The smartphone and digital technology is the foundation of today’s increasingly demanding connected consumer. Nothing has changed consumer behavior so much, so fast, as the 24/7/365 connectivity of the smartphone. It allows consumers to shop, search, share, and interact with almost any company and person in the developed world. It also can help consumers make decisions and connect with an increasing number of home devices.
We are approaching a new technological revolution, which will bring together digital technologies and the power of advanced analytics to improve convenience, simplify everyday life, and help us make better decisions. We are entering an era where digital devices will proactively provide us personalized recommendations based on past behaviors and expressed goals. Beyond just e-commerce, the smartphone has replaced the computer as the go-to device for an exponentially increasing array of needs.
The most dramatic result of this digital revolution is the shift in power to the consumer. Consumers can research, analyze, seek recommendations, purchase, interact and grow or eliminate relationships without any in-person engagement. Each of these steps in the buying process can be done with a touch of a finger or a quick voice command.
As of 2017, 71% of digital purchases were expected to be mobile-based in China. This shift is the result of friction and inefficiencies in the marketplace. What should be concerning for bankers is that there is much more friction and inefficiency in today’s banking models than with the retail industry.
The Speed and Scope of Digitization
According to McKinsey, many organizations underestimate the increasing momentum of digitization. This includes the speed of technological changes, resultant behavioral changes and the scale of disruption. “Many companies are still locked into strategy-development processes that churn along on annual cycles,” states McKinsey. “Only 8% of companies surveyed said their current business model would remain economically viable if their industry keeps digitizing at its current course and speed.”
Most importantly, McKinsey found that most organizations also underestimate the work that is needed to transform an organization for tomorrow’s reality. Much more than developing a better mobile app, organizations need to transform all components of an organization for a digital universe. If this is not done successfully, an organization risks being either irrelevant to the consumer or non-competitive in the marketplace … or both.
Complacency in the banking industry can be partially blamed on the fact that digitization of banking has only just begun to transform the industry. No industry has been transformed entirely, with banking just beginning to realize core changes.
Yet most executives are fully aware that by reducing friction, digitization enables competition to put negative pressures on revenue and profit growth. Current levels of digitization have already reduced, on average, up to six points of annual revenue and 4.5 points of growth in earnings before interest and taxes (EBIT), according to McKinsay. The full impact is much greater as digital penetration deepens.
Lack of Consensus on Definition of ‘Digital’
As we have found in several of the surveys done by the Digital Banking Report in the past 18 months, there is not a uniform definition of what ‘being digital’ really means in financial services. Many organizations associate being a ‘Digital Bank’ with the development and deployment of their mobile banking application. Others look at the digital transformation from a sales or marketing perspective.
The reality is that digital transformation goes beyond the way a financial services organization deploys their services across digital devices. Even though by 2025, more than 20 billion devices will be connected (3X the world population), the real power of these connections comes from the insight these connection produce. Use of this data, combined with advanced analytics, can change the level of back office automation, connectivity, decision making and existing business models.
“Lacking a clear definition of digital, companies will struggle to connect digital strategy to their business, leaving them adrift in the fast-churning waters of digital adoption and change,” states McKinsey. “What’s happened with the smartphone over the past ten years should haunt everyone – since no industry will be immune.”
Investing in the Wrong Places
We have found in the ‘Innovation in Retail Banking 2017‘ report (available for free and immediate download) and the ‘2017 Financial Marketing Trends‘ report (also available for free and immediate download), that most of the digital investment in banking has been focused on sales, marketing and products, but has not extended to supply chain or ecosystem investments. While this makes sense due to consumer demands for better digital experiences, it is only the beginning of what is needed.
To impact future revenues, customer growth and profitability the most, investment must be made in supply chain and the entire banking ecosystem. Looking at the growth of Uber, Airbnb, Alibaba, Amazon, etc. as well as the advantage of new challenger banks, we can see that digitization of an expanded product range and potentially the entire banking platform is required. PSD2 and open banking provides this opportunity.
The more aggressively organizations respond to the digitization of the banking industry, the better the effect on projected revenue, customer/member growth and profit generation. This includes, but is not limited to, changing corporate strategies and business models, increasing investment in core transformation and investing in new ecosystem strategies. A strong organizational culture that eliminates silos and places the consumer at the center of business strategies is also imperative.
Choice Between Disruptor or Super Fast Follower
Many recent research studies confirm that digital winners tend to either invest more aggressively or execute more successfully … quickly. When McKinsey studied the business strategies of successful digital organizations, they found that a great differentiated digital strategy, by itself, could have a dramatic impact on revenues and profits. In this scenario, execution did not need to be perfect. Unfortunately, while every financial services organization would like to be able to transform the industry like Google, Amazon, Facebook, Apple or Alibaba, it is an unlikely path for most banking organization.
The second option is to be a very fast follower. The most agile of the fast followers have established a test-and-learn process the can develop, launch and test prototypes in real time. They can leverage data insights powered by artificial intelligence and machine learning far faster than their competition. Similar to the disruptors, they benefit from word of mouth. Unlike disruptors, there is a significant premium placed on execution. In financial services, it is the ability to deliver the benefits of a fintech with better execution supported by deeper customer and member insights.
In reality, an aggressive digital strategy and excellent execution are not independent options. The reality of digital transformation means that you need to commit to both simultaneously and iteratively to succeed.
Responding to the Impact of Digital
The first step to responding to the impact of digital disruption is to recognize the challenge being faced, including the speed and scope of the change on the horizon. The next step is to build a business strategy that responds to the challenges being faced. New digital tactics (build an end-to-end account opening process for mobile) is important, but not enough. The organizational culture must be upended, silos must be torn down and agile process must be put in place.
One of the biggest barriers to digital success could be in the ability to acquire the type of talent required for growth. New skills in analytics, design, and technology must be acquired to step up the speed and scale of change. Many organizations may find that they need to partner to get the talent quickly. These additions will replace many of today’s workers who will be displaced by robotics and other digital capabilities.
Looking at current competitors will limit success. Open banking will change the dynamics of the banking ecosystem overnight. The future of banking will extend beyond traditional financial services to include e-commerce, hospitality, travel, food services, etc. It is very possible new competition will include the big tech companies. The advantage of legacy banking organizations will be their customer insight, with the largest legacy banking organizations benefiting from more insight and more money to invest in digital.
Responding to the impact of digital requires a commitment from leadership and increased investment in people, capabilities, technology, and cultural change. Looking at other organizations will not be as important as understanding internal capabilities and a willingness to be bold. In a digital world, where the speed of change is increasing, time is of the essence.