Author : Pallav Sinha
Consumer Banking Strategy in the Digital Era
The world’s largest banks enjoy huge advantages, not the least in terms of collective customer base and the data that they hold of their clients. These banks are today under siege from ‘digital first’ businesses with mobile phone based applications, and, potentially also from nascent or emerging technologies such as, blockchain. These digital technologies promise to offer bank-agnostic platforms at a fraction of cost for services such as foreign exchange remittances, payments and transaction banking and loans – which are key revenue streams for banks.
While historically banks have faced competition in areas such as Mutual Funds, which offered a better way to save and participate in equity and debt markets, never before have they been so exposed to this level of disruption. BBVA Chairman Francisco Gonzales opined that up to half the banks could disappear due to digital disruption.
In such a scenario, it is fair to assume that the banks will need to take the initiative and disrupt themselves. Perhaps the ones that will survive by successfully adapting their strategy to the digital world, will need to embrace a collaborative mindset. The opportunity for banks is to reposition from being providers of infrastructure and products, to offering a secure customer relationship and an entry point to use best-in-class 3rd party financial applications from different sources i.e. become a financial app store.
In such a bank, when a client logs in to her mobile bank using biometric authentication, which is securely deposited with the bank (i.e. deposits going beyond money and banks continued positioning for safekeeping and security), then the customer comes to an open-architecture App Store through which she can “comparison shop” and take: 1) a Peer to Peer Loan from either Zopa or Funding Circle or possibly even the bank’s proprietary loan product; 2) apply for a credit card which is not Visa or Mastercard but a non-plastic card on her mobile phone e.g. Bankomatkarte in Austria or Apple Pay; 3) remit money or make transfers using applications such as PhonePe or PayTM or internationally with lower charges and better currency conversion rates using Paypal or TransferWise.
Aligned with background and scenario, summarized below is a Digital SWOT for the Consumer Banking industry
1) Banks have deep customer relationships with unmatched data from transactional products such as current accounts, credit cards and salary accounts. Banks’ most enduring strength can be their ability to leverage these relationships and offer their customers the most secure way to transact on their platform, across a range of 3rd party and proprietary products. In effect, they can become financial supermarkets showcasing a range of financial solutions from different providers.
2) Reputation of security and confidentiality: The spate of revelations regarding fiduciary misconduct, in the wake of 2008 financial crisis, have weakened this position. However, banks can build on their reputation of security & trust, in which they are backed by regulatory authorities. So for instance they can become depositories for not just funds and securities, but also biometrics, medical records and social profiles, allowing 3rd parties to access this information based on client instructions.
3) Regulatory turf/ moat: Some areas of business continue to be reserved for banks e.g. raising deposits from retail investors in India is restricted by the Reserve Bank of India to commercial banks and select corporates (under very restrictive conditions). In the foreseeable future, banks will continue to hold sway on deposits and savings accounts. However, these are also being diluted through entities such as Payment Banks (Airtel Payment Bank). But such licenses have restrictions on lending and hence are specific in nature.
4) Behavioral Data especially with credit and debit cards and Salary accounts: This is a big competitive advantage, especially with asymmetric competitors. Banks have the ability to use this data to predict customer needs e.g. student loans, next product purchase, holidays, loan repayment, home purchase. This gives banks the unparalleled ability to create a new client-centric approach akin to Netflix i.e. predict the next purchase; offer a range of bank owned and 3rd party products.(In the past banks did manage to stave off some of such challenges by becoming the largest distributors of Mutual Funds (3rd party product, which challenged banks through products offering better savings options compared to CDs or Fixed Deposits of banks).
Banks do have a history of innovation with ATMs, Internet Banking, though they are increasingly looking stodgy now. By focussing on their core value i.e. secure relationship platform, they can bring back the innovative spirit.
1) Organization structure and legacy systems: Banks’ operating systems are built as silos and often never recognize the customer as one entity. More significantly, banks are not given to testing small innovative changes, given the risks involved and limited scope of errors in banking relationships. These structural issues stymie the speed of innovation within banks.
2) Risk aversion: Since risk management is central to bank’s lending, KYC/ Anti Money Laundering (AML) activities, that becomes part of the DNA, even more so in recent times. Post the financial crisis, banks have been spending substantial time and money in compliance and regulatory reporting. To address this banks need to use automation for Governance, Risk and Compliance (GRC), as these can be addressed through data analytics, big data, machine learning and automation.
3) Regulatory constraints: As much as regulations protect banks’ turf in some areas, they also impose many onerous responsibilities in Governance Risk & Compliance (GRC), capital adequacy, branch presence (relevant to India), which are not applicable to other non-banking entities in BFSI domain such as NBFCs, Asset Management Companies or Mutual Funds or mobile payment products and wallets such as M-Pesa or PayTM. This will enable several non-banking players from BFSI domain and outside to innovate faster and offer superior single-purpose products e.g. payment wallets, Peer-to-Peer lending options, Home finance and micro finance distribution and coverage for unbanked sections.
1) Leveraging data, technology, security and customer relationships: This is undoubtedly the biggest opportunity for banks. By learning to think like a platform rather than a product provider, banks can put the customer and security at the centre and build a strong value proposition. Banks will also need to decide to optimize on a particular part of the value chain (e.g. between payments, loans, remittances, advisory). Transforming to open-architecture access points for best-in-class 3rd party products and helping customers decide on these products (including some of the bank’s proprietary products), is a big opportunity. Think: Apple App Store, Google Play, Netflix, Amazon Prime video.
2) Value strategy around security, customer need prediction and product supermarket: With digitization there will be greater concerns about privacy and risks. Banks can become custodians of not just cash/ funds and securities, but also biometrics, medical records, social profile metadata. Using behavioural data banks can predict and suggest product requirements, not just in financial products, but also non-financial products (like Netflix). What’s more with increasing concerns on privacy and social media tracking, banks can release data such as medical info, social behaviour, biometrics based on client instructions.
3) Leveraging eKYC and Aadhaar in India: Banks have so far been slow in adapting to the options offered by India’s UIDAI or Aadhaar which has enabled biometrics based for over 1 billion people. With UIDAI eKYC has been enabled and soon upto 70 fields of data for individuals would be linked to their Aadhaar IDs e.g. subsidy eligibility; skill courses completed for employability; bank account details. For now, banks need to be able to use this data with permission and leverage Business Intelligence to expedite account opening, loan processing and even enable secure payments through biometrics enabled POS machines which are being rolled-out in India.
4) Automated or Robo advisory for wealth management: Wealth management has seen a secular move from more expensive actively managed funds to passive Exchange Traded Funds (ETFs) which are lower cost. This disruption is moving further with active management and client customized wealth management across asset classes being provided through robo advisors, which use AI and Machine Learning, to execute faster, more accurately and at lower cost. According to AT Kearney, these automated investment avenues will manage over US$ 2 trillion in US by 2020. Banks can take the lead in building these capabilities and complementing it highly trained advisors. This will allow them to increase Assets Under Management, improve execution and improve business margins.
5) Incubate start-ups and provide fillip to innovation & collaboration: Banks such as Barclays have started their own accelerators, thereby bringing under the bank’s umbrella, fintech entities which provide the ability to innovate more effectively. As also Santander’s Innoventures and in India Yes Bank have started acquiring and collaborating with the fintech eco-system.
6) Pricing strategies at a relationship level and using social data and not just credit bureau: Banks have the opportunity to improve pricing offering it online and offer single level customer view, thereby building deeper customer relationships.
7) Cybersecurity and areas such as Governance, Risk and Compliance (GRC) infrastructure: This is a core value proposition of banks for its clients. Banks will explore how they can become secure depositories of not just funds but data of clients. Also, offering cloud based GRC and cybersecurity related solutions and out-competing consultancies with automated solutions could be a future opportunity.
1) Asymmetric competition: The most potent and disruptive threat for banking industry is from asymmetric competitors who leverage, Social, Mobile, Analytics and Cloud (SMAC). These players approach specific areas of banking without the baggage of legacy processes or systems.
Two examples are: Mobile Wallets and Wearable Devices. Vodafone’s and M-Pesa in Africa and PayTM in India are case in points. These have reached customers who are unbanked but are covered by the rapid penetration of mobile phones in developing markets. M-Pesa has not only drawn millions into the financial mainstream in Kenya, it has allowed them to safely and inexpensively transfer funds home and enjoy other services such as micro insurance.
Wearables devices have thus far been used more for recording health information. However, that is beginning to change with Apple Watch which is being used for payments, checking balances, transaction history and even locating nearby branches.
The most compelling example of course telecom service providers who have as much behavioural data as banks. Airtel Payment Bank is an example of a telecom provider invading the turf of a bank.
2) Smarter client acquisition and pricing strategies: Non-bank competitors such as Lending Club have better priced borrower risks which were either over-charged or incorrectly priced using credit bureau data. Social media and big data is being used to determine customized interest rates for customers based on more accurate assessment of default risk. Social credit scoring performed by Sesame Credit (part of Alipay) has shown how going beyond credit bureaus can expand the market, especially in developing countries such as China, India, Brazil.
3) Non-Banking companies offering Home Finance, Loans, Micro Insurance: This is the more traditional form of competition i.e. companies which are specializing in one part of the value-chain (e.g. rural micro finance); or threaten to beat banks in distribution and with lower cost of customer sourcing. Some examples are non-banking companies offering small ticket Pay Day Loans entirely through mobile based acquisition (thereby lowering cost of operations). Such disruption is also being brought about by micro finance companies such as Grameen Bank in Bangladesh which was started by the Nobel Prize winner, Mohd Yunus.
4) Emerging technology such as Blockchain: Blockchain or distributed ledger based technology has the potential to disrupt many areas of business, not the least of which is banking. Use cases of blockchain in remittance have evidenced how transaction costs are reduced and security enhanced. Banks are also beginning to test blockchain in Transaction Banking.
Reference: Musings – Blogs by Pallav Sinha #
About Pallav Sinha
Pallav Sinha has over 29 years of experience and has worked with organizations like Fullerton Securities & Wealth Advisors Ltd. (a Temasek subsidiary), Fullerton Financial Holdings (FFH) – a bank holding of Temasek, Singapore, Standard Chartered Bank, Citibank, Tata TD Waterhouse, JM Morgan Stanley Retail Services, American Express & HTA. Pallav holds a Master of Business Administration (MBA) from Faculty of Management Studies – University of Delhi.