as Spain,
Italy, France, and Germany are offering it to
a less enthusiastic audience. In general,
enhancements to the product and service
portfolio are just beginning.
The next level will certainly encompass
more complex services based on insights
from various sources, such as social
networks, mobile devices, apps, and
harmonized internal data. Leading
examples can be seen in innovative
financial technology players around the
world.

10. will accept NFC by 2017, the technology just hasn't
taken off yet, according to American Express general
manager of online and mobile Stefan Happ.
“NFC has been stymied here by the retailers very
successfully. Isis (American Express e-wallet) hasn't
been able to break through into the mainstream. If
you asked me three or four years ago, would we still
be almost exclusively paying with plastic at the retail
point, I'd have told you no way but that's exactly
what's happening.”
New developments in mobile payments are occurring
weekly, sometimes daily. But from supposed industry
changing services like Apple Pay – already owning
the information of 200 million customer accounts – to
smaller, consumer centric apps, mobile payment
providers face the same problem: adoption.
Google Wallet was in use long before the Apple Pay
tornado arrived, and Square has taken the time to
build a loyal merchant following. But neither of these
managed to significantly change consumer
behaviour. In fact Google has recently announced
that as of March 2, 2015 Google Wallet for digital
goods will cease to exist. Thus, getting out of the
digital payments battle, after three years of fighting
off the competition.
A survey conducted by BayPay Forum has found that
the biggest obstacle to consumer adoption of
NFC/EMV (Europay, MasterCard®, Visa®) mobile
payments over the next 12 months is the lack of a
reason for consumers to change from swiping
cards – considered the primary obstacle by nearly
half of the respondents. Secondly, “a lack of
understanding about how it works” accounted for
nearly a quarter of those surveyed. Security
concerns ranked third with 12.5% of the votes.
As we can see, numerous startups have developed
new front-end solutions for mobile payments, while
Banks are still developing their own apps or opting
for taking over already successful startups to gain
market share. The key barriers to innovation in bank
payments, as extracted from Deutsche Bank
research & Capgemini Analysis (December 2012) are
the following:
One thing that defines digital revolution is that it has
no frontiers, so each country’s companies are taking
their own measures to face the challenge, some
faster than others.
Time is key to survive. We just have to take a look
to the recent past, and see how traditional industries
have been disrupted by software (Marc Andreesen,
August 2011): Borders by Amazon, Blockbuster by
Netflix, Nintendo by Zynga, Kodak by Flickr, AT&T
by Skype and Major record labels (EMI, Warner,
Sony) by iTunes and Spotify. In 2011, Andreesen
already believed that these new Internet companies
were building real high-growth, high-margin and
highly defensible businesses, and that there was a
dramatical technological and economic shift going
on in which software companies were poised to take
over large swathes of the economy. He also
predicted back then that historically highly resistant
to entrepreneurial change industries like financial
services, health care and education would be
primed for tipping by great new software-centric
entrepreneurs.
In this context, there’s been a lot of activity in the
M&A fintech market recently. Global investment in
fintech ventures has more than tripled over the
last 5 years, UK and Ireland experiencing the
highest investment growth of Europe. This boom in
fintech deals now accounts for more than a half of
all European activity.
While mobile-influenced
sales stand at $593 billion,
according to Open Mobile
Media research (November
2014), sales attributable
solely to smartphones stand
at just $40 billion. Fulfilment,
buying a product solely through the smartphone,
has not taken off yet.
According to the Federal Reserve 17% of US
smartphone users made a mobile point-of-sale
(POS) payment between March 2012 and March
2013. Of this figure, just 14% used NFC (Near Field
Communication technology) to make a contactless
payment at the register – the majority simply
scanned a barcode or QR code.
Although many analysts believe the day is coming,
Berg Insight forecasts that 86% of POS terminals
Fintech integration
Mobile Payments

11. DIGITAL BANKING : RESHAPING THE BUSINESS MODEL – CÉSPEDES, A. 11
Crowd-funding market potential
Bitcoin is a decentralized
criptocurrency used for online
payments that behave much
like any currency. Its value —
currently about $375 per
Bitcoin— is determined by
demand. Transactions are handled through a
decentralized peer-to-peer network similar to
BitTorrent, leaving no trace. An increasing number of
merchants around the globe accept Bitcoin; it is also
the currency used on online deep web black markets
such as Silk Road (Recently closed by FBI, November
2014) because transactions are performed
anonymously.
The most important part of the bitcoin system is a
public ledger, called the block chain, which records
transactions in bitcoins. A novel solution is that this is
accomplished without the intermediation of any single,
central authority, since a network of communicating
nodes running bitcoin software performs the
maintenance of the ledger. Hence, anyone can join
this network.
Bitcoins are created as a reward for processing work
in which users offer their computing power to verify
and record payments into the public ledger. This
activity is called mining. Individuals can buy and sell
Bitcoins using global currencies through such online
exchanges and mobile apps. Once users have
Bitcoins, they store them in their computers or mobile
devices in files known as Bitcoin wallets or in cloud-
based e-wallets.
Unlike credit cards, the purchaser pays no fees, nor
does the vendor. Bitcoin can be
stolen and chargebacks are impossible. In early
February 2014, the dominant bitcoin exchange, Mt.
Gox, suspended withdrawals claiming technical
issues. By the end of the month, Mt. Gox had filed for
bankruptcy protection in Japan amid reports that
744,000 bitcoins had been stolen. This event led the
European Banking Authority (EBA) to create a
taskforce to advise on whether virtual currencies
should be regulated. The EBA opinion, released in
July 2014, was a full risk analysis where the rationale
for a consistent regulatory response across the EU
was proposed.
Crowdfunding
Bitcoin
Using World Bank’s definition:
“Crowdfunding is an Internet-
enabled way for businesses or
other organizations to raise
money in the form of either
donations or investments from
multiple individuals”. This new form of capital
formation emerged in an organized way in the wake
of the 2008 financial crisis largely because of the
difficulties faced by artisans, entrepreneurs and
early-stage enterprises in raising funds. With
traditional banks less willing to lend, entrepreneurs
started to look elsewhere for capital.
Crowdfunding began as an online extension of
traditional financing by friends and family:
communities pool money to fund members with
business ideas, acting like business angels. In less
than a decade, crowdfunding has gained ground in a
number of developed economies, including
Australia, the United Kingdom, the Netherlands,
Italy, and the United States. This exciting
phenomenon is spreading across the developed
world and is now attracting considerable interest in
the developing world as well.
Crowdfunding takes advantage of crowd-based
decision-making and innovation, and applies it on
funding of projects or businesses. Using social
networks, social profiles, and the viral nature of web-
based communication, individuals and companies
have raised billions of dollars in debt, equity, and
donations for projects over the past five years.
Kickstarter, for instance, the market leader in
pledge or donation-based crowdfunding, has
channelled over US$815 million from 4.9 million
backers (29% of which have invested in more than
one project) to nearly 50,000 projects throughout the
world since 2009.
The different crowd-funding models are:
Crowd-
funding
model
Business
Model (based
on)
Features
Donation
Donation
Philanthropic: Funders donate
without expecting monetary
compensation.
Reward
Funders receive a token gift of
appreciation or pre-purchase for
a services or product.
Investing
Equity
Funders receive equity
instruments or profit sharing
arrangements.
Lending
Funders receive a debt
instruments that pays a fixed
coupon and returns a principal
on a specified date
Royalty
Funders receive a share in a
unit trust, which acquires a
royalty interest in the intellectual
property of the fundraising
company. A percentage of
revenue is paid out over a
period of time.

12. 3.2. DIGITAL BANKING : CLIENTS
There is a whole change of the costumer behaviour
going on, it is what Google calls Gen C. This arising
generation can be defined by 4 C’s:
It’s not an age group; it’s an attitude and a mindset.
Gen C has 8 characteristics:
1. It’s a state of mind
2. Strives for expression
3. Is a taste-maker
4. Defines the social network
5. YouTube is the habitat for entertainment
6. Constantly connected
7. Connects on YouTube on all screens
8. Values relevance and originality
Some key figures
- 80% of the millennials – under 30 years of age –
is made up of Gen C and are YouTube’s core
audience.
- 67% of Gen C upload their own content to social
networks.
- Gen C sets the trends and determines what’s
going to be popular next, with an influence that
accounts for $500bn of spending a year in the
US alone.
- 85% of Gen C relies on peer approvals for
buying decisions.
- 88% of Gen C has a social profile, with 65%
updating it daily
- Gen C is twice as likely to be a YouTube viewer
than the general population and 40% are more
likely to be only a light TV viewer.
- 91% of Gen C sleeps next to their smartphone.
- YouTube has the same reach with Gen C on
smartphones as it does on desktop. 80% of Gen
C watch YouTube on their smartphones, with a
74% increase year-on-year.
- 39% aren’t opposed to ads when they are
relevant.
In this new context described by Google it’s easy to
understand how this new generation is going to
demand a more on-the-go, flexible and accessible
banking model. Clients have access to tons of
information, which will make them more demanding in
terms of innovation, and mobile banking will be key,
as more than 30% of the financial services searches
in Google are already done from a tablet/smartphone.
Creation Curation
Connectivity Community
GEN C
USA & Canada
According to a recent Accenture
survey (2014) of nearly 4,000
retail banking customers in the
USA and Canada, the customer
relationship at traditional banks is
susceptible to disruption, despite
the fact that in the US nearly
40% of customers — 64% in
Canada — have been with their current bank for the
past decade or more.
Convergent disruption, in the form of new market
entrants, is a growing factor in the banking industry.
Yet the survey gives clear evidence that changes in
consumer behaviour are an equally relevant driving
force. For established banks, an understanding of
these evolving consumer preferences can lead to
significant new opportunities.
The 4 key findings of this study are:
Other important information extracted from this study is
that new generations are open to alternative banking
options, and this doesn’t necessarily means provided
by banks. Some important digital players are
appearing on scene, and a radical shift can take place
in very short time. After all, it only took Apple 7 years
to become the world’s largest music retailer. Google
managed to erase 85% of the market capitalization of
top GPS companies in less than 18 months after
launching its mobile maps app. Alibaba, China’s
equivalent to Amazon, became the world’s 4th largest
money-market fund only 9 months after entering the
business. Companies are increasingly venturing into
other industries for growth.

13. DIGITAL BANKING : RESHAPING THE BUSINESS MODEL – CÉSPEDES, A. 13
While non-banks are proceeding aggressively with
digital innovations to capture more and more of the
banking business, new generations of customers
are increasingly more open to alternative banking
options.
A potentially ominous sign for banks is that nearly half
of customers would likely bank with a company they
currently do business with but that does not currently
offer banking services. This includes financial players
such as PayPal and Square; but also trusted brands
outside the financial sector like Apple, Google and
Amazon. Both groups have rates of potential interest
from customers exceeding 25%, appealing mostly to
the youngest segment of population.
The industry is already seeing convergence from
established players outside the financial sector.
Costco Wholesale, for example, offers financial
services products including mortgages, investments,
and business banking in the US through a third-party
lender. Similarly, The Home Depot offers home
improvement financing up to $40,000, also through a
third-party lender. Accenture estimates that 35% of
banking revenues will be at risk by 2020 due to
disruption in the financial sector.
Europe
Mobile banking is maturing,
with longer term users in
Europe showing signs their
money management is getting
better and better. Cash is being
used less – but which payment
type will be the new favourite?
This is what the ING (International Survey, 2014) is
trying to answer. 13 European countries formed the
panel, with about 1000 respondents in each,
accounting for a total sample size of 12,403.
The following conclusions can be drawn from the
study:
1. The Netherlands, Luxembourg and Austria are
the most developed mobile banking markets in
2014, while Turkey is the top mobile banking
“hotspot” as it shows potential to rise significantly as
internet penetration rises.
2. The mobile banking users tend to be younger, earn
more and be more on top of their financial matters
than non-mobile bankers. In fact, 80% indicated mobile
banking had improved the way they manage their
money. European mobile bankers are more likely to
read money blogs but also more prone to regularly
buy something on impulse.
3. People who have been using mobile banking for
longer are more likely than newer users to say the
technology improved the way they manage money.
4. Fewer people in Europe are expecting banks to use
social media this year, compared with the survey last
year. Although the social media demand fell, many
people in Europe do want personalised alerts and
reminders from their bank.
5. New technology is not only playing a role in the
ways we bank, it also changes the ways we shop and
pay. Cash is being used less often than a year ago
by about half of people in Europe.
6. Since last year, comfort around contactless
payments has risen a lot in Romania and Poland,
both early adopters of the technology, with modest
rises in France and Italy. However, the opinion in
Europe as a whole remains split. Mobile bankers are
more likely to be confident using contactless
payments.
7. Despite the hype, few people in Europe see digital
currencies – such as Bitcoin – as “the future of
spending online”, with 76% disagreeing with that
statement or not having an opinion about it.
If these companies offered banking services, how likely
would you be to bank with them?
Mobile banking use

14. Asia & Emerging Markets
A generation of digital-
banking customers is rising
across Asia. They will want
full digital access to the
latest offerings and a more
personalized set of products
and services.
According to McKinsey research (2014), during the
past decade, Asian consumers have fled to digital
technologies, with adoption rates for some devices,
especially mobile phones, surpassing Western rates.
ATM usage has experimented a huge increase in
Asia, and across age segments the “consumer
decision journey” has increasingly moved online.
The pattern for most purchases now is that they are
researched online and concluded in the branch, but
we are beginning to see online purchasing as well.
A significant constraint on the progress of this trend
is the state of regulation in many countries, which
require purchases to be finalized by customers
signing documents in branches, in the presence of
branch employees.
As stated by PwC’s (Global Banking Survey, 2013),
regulatory environment is the 2
nd
top barrier to the
success of the digital channel strategy, only after
complex and legacy core banking system. So this
will be the main challenge to overcome for banks
operating in Asia.
Meanwhile, larger numbers of Asian consumers,
especially younger ones, are expressing a
preference for interacting through non-branch
channels. This is significant for Asia, where even
older customers can be first-time bank users,
cautious of physically surrendering their money, and
traditionally reassured by a brick-and-mortar
establishment.
This trend will only accelerate as a young, digitally
savvy generation matures. This will be the disruptive
generation when it comes to banking trends. They
have already taken to mobile technology and are
comfortable with making payments digitally.
Four shifts in consumer behaviour signal that the time
of the premier digital bank in Asia is approaching:
 Increasing digital usage. This includes higher
penetration of mobile, Internet, and smartphones
across markets. The increase in technology
usage is changing consumer behaviour, with
social networking, peer reviewing of products, and
online research becoming the norm. Digital
payments are becoming significant in Asia, and
the evidence of the digital disruption is mounting
in industry after industry. We will see more
innovative and successful initiatives like the one
implemented by Tesco in South Korea’s subway,
allowing customers to buy food goods scanning
products’ pictures with their mobiles.
 Channel-preference shift. Channel preferences
in banking have shifted significantly among
younger and wealthier segments toward non-
branch channels. About 40% of Asian mass-
affluent customers now prefer online or mobile
banking; among those under 40 years of age,
around half prefer digital banking. The Internet is
gaining ground to a traditionally ATM user older
affluent segment; for younger generations of
Asians, on the other hand, the Internet has
become a preferred channel.
 Multi-channel consumer decision journey. The
path toward purchase has already become a
multichannel journey for Asian consumers. In the
awareness stage and especially the research
stage, most buyers are consulting multiple
channels and returning to multichannel usage in
maintaining their products after purchase.
Evidence from Europe indicates that banks will be
able to boost customer loyalty and increase share
of wallet by offering an integrated and seamless
customer experience across channels.
 Digital sales. With the right regulatory
environment, more sales of deposits and loans
are expected to shift to direct channels, in line
with shifting consumer preferences and behaviour
trends in e-commerce, similar to what has
occurred in more mature Western markets.

15. DIGITAL BANKING : RESHAPING THE BUSINESS MODEL – CÉSPEDES, A. 15
In Spain the two biggest financial players, BBVA & Santander, are making their own moves to put
themselves in a competitive/collaborative position against what we call shadow banking.
We saw BBVA acquire Simple in February this year in a transaction valued at $117M, as part of
its strategy to lead the technology-driven change.
“Simple’s customer experience is unmatched in the digital banking
world," said BBVA Chairman & CEO Francisco González. “Simple will
reinforce our global digital transformation while BBVA will provide the
means to help Simple maximize its outstanding growth potential.”
Simple, based in Portland, Oregon, was founded in 2009 and its
commercial launch took place in July 2012. It now has more than
100,000 customers across the US, a fivefold increase since the end
of 2012. Simple offers users everything they need to spend smarter and save more. Customers
get a Simple Visa® card, powerful iOS and Android apps, integrated savings tools, and real
customer service.
BBVA, through its corporate venture arm BBVA Ventures, plans to invest $100 million in global
startups. Some of its current investments include SumUp, the Berlin-headquartered startup
enabling mobile point of sale (POS) payments; Radius, a US-based company providing business
insight into millions of SME businesses; Freemonee, which analyses its customers' transactional
data to create relevant offers from retailers; Ribbit Capital, a financial technology-focused venture
capital fund; Taulia, a San Francisco-based company that is digitizing the traditional supply chain
finance process with its cloud-based platform; and the seed-capital fund and accelerator
programme 500 Startups, which was launched in 2012.
Santander is on the same road. The UK subsidiary has established a venture capital fund to
invest in financial technology businesses for the same amount as BBVA, $100M. It started in
June, when Santander agreed a partnership with Funding Circle, the peer-to-peer lending
website, to refer small business customers that it turns down. In return, Funding Circle will
promote the Spanish bank’s current account and cash management services. Santander has also
invested recently in iZettle, a mobile POS payments’ startup.
Ana Botín – Santander chairwoman said: “The UK is a global leader
in financial innovation. The Santander Fintech Fund builds on our
philosophy of collaboration and partnership with small and startup
companies at Santander. In this case our aim is to provide fintech
companies with much needed capital, whilst we gain know-how and
our customers benefit from the latest thinking.”
In the recent forum of AEB (Asociación Española de Banca) held last November 24 and
conducted by the president of the association José María Roldán, the process of digitalization
process was stressed as one of the most important changes happening, apart from regulatory
issues, with a brief mention of the good results obtained by the Spanish banks in the AQR test by
the ECB.
4. CURRENT REALITY IN SPAIN
Investment
Spanish banking model
AQR Base scenario Adverse scenario
Source: elconfidencial.com

16. Roldán argued that the omni-digitalization of financial
services is a challenge to face – from mobile
payments, the rise of private currencies like bitcoin, to
the substitution of human capital by computer
programs – referring to ETFs and quantitative
portfolios managed by algorithms in some Hedge
Funds and Investment Banks.
These fintech innovation processes affect all
operators, new entrants and established firms. But it
is the latter that will experience more difficulties,
because of their higher structural costs. Thus, whilst
new players can enter in specific market segments –
like mobile payments – traditional companies have to
face costly infrastructures that can only be optimized
in the medium term, assuming adaptation costs in all
cases.
This poses one question: Who will provide financial
services in the non-profitable market segments,
products or clients rejected by these new operators?
Technology innovation is a process not to be stopped.
We know that, despite short-term costs, the benefits
in the long run will more than pay for it. What the
banking system has the right to ask is the same
playground conditions. Equal opportunities to
compete, and equal obligation of consumer
protections. It is crucial to avoid a technological
arbitrage coming from asymmetric regulation. Other
industries, equally affected by this situation such as
private transports by Uber, or the hotel sector by
AirBnb have demanded regulation for these activities
in order to be able to play a fair game.
Banks need to take advantage of their strengths: both
their technological and customer relation knowledge.
In Spain, the technological platforms provided by the
banks, allow customers to do almost every
transaction. This is a good starting point, which will
need to be followed by adding mobile payment and
other services in a stable and secure way. Some
already successful mobile payment apps worth
mentioning are Wizzo by BBVA and Yaap Money, a
Santander, La Caixa and Telefonica partnership.
Furthermore, the long-term customer relationships
give banks a deep knowledge of their needs and
demands in the different life cycles. In other words,
the Spanish Banking model owns a powerful “Big
Data” that should allow them to compete in a
privileged position with any other new entrant.
British Telecom Global Services and Avaya have
updated the Youbiquity Finance research in 2014.
The research has been undertaken with 2,017
consumers across France, Spain and the UK. The
sample was taken online, but weighted to be
representative of the public in each of the three
markets. The main conclusions of this study for
Spanish consumers are the following:
Difficulty in getting financial advice
As many as 64% of Spanish consumers say it is very
difficult to get independent advice that they can trust
about money and finance nowadays. Only 45%
expect their bank to treat them honestly and fairly.
67% of Spanish consumers would buy more from
providers that make it easier for them to do business.
Half of the respondents from Spain say that they
closely monitor their finances using a personal
financial management tool provided by their bank
with 57% of consumers opting to deal directly with
their general insurance provider. Car and household
insurance claims appear to be processed much faster
than in the UK, as is arranging to switch insurance
providers.
Social media and finance popular
The consumer trend of using a range of channels
including social media to interact with financial
services is clearly evident in Spain with 19% following
their bank on Facebook. More consumers use
Facebook, Twitter and YouTube than other countries
with 44% having fibre optic and superfast broadband
at home compared to 21% in France.
Smartphones used extensively
26% of consumers from Spain tend to use mobile
banking apps more often than Internet self-service for
banking. 20% use apps on their mobile phones,
which link to location based services. Also, in Spain
24% would like to use their smartphone’s banking
app when in their bank branch. The Spaniards, being
more connected, are more open to proactive
notifications, such as when an account is overdrawn,
when a sum is paid into their account, when an
amount is paid out of an account and reminders to
renew insurance.
61% say that banks have focused too much on self-
service rather than ‘getting to know me and my
needs’. In bank branches 70% of Spanish consumers
anticipate they will have to queue. 79% do not enjoy
their visits to a bank branch, while 4 in 5 of them feel
it is cold and unwelcoming and wish the staff were
friendlier.
Spanish market

17. DIGITAL BANKING : RESHAPING THE BUSINESS MODEL – CÉSPEDES, A. 17
5. CONCLUSIONS
Regarding the creation of customer-experiences that are better integrated across
channels, all the surveys analysed on this dissertation show notable room for
improvement. A majority of respondents who use both branch and digital say the channels
are not well integrated at most banks. This is particularly evident in age groups where
customers are conducting more advanced financial transactions, such as those between
age 30 and 34, who are likely to be purchasing a first home.
Customers still value the branch, which remains the primary sales channel; nearly 60% of
traditional retail bank products are sold via the branch. Yet branches are becoming less
relevant for younger customers – the Generation C – who are more comfortable with
digital technology and less concerned with traditional signifiers of a bank’s worthiness.
Instead, these customers want a bank that is agile and innovative, with the digital tools to
connect with them on a daily basis, like mobile, online and social media. Banks will give
themselves a sustainable competitive advantage by becoming more agile in executing
their operating model, and continuously innovating in their application of digital
technologies to meet evolving customer needs.
In order to stay in top of the digital journey, banks should react in 3 ways:
Organizations that become truly omnichannel have the potential to become an “Everyday
Bank”. Everyday Banks not only fulfil their customers’ standard financial needs but also
provide additional services and value-added products such as help with buying a car, or
even more straightforward offerings such as product research.
In becoming an Everyday Bank, the bank evolves beyond its traditional boundaries to build
a digital ecosystem with existing provider partners and other key players in areas such as
home goods, health, travel and leisure, communication, and transportation. The bank
customizes its offerings in these areas based on its analysis of a customer’s transaction
data, and it presents these offerings in a consistent, omnichannel setting, with pre-sale
advice, discounts, post-sale support, cross-sale opportunities, and more.
The surveys’ findings also indicate that digital personalized financial advice is a key
opportunity for banks. Customers are extremely interested in products and services
from their bank that save them money and a strong majority feel that this would increase
their loyalty.
Furthermore, tools and counselling can help customers gain a holistic, needs-based view
of their financial lives—from day-to-day finances to wealth management and longer-term
financial security. Providing digital personalized financial advice can better integrate
banks into the centre of customers’ financial lives as banks become more advice-driven,
instead of broker-dealer model oriented. Half of customers believe that banks should
provide tools and services to help customers create and monitor a budget. This will be
key to maintain the customer relationship when transitioning from a human-based
interaction to a more digital one.
Clearly, by bringing digital personalized financial advice to the heart of the relationship,
banks can boost engagement and customer loyalty, especially among the younger
generation who will drive bank revenue tomorrow. In some cases, such tools also provide
a direct opportunity to boost revenue. More than 25% of customers indicate that they
would be willing to pay a fee for a service in which a bank representative works directly
with them to create and monitor a budget, not to mention the increased insight customer
analytics – Big Data – can yield for enhanced cross-sell and revenue optimization.

18. 6. OUTLOOK
“The best way to predict your future
is to create it”
- Abraham Lincoln
Many relevant financial gurus have already made their
own projections of what the future will look like in the
upcoming years. But the truth is that the future is
hardly predictable. Who could have anticipated a
decade ago how Internet would change our lives and
how would the world be shaped today?
We cannot deny the fact that a digital revolution is
happening and that it will produce growth, synergies,
but also what Joseph Schumpeter called “creative
destruction”. Some industries will be born and some
others will perish, as it is the way of things.
So I think we have to be cautious when providing
precise figures and numbers about the future, because
in most of the cases, they tend to be wrong. Despite of
this, we can see major trends happening right now,
that will be responsible of reshaping the business
model in the upcoming years:
 Open source software and cloud technology
have lowered entry barriers for new technology
startups
 Financial institutions are under increasing
pressure to cut costs and exploit the growth
opportunities offered by the digital revolution
 More innovation and new product development
is being carried out by small independent firms
 More than 50% incremental revenue in almost
all banking products in Western Europe will be
digital by 2018
For all these reasons it is expected that Global Fintech
investment will more than double by 2018.
New threats, new solutions
A growing digital society is attracting a rising tide of
increasingly sophisticated attacks from cyber
criminals. As we use multiple devices and digital
services, a proliferation of digital identities and
associated passwords is compromising customer
experience and security. In response, new models of
identity, trust and authentication are gathering pace.
In a sector such as banking, regulatory and customer
forces need the highest levels of security and
integrity. Recent research by Trend Micro USA stands
that mobile payments and digital banking will be the
products most affected by cyber-attack in 2015.
Therefore, banks need to invest in robust and agile
defence, staying one step ahead of cyber criminals.
Banks will become more digital. It is only a matter of
time. As customers, competitors and regulatory
authorities push in this direction, the promise of a
transparent anytime, anywhere banking will be
materialized, bringing together today’s branch-based
traditional players with the offers of direct banks and
innovative startups, converging into this “Internet of
Things” environment explained by Rifkin.
For traditional banks carrying a heavy heritage, it
will be crucial to overcome internal obstacles to
achieve fast, robust decision making and processing,
customer-centric channel management with revised
governance mechanisms and agile, high-performance
IT landscapes. But the cultural barriers may be even
more challenging: a new mindset is required in many
regards. For direct banks (E.g. ING Direct), the
challenge will be refreshing their image from a low-
cost provider relying primarily on self-service to a
valuable player with rich products and services that
bring customer satisfaction and convenience.
With all the non-banks and other financial technology
players also being part of the mix, we will definitely
see more collaboration scenarios between banks and
innovators. These partnerships will accelerate the
digital journey as their offerings show customers
fascinating new ways to improve their banking
experience. Banking will encompass a wider range of
services with multiple parties involved while at the
same time delivering a seamless customer
experience. This will ultimately create a banking
system that is convenient, fast and proactively
meeting needs a big contrast to today’s more reactive
and non-transparent business model. This is the only
way forward.
Hence, in light of all the trends and facts analysed on
this dissertation, I would like to finish with a quote
from Abraham Lincoln: “The best way to predict your
future is to create it”. Let’s go for it.

19. 7. BIBLIOGRAPHY
 Accenture (2014). The Boom in Global Fintech Investment. [PDF file]
 Accenture (2014). The Digital Disruption in Banking: Demons, demands and dividends. [PDF file]
 Accenture (2014). The Everyday Bank: A New Vision for the Digital Age. [PDF file]
 Andreesen, M. (August 2011). Why Software is Eating the World. The Wall Street Journal.
 AT Kearney, Efma (2014). Banking in a Digital World. [PDF file]
 BBVA press room. Internet site: www.press.bbva.com
 Bounds, A. (2014). Santander UK sets up $100m financial technology fund. Financial Times.
 Bruno, P. Istace, F. and Niederkorn M. (2014) The future of global payments. McKinsey. [PDF file]
 BT, Avaya (2014). Youbiquity Finance - 2014: Consumers, channels and changing behaviours in
retail financial services. [PDF file]
 Deutsche Bank research (2012). The future of (mobile) payments. [PDF file]
 EBA (July 2014). European Banking Authority Opinion on “virtual currencies”. [PDF file]
 González, F. (2013). Banks need to take on Amazon and Google or die. Financial Times.
 González, F. (2014). Knowledge Banking for a Hyperconnected Society. BBVA.
 Google research studies (2013). Introducing Gen C: The YouTube Generation. [PDF file]
 ING International Survey (2014). Mobile Banking, Social Media and Financial Behaviour.
 Martínez, J. (2014) ‘Fintech’, la revolución bancaria permanente. España: Forbes.
 McKinsey & Company (2014). How to prepare for Asia’s digital-banking boom. [PDF file]
 Mobile Payments Insider. Internet site: www.mobilepaymentsinsider.com
 Mobile Payments Today. Internet site: www.mobilepaymentstoday.com
 Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. [PDF file]
 Olanrewaju, ‘T. (2014). The rise of the digital bank. McKinsey & Company. [PDF file]
 Open Mobile Media (November 2014). Beacon Technology in Retail: Industry leaders debate the
future of mobile commerce. [PDF file]
 Payment Eye. Internet site: www.paymenteye.com
 PwC (2014) Eyes wide shut. Global insights and actions for banks in the digital age. [PDF file]
 RBS (2014). Disruptive Technology and changing consumer behaviours. A perspective on
Banking. [PDF file]
 Rifkin, J. (2014). The Zero Marginal Cost Society: The Internet of Things, the Collaborative
Commons and the Eclipse of Capitalism. USA: Palgrave Macmillan Trade.
 Roldán, J.M. (November 2014). El modelo de negocio de la banca española. Forum AEB.
 Trend Micro (2014). The invisible becomes visible. Trend Micro Security Predictions for 2015 and
Beyond. [PDF file]
 World Bank (2013). Crowdfunding’s Potential for the Developing World. infoDev, Finance and
Private Sector Development Department. Washington, DC: World Bank. [PDF file]

20. The Future is here.
Dissertation tutorized by Enrique Pérez-Hernández,
President of Greentech Energy Systems.
Alba Céspedes Izquierdo
December 2014
Master in International Finance
Instituto de Estudios Bursátiles (IEB)