BANKS, BUSINESS MODELS, INNOVATION AND STRATEGY.
Wasn’t innovation already here? Yes, but this time it’s different, as Banca IMI’s Monica Cammarano and Umberto Menconi explain.
Technological advances are reshaping the traditional ways and processes of financial institutions and the retail sector is no exception. Today, more than ever, banks must effectively reposition their own services to become a reference point for the customer.
However, organisations have their own set of challenges and while technology opens new business opportunities, it can also pose threats in terms of cyber-security and time-to-market ability. Moreover, financial markets are exposed to other disruptive forces such as increased regulation, market fragmentation, IT risks, risks, increasing costs and the rise of new rivals.
Clients are also becoming more demanding and expecting a wider range of products and services. In order to meet these hurdles in a cost effective manner, banks are turning to electronification to become more competitive, more efficient and faster to market. Pressure for this to happen now in financial services is in part being driven by the enhanced expectations that clients derive from their daily activities outside the financial services industry.
Electronification is part of the digital trend that is profoundly changing business in a world where every touchpoint is important in providing clients with the best-in-class experience. However, to truly harness this potential, it is important that the technology deployed and the bank’s strategy are aligned in order to meet client expectations.
While predicting the future is always difficult, keeping an eye on the development of, and the investment in fintech, will give an indication of the direction of travel. It has been a steady upward climb starting with private investments of $1.8bn in fintech companies in 2010 and rising to $2.1bn in 2011, $2.4bn in 2012 and $4bn in 2013. The pace then accelerated, tripling to $12bn in 2014 and $19bn in 2015. Overall, the market has increased tenfold in just five years.
Breaking it down, 73% of the investments were directed to SMEs (small and medium-sized enterprises) and retail finance including account holders and clients looking for loans. These two sectors represent the largest chunk at 46% of the profits, followed by corporate banking at 35% and investment banking at 19%.
A large chunk of the money is being directed towards a multi-channel offering to meet the varying needs of the client. However, the advent and growth of digital banking will not be a substitute for the network of bank branches. On the contrary, the new technology will enrich the “customer experience” for the growing number of sophisticated banking clients.
As with many new changes, banks will not only have to dig deep into their coffers but also overcome cultural obstacles. History is littered with examples of companies that were slow to embrace change – much to their detriment. It requires buy-in from the top of the organisation to the bottom, along with the managers who can implement and integrate the new technology and services.
Financial intermediaries should be able to create engagement processes established on the concept of “Right Time Marketing”. In order to reshape its own business model, banks in practice have to find the correct equilibrium between capital expenditure (CAPEX) and operational expenditure (OPEX).
However, the most successful banks will be those that can be flexible and successfully use new technologies to automate the existing processes, create new products, adapt their compliance framework to the new regulatory requirements, revolutionise the customer experience and turn upside down the key components of the value chain.
Equally as important, financial institutions will have to deploy significant resources to improve the efficiency of their internal operating processes. This is because they will play an essential role in the management of big data and the successful enrichment of their product offerings. Once this degree of efficiency is reached, the bank will become a fully-fledged service hub for their customers.