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Digital Banking: Reshaping the Business Model - Alba Céspedes

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Digital Banking: Reshaping the Business Model - Alba Céspedes

  1. 1. DIGITAL BANKING: Reshaping the business model ALBA CÉSPEDES IZQUIERDO Master in International Finance 2014
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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)

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