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Knowledge Area Review Impact of digitisation on business banking relationship management model July 2012

© Internal Consulting Group 2015

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“We know exactly where technology is heading. What we lack is the imagination [regarding] what to do with it”

Samil Ismail

Global Ambassador, Founding Executive of Singular University

Convinced, as I am, that no industry sector or organization will be immune from digital transformation, I have spent the last two years looking at the effect of digitization on more

traditional industries. My conclusion is that digitization is probably three steps ahead of our managerial capabilities to exploit it!

Didier Bonnet

Global Practice Leader at Capgemini Consulting and Executive Sponsor for Capgemini Consulting’s Digital Transformation program

3


Contents

4

1.  Introduction

2.  Key messages

3.  Impact of digitisation

4.  Lessons from retail banking

5.  Digitising business banking Appendices


Introduction

5

This document is a Knowledge Area Review (KAR). It summarises available public research and case studies on the impact of digitisation on business banking*. More specifically, it describes how the pervasive adoption of connected, cloud, and mobile technologies across industries is being leveraged to improve the efficiency, revenue or customer satisfaction of the relationship management model currently used by most banks to serve their business customers (‘the business banking model’).

Much has been said and written about the impact of digitisation on consumer banking and other industries; not so much, though, on business banking. Business banking has so far not been at the forefront of application of new technologies, except for some digitisation of back-office processes. A recent CEB TowerGroup survey found business banks rolled out mobile solutions for the first time predominantly in late 2010 and 2011.

In our view, this is because lending is the core product for most SME businesses. Credit assessment of these typically riskier borrowers requires the costly (for the customer and the bank) collection and maintenance of a large amount of information on the customer. This dependence on credit can be leveraged by the bank to cross-sell a number of other products. Thus business customers, especially the small and mid-sized corporates, have tended to have a single bank and long-standing relationships.

Surely there have been for a many of years a number of players on the fringes of the business banking world providing payments and other specialised services. But so far no non-bank entrant has come in with an all-encompassing value proposition for mid-corporates with credit at its core.

So the question is not so much one of what bank incumbents or new entrants are doing in Australia or other markets, but more one of to what extent digital technologies question the implicit assumptions behind the traditional business model centred on a relationship manager facilitating access to a range of product specialists.

* ‘business banking’, throughout this document, will be used in a broad sense to mean providing banking products and services to businesses with more than $1m of turnover (i.e. all businesses except micro-businesses)

1. Introduction


Introduction (cont’d)

6

In other words, the question of the impact of digitalisation on business banking is more one of forecasting how digital technologies could impact the current business model.

This document is structured as follows:

1.  ‘Impact of digitisation’ asks what do new technologies mean and how are they changing our lives; it describes the types of technological innovation industries can experience and how responses need to differ, as well as how we can estimate the likely speed and quantum of digitisation in business banking

2.  ‘Lessons from retail banking’ looks at disruptive innovation in consumer and small business banking; specifically, what new customer value propositions and business models are being created, who are some of the new players, and obstacles to offering an all-encompassing proposition to this segment that rivals the banks’

3.  ‘Digitising business banking’ revisits the traditional relationship management model and its rationale and asks

a.  how is the model evolving (how digital technologies are being deployed to sell and service business customers by banks and non-banks and possible future developments)

b.  how do data analytics create value; what’s the current state of development of data analytics in banking; how can analytics capabilities be developed; and how can ‘big data’ be leveraged

c.  to what extent are the implicit beliefs of that model being questioned by new digital technologies

d.  how it could be disrupted, i.e. how could banks be desintermediated

e.  how investments in digitisation should be prioritised

1. Introduction


Focus of this document

7

Business owner / Finance Director

Finance Team MMaaiinn iinntteerrffaaccee

SSeeggmmeenntt SSmmaallll

bbuussiinneessss** CCoorrppoorraattee

This document focuses on the relationship management model that is typically used by banks to cover their business customers (here defined as businesses above $1m of turnover). It excludes micro-businesses and financial institutions

* Some small businesses with complex needs may also be served by the coverage model typically associated with mid-corporates Source: ICG analysis

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• Branch staff

• Branch-based small business RM team

RM based in Business Banking Centre + BBC and HO-based

Product Specialists

Centrally based RM + Product Specialists

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1. Introduction

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Business owner

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<$1m $50m - $500m >$500m

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Sources used

§  Google Scholar

§  Google Web

§  Business and financial journal databases

§  Management consulting firms’ websites

§  Websites of major consulting firms

8

This KAR is a synthesis of relevant public domain materials obtained by searching the sources below using a multitude of key words

1. Introduction


Contents

9

1.  Introduction

2.  Key messages





Key messages

§  The explosion of new digital technologies (broadband, mobile devices, cloud computing) – and the myriad of internet applications and new business concepts that ride on their cusp – are fuelling the imagination (and generating concerns) about how the traditional business banking model could be transformed.

§  Most of this innovation has so far been in the consumer banking arena. The thinking is only now starting about the application of new digital technologies to business customers, especially at the front-end.

§  Nevertheless, the time has well and truly come for the business market. Accenture argues we are reaching a tipping point where the relationship between the business customer and the bank is eroding and the traditional bundled product offer to SMEs (with credit at its centre) could be unpicked as a result of a combination of credit unavailability, lower credit needs, new technologies, changing SME needs and regulatory pressure to make switching banks easier.

§  Most of the expected innovation in business banking is focused on new products and services leveraging the mobile channel (payments products being the most prominent). Nevertheless, we can easily imagine a world where a number of new technologies are leveraged to transform quite substantially the way a relationship manager performs his/her key activities.

§  It is difficult to anticipate where disruptive innovation could come from (points of entry), but given the centrality of credit for most businesses, especially SMEs, innovation in lending is likely to be the biggest threat for incumbents (e.g. ‘rating agency’ for SMEs that allowed businesses – once rated – to shop around for credit).

§  Given the large number of possible applications of digital technologies to better sell and service businesses, it is imperative to have a clear view of priorities. For incumbents, these should be dictated by (1) the need to pre-empt potential disruptive innovation from other banks and non-banks, and (2) the opportunities with the largest scope for value creation.

10

2. Key messages


Contents

11

1.  Introduction

2.  Key messages





New technologies

12

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Three core technologies – broadband, mobile devices and the internet – have spawned a multitude of applications and counting...

E-government

Business Process Management tools

Workflow tools

Collaboration tools

Document and content management

Social media

Video- conferencing

Cloud storage

E-commerce, online auctions

Internet advertising

Search

Games

Online encyclopedias, news, medical databases

Automatic translation

SMS, instant messaging, email

Coupons websites

Geo-location services

Blogs

Online communities

EDI

E-health

E-wallets, e-cash, NFC cards

Comparison shopping websites

P-2-P Lending

Group Buying

Source: ICG analysis

3. Impact of digitisation


Macro impacts on business and consumers

13

Consumers

When…? •  ... do I want to buy/receive the product/ service/information?

Where…? •  ... do I want to received the product/ service/information?

On what basis…? •  ... do I make my purchase decision? Who influences me?

Business

What…? •  ... product/service /information do I want/need?

Who…? •  ... renders the service? •  ... sells the product?

Where…? •  ... are transactions processed? •  ... are services provided? •  ... do sales take place?

On what basis…? •  ... are products developed and offered? •  ... are customers segmented?

What…? •  ... product/service can I provide?

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Collectively, these new digital technologies are having a profound impact on numerous aspects of our lives and changing every element of the business model: how personal and business relationships are built and maintained, how information is collected and exchanged, how businesses are organised and how value is created and shared

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Seven macro impacts

14

DDee--llooccaalliissaattiioonn

• Services that do not involve physical contact with the customer (unlike e.g. hairdressing, massage) can be performed from anywhere • Face-to-face interaction with customer does not require co-location • Co-workers need not be co-located • Companies do not have to have a physical presence to compete in foreign markets

IInnddiivviidduuaalliissaattiioonn • Customer segments can be much smaller (segments of one person at the limit) • Products and communications can be highly customised (e.g. loan’s features, internet banking site)

RReeaall ttiimmee • Customers want to communicate anytime, from anywhere, and expect an answer also in real time (the emergence of the 24x7 channel) • Multi-channel interaction requires real time processing and channel integration • Opportunity to market to existing customers as they interact with the bank

CCuussttoommeerr ccoonnttrrooll • The customer has a multitude of sources of information • The rise of the militant consumer: the customer can take control of the brand and can organise easily to corral like-minded consumers • Amplifier effect of service quality (good and bad)

CChhaannggeedd eeccoonnoommiiccss • Changes in cost-to-serve, improved productivity and the entry of new players with novel business models create and re-distribute value along the chain


Collectively, these new digital technologies are having a profound impact on numerous aspects of our lives: how personal and business relationships are built and maintained, how information is created, collected and exchanged, how businesses are organised and how value is created and shared

AAuuttoommaattiioonn • Needs can be anticipated without human intervention (based on digital info collected by the systems themselves); interactive, adaptive response as customer navigates through the bank’s website

‘‘BBiigg ddaattaa’’ • Segmentation can be done on the basis of a wealth of psychographic data • Much larger amount of customer data available to develop new products and services • Location-dependant products and services can be offered



Business transformation and technological change

15 Source: ‘IT-Enabled Business Transformation: From Automation to Business Scope Redefinition”’, Venkatraman, N. Sloan Management Review,1994

Deg

ree

of b

usin

ess

tran

sfor

mat

ion

Range of potential benefits

Five levels of IT-enabled business transformation

Low Low

High

High

Evolutionary Levels

Revolutionary Levels

Localised Exploitation

Internal Integration

Business Scope Redefinition

Business Network Redesign

Business Process Redesign

A. Business basics (hygiene)

B. Global best practice

C. Leap-frogging

D.Thought leadership

The level of technological change we are experiencing is likely to require a high level of business transformation and thought leadership, but the benefits could be high as well

CONCEPTUAL

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Speed and quantum of digitisation

16

LLiikkeellyy iimmppaacctt oonn FFiinnaanncciiaall SSeerrvviicceess iinndduussttrryy

Source: Booz & Co., ‘The Next Wave of Digitization – Setting your Direction, Building your Capabilities’, 2011

The financial services industry is expected to be intensely impacted by digitisation relatively early on

• Medium speed of penetration

• High impact on products/services and business models

• High impact on labour productivity and capital intensity

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Industries most affected by digital transformation

17 Source: PWC, ‘The new digital economy’, 2011

In financial services, retail and commercial banking is expected to be most transformed

In your view, which of the following business sectors will be most transformed (for the better) by information technology over the next 5 years? (% stating “greatly transformed”)



Impact of digitisation in financial services

18

Digitisation is expected to impact the financial services industry at three levels

• Real-time, high resolution business insights (e.g. shopping habits, location, finances, social activities, search history, securities trading, travel, medical history, voting, advocacy) • Ability to reach out to customers more effectively • Growing use of critical business techniques such as social marketing, crowd sensing, and crowd sourcing

• More targeted management of workforces • Increase in process automation • Leverage of virtualization (e.g. in testing) • Cloud-enabled cooperation models allowing the tapping of talent globally • Better investment decisions due to better data

• Value shifts will be primarily within industries as a result of changes in market share or industry structure • Consumers will gain power • Need for a new wave of growth in capital investment

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NNeeww vvaalluuee ppoooollss aanndd bbuussiinneessss mmooddeellss


Contents

19

1.  Introduction

2.  Key messages





Customer innovation themes in retail banking

20 Source: McKinsey & Company, ‘Retail banking: time to innovate’, 2011

Disruptive innovation in retail banking follows six themes, all focused on the delivery of a range of financial, emotional and physical benefits

4. Lessons from Retail Banking


But... Virgin Money in the UK

21

Virgin Money appear to be planning a move from niche player in financial services to full-service provider of retail banking. They will face an uphill challenge though

Source: Steve Worthington, Peter Welch, (2011),"Banking without the banks", International Journal of Bank Marketing

RReecceenntt ddeevveellooppmmeennttss AAsssseessssmmeenntt

• Founded as Virgin Direct in 1995 as a jv with Norwich Union offering index-tracking equity funds

• In 1997 launched The Virgin One Account, a jv with RBS, the UK’s first current account mortgage [mortgage account coupled to an off-set account)

• In 2001 RBS buys out Virgin; Virgin Direct changes its name to Virgin Money and launched a credit card, savings and insurance products in jv with Bank of America

• In 2004 Virgin Group acquired full ownership • In 2010, Virgin Money had 2.5 million customers with over £2 billion of funds under management and over 2.3 million Virgin Money cards in issue

• In 2010 Virgin Money bought Church House Trust, a small regional bank offering deposits and mortgages, which it intends to turn into its platform for a full fledged retail banking business

• Jv with Fortis for insurance

• While existing banks may be more unpopular than before the financial crisis, even a brand as strong as Virgin will find it tough to shake-up the UK personal banking market: o  Consumers’ attachments to notionally “free” banking

services (current accounts, ATM transactions, credit cards) resulted in significant ccrroossss--ssuubbssiiddiieess bbeettwweeeenn ddiiffffeerreenntt ggrroouuppss of banking customers and thus acts as a significant barrier to innovation and competition in pricing

o  CCoommpplliiaannccee rreeqquuiirreemmeennttss related to data protection, identity confirmation and money laundering make it difficult to simplify products and processes

o  While 65 per cent of Tesco Bank’s business is currently done online, 70 per cent of customers would welcome an opportunity of ttrraannssaaccttiioonn bbaannkkiinngg iinn ssttoorree. If Virgin Money’s customers are like Tesco’s

4. Lessons from Retail Banking


Contents

22

1.  Introduction

2.  Key messages



5.  Digitising business banking

•  Innovation in business banking

•  Developing analytics capabilities

•  Conclusion

Appendices


SME* banking tipping point

23 * SMEs are defined by Accenture in this paper as businesses with between 50 and 250 employees Source: Accenture, ‘Next generation SME banking’, 2011

Accenture argues that as a result of skyrocketing of rejection rates and contraction of lending since 2008, the relationship between SME and bank is eroding. This, combined with new technologies, changing SME needs and regulatory pressure to make switching banks easier, is leading to a tipping point whereby the traditional SME bundled product offer could be unpicked

• mobile credit card payments •  virtual advisers •  automated cash deposit machines •  social networking

5. Digitising business banking


Four best practices in middle-market banking

24 Source: McKinsey & Company, ‘How US banks can attract middle market customers’, 2008

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RReevvaammppeedd ssaalleess oorrggaanniissaattiioonn

• Starting point is a well designed, intuitive and well-integrated online portal, similar to the offering of a good personal bank, but with more features and flexibility (e.g. web portal of Wells Fargo) • Others are remote cheque capture, EDI, payables outsourcing, payroll cards

KKeeyy eelleemmeennttss

Several of the best practices in middle-market banking require the leveraging of digital technologies (in green below). Several also impact the relationship management model (starred)


• Offer tailored solutions in an economical way (e.g. standardised product packages) • Segment the middle market into size-tiers and by industry

• Invest in account-planning tools and the underlying systems • Use a robust, centralised lead-generation database

• Embrace relationship managers from both commercial lending and cash management, matching their expertise to the customer segment • Reward RMs for cross-selling cash management products (both initial sale and continued use) • Credit cash-management sales personnel with the full value they create • Find economical ways of leveraging product specialists for smaller middle-market customers


Three types of innovation

25 Source: ICG analysis

Technological innovation can come in three flavours, but all three have the potential to be quite disruptive

IInnnnoovvaattiioonn TTyyppee AA DDoo tthhee ssaammee wwiitthh nneeww ttoooollss

Examples:

• Talk to customers via video-call

• Process loan applications using workflow tools

• Apply for a business credit card online

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Examples:

• Allow businesses to check online the progress of their loan application

• Fully-automated, contextual internet and mobile offers

• Offer depositors opportunity to (co-) fund directly a small business

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Examples:

• Create an on-line community for small businesses

• Offer marketing advice

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SSttrraatteeggiicc bbeettss

Productivity plays



Product and service innovations by company

26

Financial Institution

Product/ Service Name

Overview

Business Advice Centre Connect small businesses with local experts and guarantees a response within 24 hours.

Breakthrough Hybrid online community and competition for small businesses.

Experian Businesses can monitor creditworthiness of corporate customers and send invoices at the right time.

CEO Mobile Comprehensive mobile service offerings for mid-‐sized businesses.

Civilised Money Online, peer-‐to-‐peer, start-‐up allows individuals to transact, invest, donate, lend and borrow money with each other at fair and transparent rates.

GlobalVCard Virtual MasterCard app for B2B payments that requires no cards but ensures convenience, control and security.

Google NFC technology lets businesses to collect payments from customers using Google Wallets.

Global Connections Online competition for small businesses to win lending opportunities, cash prize and networking event.

PingIt Mobile payment system that requires only a phone and account number.

Mission: Small Business Grant competition for small businesses that allows consumers to virtually vote.

Financial Institution

Product/ Service Name

Overview

Project Re:Brand Helps small businesses refine and articulate a clear branding message.

Small Business Online Community

Online community for small businesses to connect and receive advice.

SoMoLend Online and mobile community that links investors with businesses virtually and locally.

SquareUp Mobile applications that allows businesses to accept payment through their smartphones or tablets, via a card reading device or entirely virtually.

Straight2Bank Streamlined service offering to small and mid-‐sized businesses through an online and mobile platform.

#SmallBizFridays Twitter hashtag that connects small businesses with experts.

The Small Business Hub Wide-‐ranging advice for businesses delivered from professionals and experts and community-‐building through its LinkedIn group.

Connect Comprehensive online advice platform for small businesses that’s fully integrated with social media.

Visa Business Network Peer-‐to-‐peer online community centered around advice and achieving goals.




Product and service innovations by type of SME financial need

27

IInnnnoovvaattiioonnss

SSMMEEss ffiinnaanncciiaall nneeeeddss


Credit Make and receive payments

Invest Cash flow management

•  Receive credit decisions via SMS

•  Select repayment options if upgrading or acquiring a business vehicle

•  Review and reset rates for expiring term loans on smartphones

Specialised products

• Mobile point-of-sale payment technology (using near-field communication)

•  Collect payments from credit cards via a card reader sleeve and mobile application

• Mobile remote check deposit offers deposits through smart phone image capture

• Mobile payments (customers can pay businesses through their phone)

•  EDI, payables outsourcing, payroll cards

• Make and amend bill payments to new or existing payees immediately or up to 45 days in advance

•  Provide balances and recent transaction history by sms

•  Text messaging around events including transfer completion

•  Text alerts that indicate to business owners when transactions or withdrawals exceed limits

•  View statements from up to 7 years back

Mobile channel

•  Access accounts via secure website that customers can enter into their smartphone’s web browser

• Mobile application which services both retail and business banking clients

• Offer additional services specific to their business customers’ needs through an integrated mobile application

• Offer mobile banking applications specific to the iPad

•  Business-specific online portal

•  Businesses can authorize trade transactions through the mobile app

•  View, import and export letters or credit and execute online queries

•  Active money management and credit tools



Innovation along the business banking value chain

28

Service and Portfolio Management

Fulfillment Origination

According to Accenture, most innovation is happening in origination and fulfillment. Both directly affect the role of the Relationship Manager or Business Banker

• New value-based and needs-based segmentation models

• Offer SMEs variable pricing and service options across products

• Support through multiple channels

• Adoption of more light-touch relationship manager models – including remote relationship managers available via online messaging tools

Source: Accenture, ‘Next generation SME banking’, 2011



Four cases of innovation best practice

29 Source: Accenture, ‘Next generation SME banking’, 2011

Accenture showcases four instances of innovation best practice in SME banking: virtual RMs, faster loan approval and automated e-invoicing, additional (non-banking) advice and support services, and sponsoring social communities



Innovation case studies

30

Banks risk being desintermediated in the emerging SME banking marketplace, pushed to the side as the unbundling of deposit, transaction and risk gathers pace

CCoommppaannyy NNeeeedd OOffffeerr

Square Accept card payments on the go

Instant card payment utility for iPhone

iZettle Tool enabling customers to accept credit card payments through swipe technology; includes feature that allows merchants to email a photo and receipt to buyers who can then upload details of their purchases to Facebook.

OCBC Bank OCBC’s app allows customers with Android devices to scan barcodes, obtain billing details, and make payments with merchant partners thanks to their “Scan & Pay” facility

BankInter Provide anytime, anywhere access

Launched online video conferencing, ‘Mobile Virtual Network’, in partnership with Dutch telecoms operator KPN, using the Orange network to reduce customer’s cost of data transfer. A Cisco case study claims this model delivered positive results with over 1,000 video calls

Leumi Bank ‘Leumi V’ delivers face-to-face contact for customers at their desktop and through mobile devices

Barclays Learning and development programs for employees

Launched ‘MyBusinessWorks’ – a fee-based service for business start-up customers

HSBC Launched e-Masterclass – a Global Knowledge Centre for SME learning – with free modules




Example: iZettle

31

iZettle allows merchants to accept credit card payments through swipe technology; it includes a feature that allows merchants to email a photo and receipt to buyers who can then upload details of their purchases to Facebook




Example: new ecosystem Pi and merchant terminal ‘Albert’

32

Pi is the open source platform of ‘Albert’, a new portable, multi-functional merchant terminal. It will allow businesses to download, create and upload apps. While they wait for Albert to be launched in mid-2013, businesses can use Pi to turn their iPod touch and iPhone 4 into a payments platform by means of another device called ‘Leo’ (planned for Q4/12)

‘‘AAllbbeerrtt’’ tteerrmmiinnaall::

• 7’’ screen, portable, touch interface • Powered by Android v0.4

• Includes 5 MP camera for scanning

• Accepts EMV chips and pin transactions • Wireless • Inventory management app

• Loyalty and rewards programs • Can integrate with the customer’s electronic cash register • Highly customisable • Customers can install their own or third party apps

• CBA is encouraging the development of an ecosystem on the Pi platform (software development kit to be available later in 2012)

Source: Commonwealth Bank of Australia website, July 2012

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• Cards with EMV chips

• Cards with a pin

• Magnetic stripe (‘magstripe’) cards

• Contactless cards

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• Purchase/Refund

• Tipping

• Split bill

• Reporting



Example: Bank of America online small business community

33 Source: http://smallbusinessonlinecommunity.bankofamerica.com/index.jspa

Users can subscribe for free and use the following features:

• FFoorruummss: discussion threads focused around business opportunities, tips for starting a business, financing tips, merchant services, managing employees and HR, technology and legal matters, etc.

• BBuussiinneessss AArrttiicclleess: a series of articles on a wide range of small business management issues.

• SSttoorriieess: this section highlights success stories of small business owners about how they started their business and tips to others about succeeding as business owners.

• EEvveennttss: live webinars led by subject matter experts around key issues for small business owners.


Imagine a world where...

34

OOnnlliinnee SScchheedduulliinngg:: Imagine your small business customers’ having 24x7 ability to reserve a time that is convenient for them to meet or talk with their banker or service representative. No more back and forth calls or emails, or waiting at the branch. SSeeaammlleessss cchhaannnneellss:: Imagine allowing the customer to begin and finish opening an account or submitting a service request on any combination of channels (in the branch, online, over the phone or on a mobile device) without having to start over. Thus allowing them to return to the process and provide the necessary documentation how, when and where it is convenient for them. AAsskk tthhee EExxppeerrtt:: Imagine sitting in the bank with your prospect and instantly bringing up via video conferencing an available treasury management or mortgage expert to aid in addressing customer questions. Being able to instantly check the availability of the “expert” and bring them up allows there to be a “face-to-face” connection, eliminates the need for an additional appointment and expedites the sales or service cycle. DDiiggiittiizzeedd FFoorrmmss:: Imagine there were digitized forms which allow for pre-populating customer data from CRM or other systems, eliminating inapplicable sections of the form in real time based on the service being sold and creating a digital record of information for further processing. HHoouussee CCaallllss:: Imagine using mobile platform support, digital signature capture, interactive forms and secure communications to reduce the customer’s need to go to the branch. SSccaallaabbllee RReellaattiioonnsshhiipp MMaannaaggeemmeenntt:: Imagine having a CRM system that guides and informs small business bankers in ways that promote relationship building and timely contact with their customers based on priority, “trigger” events or anticipated needs. This supports the banker’s ability to focus on serving their customers when and where it is needed most.

Source: West Monroe Partners, ‘How banks compete in the small business market’, 2011

Nevertheless, for the moment, a lot of the technological innovation in the business banking relationship model is more imagined than actually realised



Relationship management key activities and possible innovations

35

We can imagine a world where a number of new technologies are leveraged to transform quite substantially the way a relationship manager performs his/her key activities. Some of these are already starting to happen


Initial Customer Approach

Sales Strategy

•  Prospect identification

•  Competitor/ industry research

•  Product- and service-need planning

•  Call strategy creation

•  Prospect cold calls •  Initial customer calls •  Preliminary needs identification and qualification

• Meeting scheduling

Meeting Preparation

•  Presentation material creation

•  Specialist consultations

•  Credit analysis and underwriting

•  Process, pricing and terms coordination and approval

•  Closing document management

•  Business or industry learning

Sales

•  Sales calls • Meetings and presentations

•  Proposal negotiation

•  Sales closure •  Informal relationship building/ networking

•  Re-negotiation of product terms and conditions

Product & Service Delivery

•  Solution implementation

•  Customer problem resolution

•  Collection of additional materials

•  Review of customer's business

•  Credit portfolio monitoring

Training & Internal Governance

•  Training sessions, •  Coaching from manager

•  Internal meetings •  Credit committee review

•  Admin and reporting

•  tasks

•  Sophisticated analytics

•  CRM tools •  Internet search •  Automated alerts •  Leverage of third party info services

•  Identify and make contact with customers in online social forums

•  Assisted presentation development tools

•  Calendar sharing for ease of scheduling various product specialists

•  Video (conf) calls with RM and product specialists

•  Real time pricing and approvals

•  Automated product and service delivery

•  External info providers

• Online training • Online coaching, instant messaging helpdesk service

•  Real time, voice-input database updates


KKeeyy AAccttiivviittiieess

EExxaammpplleess ooff ppoossssiibbllee iinnnnoovvaattiioonn


Contents

36

1.  Introduction

2.  Key messages






•  Conclusion

Appendices


How ‘big data’* creates value

37

McKinsey identifies five ways in which ‘big data’ can be leveraged that offer transformational potential to create value

Creating transparency

Enabling experimentation to discover needs, expose variability, and improve performance

Segmenting populations to customise actions

Replacing/supporting human decision making with automated algorithms

Innovating with new business models, products and services

* Big data refers to datasets whose size is beyond the ability of typical database software tools to capture, store, manage, and analyze Source: McKinsey & Company, ‘The challenge and opportunity of big data’, Summer 2011



Benefiting from ‘big data’*

38

The finance and insurance industries are likely to benefit strongly from digitisation and ‘big data’ if barriers are overcome

* Big data refers to datasets whose size is beyond the ability of typical database software tools to capture, store, manage, and analyze Source: McKinsey & Company, ‘The challenge and opportunity of big data’, Summer 2011



The ladder of analytical capabilities

39 Source: Jeanne Harris and Tom Davenport, Analytics at Work: Smarter Decisions, Better Results (Harvard Business Review Press, 2010).

Harris & Davenport ladder of analytical capabilities is now a classic. It says that data analytics capabilities progress along a “ladder” where sophistication and value increase as companies proceed up each rung


CONCEPTUAL


Current state of development of data analytics in banking

40

“Few banks at this point have really developed capabilities to exploit data as a corporate asset”, Brian Johnston, Principal, Deloitte Consulting LLP

Source: Deloitte, ‘Leveraging Analytics in the Banking Industry ‘ podcast, 2011

FFoorrcceess ppuusshhiinngg tthhee ddeevveellooppmmeenntt ooff ddaattaa aannaallyyttiiccss ccaappaabbiilliittiieess::

• RReegguullaattoorryy rreeffoorrmm:: Dodd-Frank Act; more and more timely data is being requested by regulators

• SSyysstteemmiicc rriisskk:: requirement to develop a ‘living will’

• CCuussttoommeerr aannaallyyttiiccss:: banks are focusing on customer segmentation, pricing, profitability and how to grow and enhance the customer relationship over time

WWhheerree aarree bbaannkkss rriigghhtt nnooww??

• CCrreeaattiinngg ddaattaa ssttrraatteeggiieess

• DDeevveellooppiinngg ddaattaa rrooaaddmmaappss aanndd ggoovveerrnnaannccee mmooddeess

• AAppppooiinnttiinngg aa ddaattaa cczzaarr



Excellence in big data and analytics

41

Banking & Payments Asia has not attributed the award for excellence in data analytics. Instead, awards were given for customer experience and service innovation. The Editor’s Special Award 2012 for the Most Innovative Bank in Asia Pacific was given to OCBC Bank (Singapore)

NNoommiinnaattiioonnss ccaatteeggoorriieess AAwwaarrddss

PPrroodduucctt eexxcceelllleennccee Prepaid payment Credit card Debit card Mobile payment e-wallet e-commerce P2P payment Payment innovation

Bank of the Philippine Islands (Philippines) and Beam Money (India) Siam Commercial Bank (Thailand) Special Commendation: RHB Bank (Malaysia) KASIKORNBANK (Thailand) Special Commendation: OCBC Bank (Singapore) Security Bank (Philippines) - Bank Mandiri (Indonesia) CIMB Bank (Malaysia) Maybank (Malaysia)

CChhaannnneell EExxcceelllleennccee AAwwaarrddss

Branch Internet Mobile Social media Multi-channel integration

OCBC Bank (Singapore) Special Commendation: Bankwest (Australia) OCBC Bank (Singapore) Special Commendation: Bank of the Philippine Islands (Philippines) DBS Bank (Singapore) Special Commendation: Bank Commonwealth (Indonesia) DBS Bank (Singapore) -

SSeerrvviiccee PPrroovviiddeerr EExxcceelllleennccee AAwwaarrddss::

Payment processing Customer data management Core banking Big data/analytics Virtualisation Risk management

Customer experience: Citibank (Singapore) Special Commendation: Maybank (Singapore) Service innovation: Standard Chartered Bank (Singapore)

SSttrraatteeggyy EExxcceelllleennccee iinn BBuussiinneessss IInnnnoovvaattiioonn

Business model innovation Financial inclusion

ICICI Bank (India) Special Commendation: KASIKORNBANK (Thailand)

Source: www.vrl-financial-news.com/bpa/banking--payments-asia/events/retail-banking-and-pay-in-2012/trailblazer-awards1.aspx



Excellence in business intelligence

42

Gartner launched its BI Excellence Award in 2005. So far three banks have been distinguished

WWiinnnneerrss ooff GGaarrttnneerr’’ss BBuussiinneessss IInntteelllliiggeennccee EExxcceelllleennccee AAwwaarrdd GGlloobbaall//EEMMEEAA AAPPAACC

2005 Continental Airlines -

2006 HHyyppooVVeerreeiinnssbbaannkk --

2007 Richmond Virginia Police Department -

2008 n/av -

2009 Tetra Pak IICCIICCII BBaannkk ((IInnddiiaa))

2010 KKoommeerrččnníí BBaannkkaa n/av

2011 UPS Singapore's Land Transport Authority

2012 Medway Youth Trust -

Source: Gartner



Business intelligence case study – Komerční Banka (1/2)

43

Komerční banka won the 2010 Gartner Business Intelligence Award. "Komerční banka stood out because it demonstrated in very clear terms how it was able to use technology for quantifiable business benefits. It showed that BI is not a one time investment but that transformation happened over several years.“ Gartner

TTeerraaddaattaa:: EEnntteerrpprriissee DDaattaa WWaarreehhoouussee ((EEDDWW)) rreeqquuiirreemmeennttss ttoo ttuurrnn aa ffiinnaanncciiaall mmeessss iinnttoo bbaannkkiinngg ssuucccceessss::

• Strong support from top management

• Rigorous application of metadata

• Clearly defined, business-essential, but incremental business intelligence (BI) projects

• Robust, flexible technology

AAbboouutt KKoommeerrččnníí bbaannkkaa

Subsidiary of Societe Generale in the Czech republic, is one of the best run universal banks in Central Europe. It provides comprehensive services to clients in the areas of retail, corporate, and investment banking. The Komerční banka Group's 8,843 employees serve more than 2.7 million clients, who can use an extensive network of 398 points of sale throughout the country. Komerční banka currently operates 682 ATMs and more than 972,000 of its clients use one of direct banking channels.

Sources: www.kb.cz/en/about-the-bank/press-room/press-releases/komercni-banka-wins-an-important-gartner-award-784.shtml www.teradatamagazine.com/v11n02/Features/Revolutionary-Turnaround/



Business intelligence case study – Komerční Banka (2/2)

44

What they did.

• Integrated approach pairing an enterprise data warehouse (EDW) with a performance management system (initially, Oracle Financial Services tools for enterprise performance management (EPM))

• Step-by-step integration of this EPM functionality in an EDW from Teradata

• PPhhaassee 11:: CCrriissiiss MMaannaaggeemmeenntt.. Members of the BI team targeted three critical areas:

1.  developed reports to analyze sales performance, risk and revenue management

2.  developed key performance indicators (KPIs) across the organization (Consistent, comprehensive KPIs, backed by helpdesk support and well-understood metadata)

3.  work by the BI team enabled potential investors to conduct due diligence of the company’s business and financial data necessary for a bank-valuation model, which led to 60% of the bank being acquired by Société Générale in 2001

• PPhhaassee 22:: From 2002 to 2004, a newly created BI team rolled out BI applications for cost management, direct channels and sales support, winning fans with each targeted project.

• PPhhaassee 33:: Starting in 2004, the BI group turned its attention to building sophisticated tools to handle risk and further concentrated on the metadata solution. It delivered new capabilities to thwart money laundering and meet regulatory requirements like Basel II

• PPhhaassee 44:: Since 2008, the priority has been consumer-focused efforts, such as analytical customer relationship management and campaign management

Sources: www.kb.cz/en/about-the-bank/press-room/press-releases/komercni-banka-wins-an-important-gartner-award-784.shtml www.teradatamagazine.com/v11n02/Features/Revolutionary-Turnaround/



Digital transformation case study – BNP Paribas

45 Source: MIT Center for Digital Business and CapGemini Consulting, ‘Digital transformation: a roadmap for billion dollar organizations’, 2011

BBaacckkggrroouunndd:: • BNP Paribas grew rapidly in the past decade by acquiring banks in several countries. The firm is now aiming to solidify its international position, aligning processes globally

• Crisis, regulation and technology adoption by customers and employees are pushing BNP Paribas to consider digital transformation TThheeiirr jjoouurrnneeyy ssoo ffaarr::

• The first step of the transformation has focused on reach: creating a multichannel strategy that includes the web as well as emerging technologies such as mobile and social media

• BNP Paribas is today in a transition phase to reach the second step of the transformation: integrating transactions across channels and building a conversation with clients via an external CRM and analytics-based tools

• To improve customer experience, the firm launched multiple initiatives. −  The firm increased customer touch points via social media, providing customer service on twitter and advertising on Facebook. −  In 2010, BNP Paribas launched a new branch model. This Concept Store will help develop new ways of interacting and selling

products to the customer via new technologies and self-service areas. −  The firm’s next step is to start a conversation with customers on social media. This will require building social-customer

knowledge, via an external CRM, and increasing analytics capability. −  Mobile apps provide a substitute to using the internet website. In 2011, BNP Paribas launched new mobile bank services in

partnership with a telecom operator. This was more than a simple website substitution. It was a switch from traditional business model to a digital one, with a different cost and revenue structure.

•  From an operational process point of view, BNP Paribas is still at the beginning of its transformation journey. The firm is focusing on security improvements and cloud solutions, which executives see as key differentiators in the industry. The objective of process rationalization will be to have end-to-end digitized processes in an integrated platform, which could generate international economies of scale.

NNeexxtt ddiiggiittaall oobbjjeeccttiivveess:: • Move into mobility, reach the next level of customer intimacy and develop a strong analytics strategy.

BNP Paribas has started on a multi-year digital transformation journey



Case study: Predicting potential profitability and product uptake at First Tennessee Bank

46 Source: IBM/IDC, ‘ Banking for Success: Using Analytics to Grow Wallet Share’, Jan 2012

“By transforming its approach to data and analysis, First Tennessee Bank has dramatically increased its marketing effectiveness. This is a bank that understands that measuring effective marketing must include realized compared with potential customer profitability as opposed to measuring just the number of new products sold. As every marketer knows, if you simply make an offer attractive enough, sales will follow. Many banks pursue this strategy to increase deposit rates — offering high interest accounts to bring in new business — but lose those customers as soon as a competitor has a better offer. Customers brought in by overly attractive offers are not only less loyal but also less profitable. Using analytics effectively allows banks to manipulate offer attributes, in a very granular way, to achieve higher profitability from a growing customer base. First Tennessee uses models they have developed internally to ccrreeaattee pprrooffiittaabbiilliittyy ttiieerrss wwiitthh vvaarryyiinngg pprroodduucctt aattttrriibbuutteess. The bank has also developed ccuussttoommeerr ssccoorriinngg mmooddeellss, based on very granular data points, to determine each customer's likelihood to purchase potential offers. With these product and customer models, the bank can create profitability scenarios and use these to determine which product offers will generate the most value for the bank. The bank then uses this information to prioritize marketing programs and allocate resources effectively. As a result of this approach, First Tennessee has produced quantifiable results. It has cut its mailing and printing marketing costs by 20% and 17%, respectively, by allocating resources more effectively. And at the same time, it has increased effectiveness — generating a 3.1% increase in response rates by putting better offers in front of its prospects without sacrificing profit targets.”



Building an enterprise-wide analytics capability

47

IBM advises to start with selecting a critical question or objective

“it should not be assumed that analytical insight cannot be extracted until obstacles have all been resolved”

AApppprrooaacchh::

SStteepp 11:: IIddeennttiiffyy aanndd pprriioorriittiizzee ccrriittiiccaall bbuussiinneessss iissssuueess aanndd aallllooww tthheessee pprriioorriittiieess ttoo sstteeeerr tthhee pprroojjeecctt

Decision criteria should include:

• Value of anticipated benefits to be derived from the project

• Reports and insights need to be efficiently produced and securely delivered

• Data sources must be trusted across functional boundaries

• Analytics tools should be adopted broadly, support self-service, and be business-owned but IT-supported

SStteepp 22:: CCoonndduucctt aann iinnvveennttoorryy aanndd aasssseessssmmeenntt ooff tthhee ddaattaa to confirm that the scope is achievable and that analysis will yield actionable results within the agreed hypotheses

Source: IBM, ‘The shift to analytics: the next wave for transaction banking’, 2012

TTyyppiiccaall oobbssttaacclleess::

• Complex, heterogeneous technology architectures

• Operationally optimized but siloed processes and systems

• Data fragmented across multiple databases

• Constrained investment budgets with competing agendas

• Lack of skilled resources

• Perception that the data available is of insufficient quality to support analysis.



Principles to leverage ‘big data’

48 Source: McKinsey, ‘Seizing the potential of ‘big data’’, Oct 2011

Senior executives need understand big data’s potential in their businesses, the data assets and liabilities of those businesses, or the strategic choices they must make to start exploiting big data

IIddeennttiiffyy bbiigg ddaattaa rreessoouurrcceess aanndd ggaappss

UUnnddeerrssttaanndd tthhee oorrggaanniissaattiioonnaall iimmpplliiccaattiioonnss

SSiizzee tthhee ooppppoorrttuunniittiieess aanndd tthhrreeaattss

AAlliiggnn oonn ssttrraatteeggiicc cchhooiicceess

• Identify threats and opportunities that leverage big data • Estimate their size and value

KKeeyy eelleemmeennttss

• Conduct a ‘data audit’: thorough review of all relevant internal and external data to develop a realistic view of the information and capabilities required; this will also help identify ‘data gems’ cloistered inside business units

• Strategies involving ‘big data’ often have implications across the entire company that only senior executives can address • To be useful, data must cut across organisational boundaries

• Don’t rush into action: data strategies are likely to be deeply intertwined with overall strategy and therefore require thoughtful planning about allocation of resources • Ensure senior management has visibility and sets the priorities of the analytics team



Concerns regarding ‘big data’

49

IInnffoorrmmaattiioonn sseeccuurriittyy

DDaattaa uusseess

PPrriivvaaccyy

RRuulleess oonn ssttoorraaggee ooff ddiiggiittaall rreeccoorrddss

CCoommmmeennttss

• Concerns around the legal implications of using statistical correlations: what if a computer model factors in the educational level of the applicant's mother, which in America is strongly correlated with race? And what if computers can predict his predisposition to committing a crime? • A new regulatory principle in the age of big data, then, might be that people's data cannot be used to discriminate against them on the basis of something that might or might not happen

Source: The Economist, ‘New rules for big data’, 2010

Society and regulators are only gradually setting rules for ‘big data’. In the meanwhile, companies have to make decisions without regulatory clarity

• Biggest concern. Could be (partially?) resolved with more transparency and by giving users more control • Lack of clarity and potential legal framework changes surrounding property rights of personal information

• A pioneering law in California in 2003 required companies to notify people if a security breach had compromised their personal information, which pushed companies to invest more in prevention. The model has been adopted in other states and could be used more widely.

• Current rules on digital records limit the length of time when data can be stored. However, companies can and have an interest in keeping information for a long period of time; regulation is also pushing in this direction

IInnffoorrmmaattiioonn iinntteeggrriittyy • Censorship pollutes the internet environment.



Contents

50

1.  Introduction

2.  Key messages






•  Conclusion

Appendices


Where does all this leave the typical business banking model?


The typical business banking model – centred on a business banker/relationship manager who often doubles up as the credit and payments product specialist, supported by a large range of product specialists, some based in the BBC, others stationed at HO – has a logical rationale. But to what extent are the implicit beliefs of that model being questioned now by new digital technologies?

FX/IR Derivatives

20+ Product specialists

Business Banker / Lending and Payments Product Specialist

Business Banking Centre

Business Customer

Internet Local retail branch

Equipment Finance/Leasing

Invoice finance/Factoring

Payments/Merchant Services

Call Centre

Financial Planning

Trade finance

Business Insurance

Share Trading



Beliefs underlying the traditional business banking model

52

BBeelliieeffss uunnddeerrllyyiinngg tthhee ttrraaddiittiioonnaall bbuussiinneessss bbaannkkiinngg mmooddeell::


The current economic climate is making SMEs more open to considering alternatives (and easier too). But the fundamental issue of collecting and maintaining risk assessment information has not gone away

TThhee nneeww rreeaalliittyy::

• SMEs are riskier than larger corporates – the bank needs to take the time to understand their business before extending credit or seek guarantees

• SMEs lack sophistication; thus products need to be simple

• SMEs are quite diverse – products need to be tailored, but not too much as that introduces complexity and cost; thus packaged solutions

• SMEs lack time and resources and it is very time consuming to shop around and supply new banks with the necessary information on the SME owner and their business; it is also cumbersome and time consuming to change transactional banking arrangements

• Risk assessment needs to be more granular than just industry and size – this requires data and analytics

• The contraction in credit has led many small businesses feeling the need to diversify their banking relationships

• Financial comparison websites allow quick assessment of suitability of products and comparison of prices and terms

• Products can now be more cheaply tailored

• More services can be provided in a fully automated way with no human intervention

• SMEs demand business banking offers that run on their mobile devices

• The technology now exists to provide easier access (after hours) to the RM and product specialists (via video call)

Ø  SSMMEEss wweerree ffiieerrcceellyy llooyyaall aanndd ‘‘ssttiicckkyy’’ ccuussttoommeerrss tthhaatt tteennddeedd ttoo hhaavvee aa ssiinnggllee bbaannkk

Ø  SSMMEEss eexxppeeccttaattiioonnss aarree rriissiinngg;; mmoorree wwiilllliinnggnneessss ttoo sshhoopp aarroouunndd aanndd bbuuyy ddiiffffeerreenntt pprroodduuccttss ffrroomm ddiiffffeerreenntt pprroovviiddeerrss



A bank’s processes and key functions

53

“The real issue of disintermediation therefore, is not around the core of banking – the holding money area that is protected by banking licenses – but around the boundaries of banking. The thing is the boundaries is where all the profit lies. […] All of the processes and functions of a bank can become apps that users can download and integrate to build their own bank. The Build-Your-Own-Bank (BYOB) is the new generation of banking.”

Source: ACI Worldwide

Source: Financial Services Club Blog by Chris Skinner



Imagine a world with no banks

54

Our thesis is that the most disruptive innovation will come from business models that break the credit bond between bank and business customer. For larger corporates, this already happened decades ago with direct access to the capital markets, and the consequent decline in profitability of this segment. For SMEs, it could now happen as well

AAlltteerrnnaattiivvee bbuussiinneessss mmooddeellss

SSMMEEss ffiinnaanncciiaall nneeeeddss


Credit provision

Risk assessment

Make and receive payments

Invest Cash flow management

•  SME provides all its business and personal information to an SME credit rating firm that issues an initial risk assessment and monitors risk on an on-going basis

• With a credit rating in hand, the SME shops around for credit in one of many financial supermarkets

•  The SME receives a product recommendation tailored to its needs from a ‘Payments Advisor’ that had access to the info provided to the ratings firm

•  The Payments Advisor implements the recommended solution after the customer approves it

•  The SME uses a cash flow management firm that automatically sweeps account balances to high yielding savings accounts according to pre-determined rules

Specialised products

(leasing, factoring, derivatives) •  The SME’s financial advisor recommends and implements solutions

TThhee ssiimmpplleerr yyoouu ccaann mmaakkee tthhee pprroodduucctt tthhee lleessss yyoouu nneeeedd ffaaccee--ttoo--ffaaccee aaddvviiccee



New business models

55

Bank SME

Other funding providers:

• Consumers

• SMEs

• Corporates

Financial Supermarket

Financial Comparison website

Payments Advisors

SME Rating agencies

...

Others Banks

• Independent advice • Information gathering • Product selection • Solution implementation

A number of financial services providers could desintermediate banks and reduce them to commodity providers of funding




Examples of potential disruptive innovation in business banking

56

New entrants can cherry pick on the margin (e.g. payments) or come in through the main door by breaking the bond between bank and business customer through lending

EEnnttrraanntt NNeeeedd OOffffeerr

Funding Circle Funding An online marketplace where people can lend directly to small businesses in the UK

Crowdcube Offering a new model for sourcing capital for start-ups by utilizing an online platform to help match investors with businesses through equity stakes and non collateralized loans

GE Investing in growing their SME lending business through acquisitions


•  Banks have the opportunity to co-create investment opportunities with their customers, playing a bigger part in this emerging market.

•  Business banks can look to create new asset classes by allowing retail and private banking customers to invest in SME customers – effectively sharing the risk.



Example: Funding circle

57 Source: www.fundingcircle.com/how-it-works


Example: Crowd Cube

58 Source: www.crowdcube.com/pg/how-it-works-4


Example: Civilised Money

59

WWhhaatt wwiillll iitt bbee lliikkee?? Eventually CCiivviilliisseeddMoney will offer all the services that you currently associate with traditional banks, and some you don't. You'll be able to choose what happens with your money, whether you participate in lending, borrowing, investing, donating, fundraising or transacting.

Source: www.civilisedmoney.co.uk


Prioritising investments in digitisation

60

• How will digitization iimmppaacctt mmyy ccuurrrreenntt bbuussiinneessss mmooddeell aanndd ppoossiittiioonniinngg

within my industry’s value chain? (speed and quantum of impact and

respective determining factors)

• What areas of my business offer nneeww eennttrraannttss clear opportunities to

disrupt my current business model, and how can I best fight back?

• How can I best identify and enter aarreeaass wwhheerree vvaalluuee iiss bbeeiinngg ccrreeaatteedd,

both inside and outside my industry?

• Which ccaappaabbiilliittiieess do I need to build to be a leader in the field?

Source: Booz & Co., ‘The Next Wave of Digitization – Setting your Direction, Building your Capabilities’, 2011; ICG analysis

There are four questions that are key in deciding how to prioritise investments in digitisation

• HHooww mmuucchh ttiimmee ddoo II hhaavvee??

• WWhhaatt ddoo II nneeeedd ttoo wwaattcchh??

• FFuuttuurree eeccoonnoommiiccss??

• PPooiinnttss ooff eennttrryy ooff ddiissrruuppttoorrss??

==>> DDeeffeennssiivvee mmoovveess

• OOppppoorrttuunniittiieess??

==>> OOffffeennssiivvee mmoovveess

==>> EEnnaabblleerrss



Foundation enablers to take advantage of digital world

61

RReeaall ttiimmee // SSaammee ttiimmee • Real time integration across all channels (channel-agnosticism) • Real time processing of transactions • If not real time, at least ‘same-time’: all transactions reported as at the same time

‘‘TThhee ggllaassss bbaannkk’’ Customer is able to self-service (e.g. check on the progress of their loan application)

SSoopphhiissttiiccaatteedd aannaallyyttiiccss The increasing amount of data that banks can/will be able to collect on customers is a major asset that can be leveraged to develop much finer psychographic segmentation, customised products, real time offers, location-dependent offers or alerts, etc

CCuussttoommiissaattiioonn • Ability to offer highly customised products and services • Customer control / self-design of products and services • Customised processes • Customised pricing


SSiinnggllee ccuussttoommeerr vviieeww This ‘holy grail ‘of banking (and other industries) has been difficult to achieve, but in the digital era it is really a foundational pre-requisite of any player or strategy

Regardless of bank or strategy, future technological platforms will have to offer some core, foundational capabilities that all customers will expect and demand. If properly leveraged, many of these capabilities also present great opportunities to reduce cost, increase revenue and strengthen customer loyalty

CCaappaabbiilliittyy DDeessccrriippttiioonn



Next steps: strategic issues facing business banks today

§  Can we afford an RM-centred model for more/different customers if we use a different model?

§  Can a more digitised coverage model make it economical for us to target new customers?

§  Will our current coverage model remain competitive against an alternative, lighter coverage model of a competitor?

§  How do we leverage new digital technologies...

§  ... without weakening the quality of the relationship?

§  ... to leapfrog competitors with denser coverage and more resources?

§  ... to increase cross-sell and deepen relationships?

§  ... to create new products, services and value propositions?

§  From where can we expect disruptive innovation? Can the traditional bundled product offer to SMEs (especially the smaller ones) be unpicked? How?

§  What do we need to do to ensure we retain the direct interface with the customer? E.g. do we need to offer third party products and provide independent advice?

§  How do we re-define the role of each channel and the customer value proposition? Could the mobile channel replace the relationship manager altogether for certain simple products and services?


Digital technologies raise a number of new strategic issues for business banks that should be further investigated


Contents

63

1.  Introduction

2.  Key messages





Appendix A Impact of digitisation

64


Speed of digitisation

65 Source: Booz & Co., ‘The Next Wave of Digitization – Setting your Direction, Building your Capabilities’, 2011

There are four sets of factors driving the speed of digitisation


Industries most affected by digital transformation

66 Source: Booz & Co., ‘The Next Wave of Digitization – Setting your Direction, Building your Capabilities’, 2011

Financial services and insurance are expected to be highly impacted by digitisation in the medium term


Impact of digitisation on various industries

67

Digitization will allow for an increase in customer insight/reach, improvements in productivity and access to new value pools and business models



ICT and e-business impact on the banking industry

68 Source: Rambøll Management for the European Commission , ‘ICT and e-Business Impact in the Banking Industry’, 2008

Process efficiency

Branch renewal

Market structure

• Mergers drive increased spend on ICT • ICT, in turn, makes integration easier • Acquiring certain technologies is a key thrust behind some acquisitions (e.g. Acquisition of Egg bank by Citibank)

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The European Commission sees ICT having an impact on the banking industry in three ways

• Productivity is increasing while average working hours per employee are falling. In other words, ICT capital investments are largely substituting labour, particularly in retail banking • Standardisation of ordinary financial services and increase in customer on-line self-servicing are rendering the tellers redundant

On-line increasingly used for traditional, manual banking services, while branches are reserved for face-to-face advisory services


Value shifts within industries – The media sector

69 Source: PWC 2010 industry data for US and Western Europe; Booz & Co., ‘The Next Wave of Digitization – Setting your Direction, Building your Capabilities’, 2011

While the overall economic value of the media sector has risen, there has been a major shift from traditional media to new media


Appendix B Excellence in customer analytics and data management

70


Sources of value in customer analytics

71

Increased maturity in customer analytics will only deliver a sustainable competitive advantage – through increased bargaining power and marketing effectiveness and efficiency – if coupled with other unique company resources like scale advantages and privileged access to data

Source: Olena Valentynivna Bazylevska, Master thesis ‘Customer analytics as a source of competitive advantage’, Delft University of Technology, November 2011

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Data management best practices

72

The MBA identifies six areas of data management best practice

Source: Mortgage Bankers Association Residential Technology Steering Committee, ‘Data management best practices’, 2008

•  Ensure support from the most senior business leaders •  Establish a Data Governance committee to align the processes and technologies to manage data strategically

• Nominate a Business Data Steward to define: − Business definitions & business rules − Identification of critical data elements − Data quality monitoring, issue identification &

resolution − Identification of trusted sources of data − Support in the simplification of the data

environments •  Use common business definitions • Move data quality checks as far upstream as possible

•  Put data quality checks on critical data elements

•  Understand the quality of the data •  Execute common business rules once and centralize

•  Ensure that metadata is captured in a central source

•  Identify trusted sources of data •  Share data when possible

• Methodologies that can be utilized to improve an organization’s data quality are based on more generic quality improvement methodologies, such as Six Sigma or Total Quality Management

Data stewardship

Data governance

Data security

Data architecture

Data standards Data quality

•  Create an enterprise data model which logically represents the business and shows the relationships between various subject areas

•  Create diagrams that show the lifecycle of how data moves across major business entities

•  Identify data stakeholder roles, organizations, processes and applications

• Define how data will flow between applications and databases

•  Assign data stewards to subject areas, data entities, and application code sets

•  There must be an agreement among all interacting parties that their data values will conform to that standard

Data security, or Information Security, covers the confidentiality, integrity, and availability of data regardless of the form the data may take: electronic, print, or screen visible. It also can be regarded as the protection of data from unauthorized (accidental or intentional) modification, destruction, or disclosure.


Excellence Awards

73

The Banking & Payments Asia 2012 award for excellence in data analytics was not attributed. The Editor’s Special Award 2012 for the Most Innovative Bank in Asia Pacific was given to OCBC Bank (Singapore)

Source: www.vrl-financial-news.com/bpa/banking--payments-asia/events/retail-banking-and-pay-in-2012/trailblazer-awards1.aspx

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PPrroocceessss EExxcceelllleennccee AAwwaarrddss Customer centricity Account opening Loan origination/approval Collection/debt management Risk management

Maybank (Malaysia) Special Commendation: Bank of the Philippine Islands (Philippines) Standard Chartered Bank (Singapore) Special Commendation: OCBC Bank Citibank Savings (Philippines) Special Commendation: Bankwest (Australia) - Kotak Mahindra Bank (India)

PPrroodduucctt eexxcceelllleennccee Prepaid payment Credit card Debit card Mobile payment e-wallet e-commerce P2P payment Payment innovation

Bank of the Philippine Islands (Philippines) and Beam Money (India) Siam Commercial Bank (Thailand) Special Commendation: RHB Bank (Malaysia) KASIKORNBANK (Thailand) Special Commendation: OCBC Bank (Singapore) Security Bank (Philippines) Bank Mandiri (Indonesia) CIMB Bank (Malaysia) Maybank (Malaysia)

CChhaannnneell EExxcceelllleennccee AAwwaarrddss Branch Internet Mobile Social media Multi-channel integration

OCBC Bank (Singapore) Special Commendation: Bankwest (Australia) OCBC Bank (Singapore) Special Commendation: Bank of the Philippine Islands (Philippines) DBS Bank (Singapore) Special Commendation: Bank Commonwealth (Indonesia) DBS Bank (Singapore) -

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Payment processing Customer data management Core banking Big data/analytics Virtualisation Risk management

Customer experience: Citibank (Singapore) Special Commendation: Maybank (Singapore) Service innovation: Standard Chartered Bank (Singapore)

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Business model innovation Financial inclusion

ICICI Bank (India) Special Commendation: KASIKORNBANK (Thailand)


Accenture customer analytics case study – Wachovia Bank

74 Source: Accenture, ‘Data to Knowledge to Results: Building an Analytic Capability’, 2001


Business analytics in transaction banking

75

Commentators, analysts and banks recognize four key areas where analytics capability can provide value:

• Customer analytics

• Integrated risk management

• Operational effectiveness

• Optimized transaction products

Source: IBM, ‘The shift to analytics: the next wave for transaction banking’, 2012

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A leading North American institution required real-time information on queued payments to calculate changes in intraday liquidity positions and assess the risk, based on time of day, of all payments not being completed by deadlines. The organization was also striving to improve payments customers’ satisfaction with its call-centre service, seeking insight on customers affected, expected completion and the potential liability of in-flight payments within the bank’s payment system.

The operational dashboards made available through IBM’s payments and analytics solutions provided a consolidated real-time view of payments process flows, performance indicators for key customers, and alerts to appropriate team members for out-of-bound payments, bottlenecks and customers at risk.

The solution accelerated the bank’s ability to identify and act on events by providing better insight into process bottlenecks. This resulted in improved STP rates, reduced service disruptions and lower operating costs. The net result was increased customer satisfaction by improving payment processing and enhancing information provision.


List of ACL references

76 Source: www.acl.com/customers/success_stories.aspx

“ACL Services Ltd. is the leading global provider of audit analytics and continuous monitoring software to the audit and controls professions and the financial management community”


Cognitro Analytics success stories

77

The Royal Bank of Canada saved over $15m after the implementation of a fraud prediction measures

National Bank of Canada increased Customer Retention rate by 40% through proactive initiatives in customer churn analytics

Bank of America reported a net reduction rate of 17% in loan defaults following the adoption of predictive scoring analytics

The Banco Santander Totta in Portugal increased conversion rates on credit card offers from 5% to 30% and reduced the churn by 25% by using data mining techniques

Source: http://cognitro.com/DMABA10-Seminar-Brochure.pdf


IBM case study – Analytics in action: FIDUCIA IT AG

78

“FIDUCIA is the largest comprehensive outsourcing partner in the cooperative banking sector, serving more than 850 banks and 38 million banking customers in Germany. With IBM Cognos software at the core of its business intelligence competency centre, FIDUCIA can bring new answers and insights to its banking customers.” Cognos fits perfectly with FIDUCIA’s streamlined ASP model—letting FIDUCIA offer BI capabilities to its hundreds of banking customers in a way that is consistent with its vision of providing comprehensive, value added services in a simple, secure, and scalable manner. Here are some of the key benefits that FIDUCIA executives attribute to Cognos: • Expanded self-service offerings—One key to FIDUCIA’s success is the ability to empower its customers to use new BI solutions and capabilities at the desktop level—but without the complexity and expense of installing and upgrading desktop software. • New revenues—Easy to deploy and use, IBM Cognos BI solutions expand FIDUCIA’s ASP model and enable it to serve its customers with cost effective, value-added applications and services— enhancing revenues and building the customer base. • Better information and more transparency— Direct, fast, flexible, and integrated access to relevant information lets FIDUCIA help its customers achieve their business and profit targets. For example, by identifying market potential, they can ensure that they are maximizing it.

Source: IBM, ‘Business analytics for banking ‘- Three ways to win, 2010


IBM case study – Analytics in action: Bank Austria AG

79

Bank Austria AG is the clear number one in the Austrian banking industry. With a balance sheet total of around €145 billion, Bank Austria is about double the size of the next largest bank. Bank Austria needed a system with an independent and flexible response to be able to produce efficient ad-hoc reporting whenever it was required. With Cognos 8 BI, reporting to the parent company is now uniform, and can be achieved much more quickly and at a lower cost than previously. This speed and flexibility are also apparent in the bank’s ad hoc reporting, particularly important in the current economic climate. With all controlling content consolidated to a single platform, data discrepancies are a problem of the past – the bank can now have total confidence in its data.

IBM case study – Analytics in action: Major European Bank A major European bank has deployed IBM SPSS predictive analytics to construct an innovative early warning system that detects potential failures among its business customers. It also models the relationships and economic dependencies among them. This allows the bank to predict the impact on the bank (and its other customers) of a business failure by a major client, taking into account the “domino effect” in which one failure may trigger others. It provides an effective safety net by allowing the bank to calculate the maximum risk from a major business failure.

Source: IBM, ‘Business analytics for banking ‘- Three ways to win, 2010


Appendix C Additional Knowledge References

80


Additional Knowledge References

81

•  ‘Driving Business Value From Investments in Informa6on’, Jiří Omacht, Michael Ventruba, available at hAp://agendabuilder.gartner.com/BIE12I/webpages/SessionList.aspx?SessionType=140

•  ‘The Komercni Bank Profits From Investments in Informa6on -‐ Analyst Report, available from Gartner •  IBM reports on business analy6cs for banking available at hAp://www-‐01.ibm.com/so\ware/be/analy6cs/banking/index.html • Rambøll Management for the European Commission , ‘ICT and e-‐Business Impact in the Banking Industry’, 2008, includes the following case studies:

− ICA Banken – Making banking more convenient − Hansabank – Development of an e-‐banking product for private customers − Tapiola Bank – Dual-‐combina6on banking − Na6onal Irish Bank – The impact of ICT on post-‐merger branch renewal − Nova Ljubljanska Banka – Implemen6ng Online Banking in a CEE-‐context − SkandiaBanken – the role of ICT in the development of an Internet-‐only bank − Egg/Ci6bank UK – Acquiring Online Capabili6es − Eurobank EFG – ICT-‐facilitated Process Management − Glitnir Bank – Banking in an Online Society − Société Générale – Strategic Procurement of ICT

• How Ci6bank uses TwiAer to improve customer service, available at hAp://cio-‐asia.com/resource/industries/how-‐ci6bank-‐uses-‐twiAer-‐to-‐improve-‐customer-‐service/?page=2


Further reading – Articles from ‘ICG Industry Insights Review’ (1/2)

82

Face-‐to-‐face channels •  “Face-‐to-‐Face: A €15–20 Billion Mul6channel Opportunity.” – McKinsey and EFMA •  “The Future of Face-‐to-‐Face: How to Make the Transforma6on a Reality” – McKinsey Mobile channel and payments •  “Mone6sing Mobile: How Banks are Preserving Their Place in the Payments Value Chain” – KPMG •  “Applied Mobility for the Banking Industry” – DeloiAe •  “What’s the Future of Mobile Banking in Europe?” – McKinsey •  “Your Wireless Wallet” – McKinsey •  “Dialing up a Storm: How Mobile Payments Will Create the Most Significant Revenue Opportuni6es of the Decade for Financial

Ins6tu6ons” – PWC •  “Online Merchant Acquiring: Innova6ng Beyond Payments” – McKinsey Digi7sa7on •  “Minding Your Digital Business: McKinsey Global Survey Results” – McKinsey •  “Preparing for RDR: Opportuni6es and Challenges for Wealth Managers and Private Banks in the UK” – Accenture •  “Measuring Industry Digi6za6on: Leaders and Laggards in the Digital Economy” – Booz •  “The New Digital Tipping Point” – PWC •  “Digital Insurance – Char6ng a Course to Best-‐in-‐Class Capabili6es” – BCG Social media •  “Designing the Transcendent Web: The Power of Web 3.0” – Booz & Co •  “Banking on Social Media” – Booz and Co


Further reading – Articles from ‘ICG Industry Insights Review’ (2/2)

83

Data analy7cs •  "Crea6ng Value through Data Integrity -‐ a Pragma6c Approach" – Boston Consul6ng Group •  “An 8-‐Point Tune-‐up to Boost Auto Lending: How Analy6cs and Business Rules are Helping Steer More Top-‐Line Growth to the BoAom

Line” – FICO •  “Driving intelligent growth with Customer Value Maximiza6on: How banks should go beyond CRM” – McKinsey •  “Finally, Customer Analy6cs for Banks” – DeloiAe •  “Seizing the Poten6al of ‘Big Data’” – McKinsey •  “Compe6ng Through Data: Three Experts Offer Their Game Plans” – McKinsey •  “Analy6cs in Banking: Taking a Fresh Look at Your Challenges” – DeloiAe •  “Turning Data into Dollars” – DeloiAe •  “A New Virtuous Cycle for Banks – Linking Social Media, Big Data, and Signal Advantage” – BCG Cloud compu7ng •  “Cloud Compu6ng in Banking -‐ What Banks Need to Know When Considering a Move to the Cloud” – Capgemini •  “Banking on Capability Clouds” – DeloiAe Other •  “A ‘New Normal’ is Emerging – But Not Where Most Banks Expect” – FICO •  “Rethinking Retail Banking Growth: Effec6ve Strategies for Increasing Revenue by Building Stronger Connec6ons to the Post-‐Crisis

Consumer” – DeloiAe •  “A Strategic Approach to Self Service: Capture the Value, Avoid the Piralls” – Booz and Co. •  “IT Advantage Fall 2011” – BCG •  “Commercial Banking: Compe6ng for Growth in 2012” – Oliver Wyman •  “Banking Technology Vision: Technology Waves that are Reshaping the Banking Landscape” – Accenture •  “Retail Banking in CEE: Exploi6ng the Poten6al of the Micro Business Segment” – Roland Berger


Internal Consulting Group Unbundled consulting § Project support § Capability building § Professional association www.internalconsulting.com.au

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This document was prepared by Anna Videira-‐Johnson ([email protected]). Anna is an ICG affiliate who leads work in corporate and business unit strategy, opera6onal improvement and corporate restructuring. Anna spent six years with McKinsey & Company as a strategy and corporate finance consultant and over two years as a senior advisor in NAB’s Corporate Strategy & Investments team.

Anna was assisted by ICG’s Wholesale Banking Prac6ce Leader, Peter Beaumont, and an ICG expert panel drawn from ICG’s affiliate pool.

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