Sanat Rao, Chief Business Officer, and Global Head, Infosys Finacle
According to the Infosys Finacle – Efma “Innovation in Retail Banking” report for 2016, 41 percent of banks are working with fintechs or startups as suppliers. In another survey, senior industry executives around the world ranked the use of Big Data, AI, Advanced Analytics and Cognitive Computing by financial services as the second biggest focus area for 20171.
Recently, a global consulting firm said 31 percent of profits of U.K. and European banks were at risk from digital disruption, and that that number could shoot up to 50 percent by 20202.
Clearly, digital disruption is changing the face of banking forever. But although this will severely challenge those banks, which do not evolve their business models, operations and talent resources to meet the needs of the digital age, on the flip side, it will present very significant opportunities to those that do. In fact, 2017 may well belong to the banks, which take systematic and comprehensive steps to transform into truly digital entities that offer greater value to customers, employees, partners and the ecosystem in general.
Two factors, namely macroeconomic conditions and digitization, will be most influential in this transformation.
Macroeconomic conditions remain soft worldwide, straining traditional sources of banking revenues, such as interest, and fees and charges. For developed market banks, the major challenges stem from stagnant growth opportunities and legacy infrastructure. For their developing market counterparts, the biggest challenge is clearly the sharply rising bad loans.
But at the same time, technology is opening up new opportunities, including new revenue streams attached to products and services relevant to the current times.
However, to unlock these revenue streams, banks will need to entrench themselves within their ecosystems, either as lead players or participants. With so many ecosystems emerging, populated by both global giants and local entities, these truly digital banks need to choose their ecosystems wisely, and take particular note of the economics while doing so.
Revenue focus needs to be reinforced with a push on cost control. New technologies of the digital age, including robotic process automation, artificial intelligence and blockchain will help bring down costs from where they are today, and also improve utilization of human resources.
Banks will need to be highly flexible and scalable, and prepared to make changes in next to no time.
Truly digital banks will only be able to achieve this by going “cloud first” for new infrastructure and applications.
Next, they should become even more agile by simplifying technology architecture using enterprise componentization.
Digitization has created the most demanding consumer in history. With new-age competitors offering superior experiences, and exit barriers coming down, the fight for customers has turned fierce.
Gartner says that 89 percent of marketers expect customer experience to be their main plank of differentiation in 20173.
We have seen that truly digital banks, those which have evolved their purpose, offerings, operations, structures, and human resources to align with customer expectations, and deliver the best experience possible, have clearly won the battle for new customers. One example worth mentioning is DBS. DBS is Singapore’s premier bank, and they have come up with a mobile-only, digital bank that is completely paperless. With this digital bank, DBS created a whole new segment of customers and created offerings that were tailored for this segment. DBS has managed to improve customer experience immeasurably by removing all paper that is usually involved in banking transactions. And the results are obvious – they have managed to accumulate 800,000 customers in just nine months.
Empowered people and a culture of continuous learning are also key factors of transformation. Banks need to prepare their staff to survive in the digital age, which will see many roles being lost to artificial intelligence/automation. Rather than fearing or resisting this trend, banks should view it as an opportunity to amplify their human capital by deploying it into more rewarding pursuits such as problem solving, creative thinking and innovation.
Digital customers go wherever they receive the best service and experience. Hence, banking services delivery today is shared by an ecosystem of diverse players. As global tech giants, platform companies and Fintech startups penetrate further into this business, the position of incumbent banks as the central intermediary in transactions is coming into question. What’s more, many countries are introducing regulations to encourage openness in banking. In 2017, we expect truly digital banks to open up further with the help of initiatives around API.
At the same time, banks will also have to reckon with greater security threats, an unfortunate but inevitable outcome of digitization. IoT and open banking will introduce layers that never existed before, which must be secured at all cost. This will call for nothing less than a reimagination of security philosophies, policies, processes and infrastructure.
Customer-first banking, ecosystem driven business model, people empowerment and continuous learning, automation using artificial intelligence, and pervasive security – these are the milestones on the journey to transformation. Truly digital banks – or those aspiring to be one – will clearly have their hands full this year.