Digital sales, a dangerous unseized opportunity for banks

For banks, digital sales are a crucial new benchmark—and a logical next step in the race to digitization. For every time that customers visit a branch, customers access their banking apps between 50 and 80 times. And this number doesn’t take into account visits to banks’ websites, this makes the ratio of digital to physical interactions even more lopsided. Yet despite this mammoth behavioral shift, most banks’ proportion of digital sales hasn’t increased so much. It remains an opportunity that banks haven’t seized. In their upcoming phase of hiring, technology buying, and strategy formulation, banks need to create a foundation for digital sales. The ones that do so will gain a lasting advantage. The ones that don’t will die.

Digital champions: Big Tech & Fintech educate customers fast to buy digitally

Digital mature companies offer a wide range of relevant functionalities for customers with a compelling user experience. Their digital strategies share one single item: creating world’s best customer engagement. Two examples of Big Tech companies illustrate how severe competition for the traditional banks has become. Amazon for example defined their strategy around being the most customer centric company on earth. Jeff Bezos believes that a few successes compensate for billions of dollars of failures. This drives the company’s rhythm and makes it experiment continuously, improving customer engagement, finding new customer market combinations and developing new business models. From payments to lending to insurance to checking accounts, Amazon is attacking financial services from every angle without applying to become a conventional bank. It’s clear that the company remains very focused on building financial services products that support its core strategic goal: increasing participation in the Amazon ecosystem. As a result, the company has built and launched tools that aim to:

1. Increase the number of merchants on Amazon and enable each merchant to sell more, 
2. Increase the number of customers on Amazon and enable each customer to spend more
3. Reduce any buying/selling friction.

In parallel, Amazon has made several fintech investments, mostly focused on international markets (India and Mexico, among others), where partners can help serve Amazon’s core strategic goal. In aggregate, these product development and investment decisions reveal that Amazon isn’t building a traditional bank that serves everyone. Instead, Amazon has taken the core components of a modern banking experience and tweaked them to suit Amazon customers (both merchants and consumers). Another interesting example can be found in Ant Group. Ant Group recently made news with its plans to go public simultaneously in Hong Kong and Shanghai. As an affiliate of Alibaba and the owner of Alipay, the firm rebranded from Ant Financial to Ant Group early 2020, aiming to further evolve its business model and accelerate its global expansion. Ant Group, growing from Alipay, an online payment system for eCommerce, has successfully expanded to wealth management (Ant Fortune) and online banking (MYbank). To enable these successes, Ant Group has developed a unique portfolio of tech-driven capabilities for the financial services industry, including database, cloud-native, middleware components and blockchain platforms. In fact, according to Ant Group CEO Simon Hu, the firm made more than 50% of its revenue in 2019 by selling technology products and services to financial institutions. The firm expects this ratio to continue to expand in the future. Ant Group created the 3-1-0 online lending model (three minutes to apply, one second to approve, and zero human intervention), which has served 29 million small and medium-size enterprises (SMEs) in China, a number that has nearly tripled since 2018. This data-driven, no collateral-based lending model kept the nonperforming loans (NPL) rate under 2%, even during the COVID-19 lockdown period. 

And FinTechs also change the game faster than ever before and adapt to the new post COVID-19 normal. Fintech companies are expected to benefit over the long term from the customers’ shift to online banking due to COVID-19. N26’s home country Germany is among countries whose citizens were considered especially wedded to cash prior to the pandemic. N26 is among the financial institutions that have benefited from flexibility in meeting customer expectations, which was only possible because it is what the industry refers to as “digitally mature” institution. N26 already raised nearly $800 million in venture capital, Bloomberg reported, including a $ 100 million round in May 2020. And last but not least, N26’s CX is amazing. Another great example is US based SoFi. SoFi launched in 2011 as a student loan financing company for millennials, but quickly expanded to personal and mortgage loans, refinances and wealth management services. The company has raised $2.3 billion in funding and is valued at around $4.8 billion. In response to the pandemic, it is the first US company that launched a small business lending program to fund over $50 million in loans under the US Payroll protection program.  

Leading group of banks: the battle on customer profitability

The immature or intermediate digital mature banks are losing the profitable customers in this market driven by digital customer engagement. Not many banks are doing a good job at all. In our research we found that very few banks are delivering personalized marketing to their customers’ mobile devices. Many banks provide product information over their digital channels, but the presentation often doesn’t take advantage of the medium’s interactivity or, in the case of mobile, is not responsive to the small screen. It’s almost never easy to buy a bank product digitally; most such attempts result in the shopper’s having to re-enter personal data, being redirected to a separate bank website, or visiting a branch. And heaven helps the shopper who wants support while making a purchase: the options, whether phone, chat, or video, are usually rudimentary—if they are available at all. Some of them however dare to take the leap and try to fundamentally transform. ING for example grows its customer base as a digital attacker with ING Direct. In their home market The Netherlands they completely shifted the traditional value chain banking operating model into an agile one with tribes and chapters. BBVA also embraced a digital champion operating model several years ago and created a business that is flexible and responsive to change at all levels. Working with digital is not unusual and is a fully embedded part of daily working life across the organization. And also, the Belgium bank KBC has fully embedded the digital maturity strategy and launched a personal digital assistant as arrowhead in their customer engagement strategy this year. Recent Roland Berger research shows that the digital mature banks are also Europe’s top performing banks. Banks like KBC, ING, BBVA and Barclays lead the game on profitability showing cost income ratio’s around 56%. Their boards embraced a company strategy that focusses on digital customer engagement. In relation to digital sales these banks indeed also grew faster than their peers. It will be this leading group of banks that dare to take the leap in rigorous digital transformation strategies that might have a change against the customer engagement power of Big Tech and unicorn Fintech companies. They will grow beyond their core in relevant eco-systems, create financial supermarkets, find ways to monetize their data and find ways to become champions in extending value across the customer journey. They will have a chance to take a significant piece of the 14,9% CAGR of the digital banking market until 2025. The rest of the banks grow too slow and will be eaten or pushed away into an infrastructure supplier role. The leading group of digital banks is at war with Big Tech and Fintech in the battle on customer engagement!  Let the customer decide who will win.