According to a Gartner/MIT CISR study, companies with above-average levels of digital revenue have been growing on average 1.5% faster than the industry mean. They achieve it mostly by automation, creating better customer experiences and improvement of internal processes. And while leaders grow, digital laggards still regard technology as a cost or downplay its impact on their business.
The financial sector is a great example, with multiple success stories of digitalized services, but also companies that fall behind. What are the factors that determine the direction in which an organisation is heading?
Banks and other established financial companies more often than not employ manual processing of data and are forced to coordinate between multiple data sets. Combined, this leads to numerous mistakes. The case of the European bank described by McKinsey points, that as much as 30% - 40% of paper documents contained errors and applications for a simple account switch got stuck in the process for multiple days. It is no longer acceptable in a world, where you can get a credit score in a matter of minutes, if you are registered with a social media platform, as it is in WeChat’s case. Inflexible legacy systems are not suited to the current business needs anymore, as they keep on changing faster, driven by technology. In addition, scattered data is not only making the processes longer, it also blocks companies from obtaining useful insights. Information about lifestyle and purchasing behaviour of a bank customer opens new opportunities of better targeted marketing or customizing offers.
Technology also helps financial services enterprises to deal with high amount of complicated regulations. Again, applying the right regtech solutions, can bring immense difference to a business. HSBC is a good example of a bank, that struggled with inefficient compliance processes. The company partnered up with an AI startup, that provided automated anti-laundering investigations. Results of a pilot project were outstanding - the number of unnecessary investigations dropped by 20%, while the ratio of discovered risky cases remained unchanged.
Another beneficial use of digitalisation, transferring the customer-bank interactions into web and mobile apps, leads in turn to a reduction of cost. Marginal costs of servicing another customer are close to zero. At the same time employees are released from doing repetitive work, which allows them to work more on tasks creating real value for the company.
The above examples are a common strategy for companies looking to take advantage of digitalisation. They are an easy way, at least in theory, to increase profitability in a relatively short period of time. The aforementioned European bank managed to generate positive ROI in as little as 15 months after implementing their new system. According to McKinsey’s analysis, digital sales, using data automation and transaction migration contributes to as much as additional 40% in net profit. This profit is brought by higher efficiency or offering a better service. However, is this advantage sustainable in the long-term? From a single company’s point of view, the majority of benefits are realized by being the first mover. With democratization of technology, competitors either follow and adapt to new standards or fall behind. As result, the entire industry is changing and becoming more efficient. Initial fast returns and market share are divided between remaining market players, and the cycle starts again when a new solution is being introduced by a first mover. This brings into question the second aspect of profitability in the financial industry - creating new revenues.
Creating blue oceans in the financial sector is often considered much more difficult than it is for other industries. However it shouldn’t be ignored by digital banks. Coming back to McKinsey’s data on digital innovation influencing profits and losses of banks - innovating solutions introduced by competitors are the second biggest threat to retail banks. They contribute to a 13% decrease in profits, which is just a bit less than the decrease in the already shrinking margins resulting from growing competition from cost efficient fintech solutions.
Digitalisation has facilitated creation of a significant number of new solutions on the market, credit scores designed especially for student loans, or robo-advisors managing personal investments, to name a few. These products do have the potential to reach customers, who would probably never look for them themselves, because of the cost barrier or their preference for interaction with human advisors. But to a great extent it will be only shift revenues from the old credit and investment management offering. It were the fintech startups that managed to address those needs. They succeeded, because they understood what customers expect and where to find them. As Catherine Zhou from PwC underlines, “fish where the fishes are”, don’t wait for them to come. Still, however, it can be put down to transferring revenues from banks to startups.
It is not true, that creating new products is impossible in the financial sector. PwC even points that by 2020 it will be a strong push, driven by e.g. demographical changes and access to unbanked people from emerging countries.
Banks may still struggle to dive into such blue ocean strategy. In order to create new innovative products they need to digitalize their back office first. Otherwise they will not have the right data and flexibility to test ideas for new products. This multiplies the difficulties faced by fintech startups. It does not mean banks and financial companies are underprivileged - they, on the other hand, have access to much needed resources. PwC offers four pieces of advice on how search for new revenues should be approached: go where your customers are, learn from disruptors, embrace imperfection and don’t do it alone.
With better or worse results, financial services companies increasingly implement digitalisation into their existing offering, achieving lower costs and higher efficiency. As positive as it is, it can be put down to moving money between different players on the market. Naturally it cannot be downplayed, following the new standards is an imperative to stay competitive and profitable. In order to succeed a company first of all needs software that can rapidly adapt to change and this is facilitated by Agile development.
Focusing on a long-term profitability should be a logical next step that will derive from improved efficiency and the introduced flexibility. These are the foundations to create digital blue oceans. However, such strategy requires a different approach as well. It moves the focus point from efficiency to reconsidering the value which is being offered to customers. As their needs are evolving with the development of technology, opportunities arise. The ability to recognize those needs is crucial and requires a much broader, global and cross industry perspective. The advice is to use many resources of knowledge, including customers, competitors and industry experts.
The key thought for financial companies to be taken away is that transformation of a company is not a goal itself. It’s a basis to increase a company’s value in the long term.
At Netguru Labs we help to take the first steps and make your company digital, using industry knowledge and over a hundred developers. We also conduct thorough analyses, to help create suitable business models that can take your company to the next level.