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Most incumbent banks digital transformation efforts (whether they are piecemeal or end-to-end) are optimized for a world that no longer exists: the vertically integrated value chain, where change is slow, competition is limited, and incumbents are protected by regulation and channels (branch networks). In this world, doing what banks have always done, only better - faster, cheaper, etc. - drives business results. In the digitally disaggregated value chain, banking opens up, and industry lines blur. Everything that banking is begins to change.
In areas where it is the same - specific disaggregated niches - it’s harder, as new tech-entrants squeeze incumbents on margin. Incumbents must find new things to do and do old things better. Their assets - branches, mainframes, risk management - become liabilities (high cost-income ratio, lack of agility, obstacles to innovation, etc.). New banks - whether independent banks, tech firms, telcos, etc. - enjoy an obvious technology advantage.
Banks’ advantages are well known: they have all the customers, those customers trust them (at least to keep their money safe), they have lots of money, and they’re spending that money on digitization. But digitization cannot be bought. You can buy a digital channel; you can’t buy a digital culture. You can source external innovation - through fintech partners - but you can’t distribute that to customers through the existing structures and processes of the bank. Bank legacy is ever present.
Incumbent banks face difficult questions around their liabilities, growth prospects, and role in coming years. The core of banking isn’t going away. Who else could sustain that level of regulation? Who would want to? The question is whether banks will become little more than dumb pipes, acting as utilities with all the more interesting, valuable customer interaction, happening in over-the-top (OTT) apps.
It’s not necessary to be a bank to disrupt banking. Indeed, it may well be the best approach - highly specialized, free from legacy, and able to bypass bank regulation. However, a bank license does confer a level of trust, the ability to hold deposits, lend money, and earn net interest margin (NIM), and the revenue pool associated with those activities exceeded $5 trillion in 2018. That business is not going away anytime soon. This report assesses the potential for full service digital banking providers to protect and grow that revenue.
- The vast majority of bank customers are unwilling to use a digital-only bank as their main current/checking account. However, those customers that described themselves as very willing are typically banks’ “better” customers (higher income, likely to hold more products, heavy digital users, etc.).
- New digital banks structure fees so they win when customers win (e.g. a small product commission when finding a customer the best mortgage for their needs or the best rate on a credit card). Incumbent banks often earn most when customers benefit least creating enormous structural disincentives to customer centricity.
- New digital banks simplify products. Consumers don’t trust products they don’t understand. Complex products are not only harder to sell, requiring more training and more tinkering with the incentive plan, they drive more branch visits, which means a bank’s greatest expense - the branch - spends much of its time dealing a problem the bank itself created through bad design.
- New digital banks Interpret regulation from the customer perspective. Risk-averse compliance departments often have interpretations of regulation that are more restrictive than the actual regulation. This type of legacy thinking, unchallenged, constrains what banks can deliver to their customers as much as legacy technology.
- New digital banks create communities for feedback. Banks don’t know what customers what. They have to ask them. That’s why GoBank, Fidor, Moven, Monzo prioritize a tribal sense of community for product development. Tandem launched with 11,000 ‘co-founders’ (co-founder = ‘beta testers’). Revolut in the UK launched a Revolut Beta App, available to 1000, beta testers.
- New digital banks bring customers to life. Customer personas, journey maps and design thinking bring customers’ core needs to life. This combination of techniques allows firms to go beyond the “what” and “how” to reveal the underlying “why”. Customers don’t want a mortgage (bank product), or to apply online (bank process), they want to buy a home. Understanding core needs is critical to digital reinvention as it forces banks to think about the true value they might provide. This is not always straight-forward. For example, Amazon’s true value wasn’t in selling books online, but in providing unrivalled convenience and selection, which led them to expand beyond books.
- New digital banks have a single view of the customer. This is the multi-year tech transformation that takes time, of course, but appointing customer outcome owners to synthesize processes across products and channels, where otherwise there is not enough tech alignment, can help. So too can rotating executives across siloed functions and business units.
Reasons to buy
- Understand consumer adoption globally of different digital banking touchpoints
- Identify technology, regulatory and consumer trends driving digital transformation at incumbent banks and progress with those initiatives at leading banks
- Receive detailed insights regarding new entrants, their business models and their key sources of competitive advantage
- Learn how incumbent banks can move beyond core products to build deeper engagement with customers and identify new revenue opportunities
Table of ContentsPLAYERS
Mergers and acquisitions
NINE DIGITAL BANKING THEMES
Bank centric to customer centric: putting the customer at the heart of digital strategy
Deposit-driven to data-driven: enabling safe and secure data sharing
Backward-looking advice to forward-looking coaching: making money management easy
Product-focused to life-journey focused: building overall digital engagement
From closed to open distribution: leveraging non-proprietary channels
Human to humanized digital: delivering human-like help and support
B2C to B2B: optimizing digital products and services for API as a channel
Disabling security to enabling security: making it easy to become a customer
From efficiency to agility: evolving to support changing customer needs
Incumbent banks and credit unions
Incumbent-built or owned digital banks
New independent digital banks
Subsidiaries of non-bank and tech companies
APPENDIX: OUR THEMATIC RESEARCH METHODOLOGY
A selection of companies mentioned in this report includes:
- Buddy Bank
- Bank Mobile
- Tinkoff Bank