Fintech’s Digital Disruption In Five Scenarios

The BIS task force has developed five scenarios which highlight how Fintech disruption might play out, in a 50 page report “Implications of fintech developments for banks and bank supervisors.”  Bankers will find it uncomfortable reading!

Under the The Bank For International Settlements (BIS) five scenarios, the scope and pace of potential disruption varies significantly, but ALL scenarios show that banks will find it increasingly difficult to maintain their current operating models, given technological change and customer expectations.

The fast pace of change in fintech makes assessing the potential impact on banks and their business models challenging. While some market observers estimate that a significant portion of banks’ revenues, especially in retail banking, is at risk over the next 10 years, others claim that banks will be able to absorb or outcompete the new competitors, while improving their own efficiency and capabilities.

The task force used a categorisation of fintech innovations. Graph 1 depicts three product sectors, as well as market support services. The three sectors relate directly to core banking services, while the market support services relate to innovations and new technologies that are not specific to the financial sector but also play a significant role in fintech developments.

The analysis presented in this paper considered several scenarios and assessed their potential future impact on the banking industry. A common theme across the various scenarios is that banks will find it increasingly difficult to maintain their current operating models, given technological change and customer expectations. Industry experts opine that the future of banking will increasingly involve a battle for the customer relationship. To what extent incumbent banks or new fintech entrants will own the customer relationship varies across each scenario. However, the current position of incumbent banks will be challenged in almost every scenario.

1. The better bank: modernisation and digitisation of incumbent players

In this scenario the incumbent banks digitise and modernise themselves to retain the customer relationship and core banking services, leveraging enabling technologies to change their current business models.

Incumbent banks are generally under pressure to simultaneously improve cost efficiency and the customer relationship. However, because of their market knowledge and higher investment capacities, a potential outcome is that incumbent banks get better at providing services and products by adopting new technologies or improving existing ones. Enabling technologies such as cloud computing, big data, AI and DLT are being adopted or actively considered as a means of enhancing banks’ current products, services and operations.

Banks use new technologies to develop value propositions that cannot be effectively provided with their current infrastructure. The same technologies and processes utilised by non-bank innovators can also be implemented by incumbent banks, and examples may include:

  • New technologies such as biometry, video, chatbots or AI may help banks to create sophisticated capacities for maintaining a value-added remote customer relationship, while securing transactions and mitigating fraud and AML/CFT risks. Many innovations seek to set up convenient but secure customer identification processes.
  • Innovative payment services would also support the better bank scenario. Most banks have already developed branded mobile payments services or leveraged payment services provided by third parties that integrate with bank-operated legacy platforms. Customers may believe that their bank can provide a more secure mobile payments service than do non-bank alternatives.
  • Banks may also be prone to offer partially or totally automated robo-advisor services, digital wealth management tools and even add-on services for customers with the intention of maintaining a competitive position in the retail banking market, retaining customers and attracting new ones.
  • In this scenario, digitising the lending processes is becoming increasingly important to meet the consumer’s demands regarding speed, convenience and the cost of credit decision-making. Digitisation requires more efficient interfaces, processing tools, integration with legacy systems and document management systems, as well as sophisticated customer identification and fraud prevention tools. These can be achieved by the incumbent by developing its own lending platform, purchasing an existing one, white labelling or outsourcing to third-party service providers. This scenario assumes that current lending platforms will remain niche players.
    While there are early signs that incumbents have added investment in digitisation and modernisation to their strategic planning, it remains to be seen to what extent this scenario will be dominant.

2. The new bank: replacement of incumbents by challenger banks

In the future, according to the new bank scenario, incumbents cannot survive the wave of technology-enabled disruption and are replaced by new technology-driven banks, such as neo-banks, or banks instituted by bigtech companies, with full service “built-for-digital” banking platforms. The new banks apply advanced technology to provide banking services in a more cost-effective and innovative way. The new players may obtain banking licences under existing regulatory regimes and own the customer relationship, or they may have traditional banking partners.

Neo-banks seek a foothold in the banking sector with a modernised and digitised relationship model, moving away from the branch-centred customer relationship model. Neo-banks are unencumbered by legacy infrastructure and may be able to leverage new technology at a lower cost, more rapidly and in a more modern format.

Elements of this scenario are reflected in the emergence of neo- and challenger banks, such as Atom Bank and Monzo Bank in the United Kingdom, Bunq in the Netherlands, WeBank in China, Simple and Varo Money in the United States, N26 in Germany, Fidor in both the United Kingdom and Germany, and Wanap in Argentina. That said, no evidence has emerged to suggest that the current group of challenger banks has gained enough traction for the new bank scenario to become predominant.

Neo-banks make extensive use of technology in order to offer retail banking services predominantly through a smartphone app and internet-based platform. This may enable the neo-bank to provide banking services at a lower cost than could incumbent banks, which may become relatively less profitable due to their higher costs. Neo-banks target individuals, entrepreneurs and small to medium-sized enterprises. They offer a range of services from current accounts and overdrafts to a more extended range of services, including current, deposit and business accounts, credit cards, financial advice and loans. They leverage scalable infrastructure through cloud providers or API-based systems to better interact through online, mobile and social media-based platforms. The earnings model is predominantly based on fees and, to a lesser extent, on interest income, together with lower operating costs and a different approach to marketing their products, as neo-banks may adopt big data technologies and advanced data analytics. Incumbent banks, on the other hand, may be impeded by the scale and complexity of their current technology and data architecture, determined by factors such as legacy systems, organisational complexity and historical acquisitions. However, the customer acquisitions costs may be high in competitive banking systems and neo-banks’ revenues may be offset by their aggressive pricing strategies and their less-diverse revenue streams.

3. The distributed bank: fragmentation of financial services among specialised fintech firms and incumbent banks

In the distributed bank scenario, financial services become increasingly modularised, but incumbents can carve out enough of a niche to survive. Financial services may be provided by the incumbents or other financial service providers, whether fintech or bigtech, who can “plug and play” on the digital customer interface, which itself may be owned by any of the players in the market. Large numbers of new businesses emerge to provide specialised services without attempting to be universal or integrated retail banks – focusing rather on providing specific (niche) services. These businesses may choose not to compete for ownership of the entire customer relationship. Banks and other players compete to own the customer relationship as well as to provide core banking services.

In the distributed bank scenario, banks and fintech companies operate as joint ventures, partners or other structures where delivery of services is shared across parties. So as to retain the customer, whose expectations in terms of transparency and quality have increased, banks are also more apt to offer products and services from third-party suppliers. Consumers may use multiple financial service providers instead of remaining with a single financial partner.

Elements of this scenario are playing out, as evidenced by the increasing use of open APIs in some markets. Other examples that point towards the relevance of this scenario are:

  • Lending platforms partner and share with banks the marketing of credit products, as well as the approval process, funding and compliance management. Lending platforms might also acquire licences, allowing them to do business without the need to cooperate with banks.
  • Innovative payment services are emerging with joint ventures between banks and fintech firms offering innovative payment services. Consortiums supported by banks are currently seeking to establish mobile payments solutions as well as business cases based on DLT for enhancing transfer processes between participating banks (see Box 4 for details of mobile wallets).
  • Robo-advisor or automated investment advisory services are provided by fintech firms through a bank or as part of a joint venture with a bank.

    Innovative payment services are one of the most prominent and widespread fintech developments across regions. Payments processing is a fundamental banking operation with many different operational models and players. These models and structures have evolved over time, and recent advances in technological capabilities, such as in the area of instant payment, have accelerated this evolution. Differences in types of model, technology employed, product feature and regulatory frameworks in different jurisdictions pose different risks.

The adoption by consumers and banks of mobile wallets developed by third–party technology companies – for example, Apple Pay, Samsung Pay,12 and Android Pay – is an example of the distributed bank scenario. Whereas some banks have developed mobile wallets in-house, others offer third-party wallets, given widespread customer adoption of these formats. While the bank continues to own the financial element of the customer relationship, it cedes control over the digital wallet experience and, in some cases, must share a portion of the transaction revenue facilitated through the third-party wallets.

Innovation in payment services has resulted in both opportunities and challenges for financial institutions. Many of the technologies allow incumbents to offer new products, gain new revenue streams and improve efficiencies. These technologies also let non-bank firms compete with banks in payments markets, especially in regions where such services are open to non-bank players (eg the Payment Service Directives in the European Union and the Payment Schemes or Payment Institutions Regulation in Brazil).

4. The relegated bank: incumbent banks become commoditised service providers and customer relationships are owned by new intermediaries

In the relegated bank scenario, incumbent banks become commoditised service providers and cede the direct customer relationship to other financial services providers, such as fintech and bigtech companies. The fintech and bigtech companies use front-end customer platforms to offer a variety of financial services from a diverse group of providers. They use incumbent banks for their banking licences to provide core commoditised banking services such as lending, deposit-taking and other banking activities. The relegated bank may or may not keep the balance sheet risk of these activities, depending on the contractual relationship with the fintech company.

In the relegated bank scenario, big data, cloud computing and AI are fully exploited through various configurations by front-end platforms that make innovative and extensive use of connectivity and data to improve the customer experience. The operators of such platforms have more scope to compete directly with banks for ownership of the customer relationship. For example, many data aggregators allow customers to manage diverse financial accounts on a single platform. In many jurisdictions consumers become increasingly comfortable with aggregators as the customer interface. Banks are relegated to being providers of commoditised functions such as operational processes and risk management, as service providers to the platforms that manage customer relationships.

Although the relegated bank scenario may seem unlikely at first, below are some examples of a modularised financial services industry where banks are relegated to providing only specific services to another player who owns the customer relationship:

  • Growth of payment platforms has resulted in banks providing back office operations support in such areas as treasury and compliance functions. Fintech firms will directly engage with the customer and manage the product relationship. However, the licensed bank would still need to authenticate the customer to access funds from enrolled payment cards and accounts.
  • Online lending platforms become the public-facing financial service provider and may extend the range of services provided beyond lending to become a new intermediary between customers and banks/funds/other financial institutions to intermediate all types of banking service (marketplace of financial services). Such lending platforms would organise the competition between financial institutions (bid solicitations) and protect the interests of consumers (eg by offering quality products at the lowest price). Incumbent banks would exist only to provide the operational and funding mechanisms.
  • Banks become just one of many financial vehicles to which the robo-advisor directs customer investments and financial needs.
  • Social media such as the instant messaging application WeChat13 in China leverage customer data to offer its customers tailored financial products and services from third parties, including banks. The Tencent group has launched WeBank, a licensed banking platform linked to the messaging application WeChat, to offer the products and services of third parties. WeBank/WeChat focuses on the customer relationship and exploits its data innovatively, while third parties such as banks are relegated to product and risk management.

5. The disintermediated bank: Banks have become irrelevant as customers interact directly with individual financial services providers.

Incumbent banks are no longer a significant player in the disintermediated bank scenario, because the need for balance sheet intermediation or for a trusted third party is removed. Banks are displaced from customer financial transactions by more agile platforms and technologies, which ensure a direct matching of final consumers depending on their financial needs (borrowing, making a payment, raising capital etc).

In this scenario, customers may have a more direct say in choosing the services and the provider, rather than sourcing such services via an intermediary bank. However, they also may assume more direct responsibility in transactions, increasing the risks they are exposed to. In the realm of peer-to-peer (P2P) lending for instance, the individual customers could be deemed to be the lenders (who potentially take on credit risk) and the borrowers (who may face increased conduct risk from potentially unregulated lenders and may lack financial advice or support in case of financial distress).

At the moment, this scenario seems far-fetched, but some limited examples of elements of the disintermediation scenario are already visible:

  • P2P lending platforms could manage to attract a significant number of potential retail investors so as to address all funding needs of selected credit requests. P2P lending platforms have recourse to innovative credit scoring and approval processes, which are trusted by retail investors. That said, at present, the market share of P2P lenders is small in most jurisdictions. Additionally, it is worth noting that, in many jurisdictions, P2P lending platforms have switched to, or have incorporated elements of, a more diversified marketplace lending platform business model, which relies more on the funding provided by institutional investors (including banks) and funds than on retail investors.
  • Cryptocurrencies, such as Bitcoin, effect value transfer and payments without the involvement of incumbent banks, using public DLT. But their widespread adoption for general transactional purposes has been constrained by a variety of factors, including price volatility, transaction anonymity – raising AML/CFT issues – and lack of scalability.

In practice the report highlights that a blend of scenarios is most likely.

The scenarios presented are extremes and there will likely be degrees of realisation and blends of different scenarios across business lines. Future evolutions may likely be a combination of the different scenarios with both fintech companies and banks owning aspects of the customer relationship while at the same time providing modular financial services for back office operations.

For example, Lending Club, a publicly traded US marketplace lending company, arguably exhibits elements of three of the five banking scenarios described. An incumbent bank that uses a “private label” solution based on Lending Club’s platform to originate and price consumer loans for its own balance sheet could be characterised as a “distributed bank”, in that the incumbent continues to own the customer relationship but shares the process and revenues with Lending Club.

Lending Club also matches some consumer loans with retail or institutional investors via a relationship with a regulated bank that does not own the customer relationship and is included in the transaction to facilitate the loan. In these transactions, the bank’s role can be described as a “relegated bank” scenario. Other marketplace lenders reflect the “disintermediated” bank scenario by facilitating direct P2P lending without the involvement of a bank at any stage.

The Other Side of Digital

A report, commissioned by TSA Limited (TSA), a not-for-profit industry funded organisation developing sales and marketing campaigns to promote the paper and print industries, makes some interesting comments on the down side to digital.

According to The Australian Bureau of Statistics, 87% of Australians access the internet daily with an average of 10 hours a day spent on an internet connected device. With many of our daily tasks now being carried out digitally, consumers are becoming increasingly aware of how much time they are staring at screens.

Findings from a 2017 Toluna survey, a study into Australian consumer preferences, trust and attitudes towards print and paper in a digital world, indicate that Aussies do know when enough is enough with many choosing to disconnect from the online world and get back in touch with print to reduce the digital overload.

Specifically, the findings showed that 48% agree they spend too much time on electronic devices, with 34% saying they are suffering from digital overload. In addition to this, 52% are concerned the overuse of electronic devices could be damaging to their health, including symptoms of eyestrain, sleep deprivation and headaches.

The report highlights the differences between consumer segments, and their preferences.

When the data was broken down into age demographics by channel, reading preference remains relatively the same across all channels for each age group. For example, Generation X recorded a consistent preference for print across newspapers/news (41%), magazines (42%), books (43%) and product catalogues (42%) showing only a 2% difference across all four of the channels. At the same time, analysis of the data shows there are large preference discrepancies between age groups. For example, Millennials represent 60% of the 11% of those who prefer to read their newspaper/news on mobile, whereas Baby Boomers only represent 7% of them.

When looking at how consumers prefer to receive information from service providers, results indicate consumers prefer to receive information in print, with the highest being from council or doctors. However, if we combine the two computer channels (laptop/desktop) a preference trend line can be drawn in favour of digital for utility and telecommunications. Tablets are the least preferred for receiving information from service providers.

Interestingly, preference for mobile phone bills and statements via mobile sees the highest preference at 15% for mobile compared to other service providers. Mobile service providers are evidently utilising their channel well, as otherwise, mobile sits second lowest in preference next to tablets.

The advancements of digital technologies enabling everything from communicating globally to fighting disease are irreplaceable – however, our desire to engage with them 24/7 seems to be waining.

The Toluna study found that consumers prefer print for leisure and for consuming news media, reporting that 72% prefer to read books and magazines in print, and 56% prefer to read newspapers in print. To combat digital overload, and align with consumer’s preferences for paper and print, it seems analogue methods are making a comeback.

Similar to the resurgence of vinyl and old school photography, stationary and physical daily planners are flying out the door and companies like kikki.K and Typo among others, are reaping the benefits. What was accused of being dead is coming back and we are seeing more and more consumers turning to print and other analogue channels with 66% believing it is important to “switch off”.

More On The Digital Banking Revolution and Fintech

We had great reactions to our earlier piece on the Digital Banking Revolution, and where Consumers fit in the Fintech Stack, following the release of our latest Quiet Revolution report.

Of particular interest was our Banking Digital Innovation Life Cycle analysis, as shown below, and includes a number of enhancements:

[Editors Note: Diagram above updated to include Distributed Ledger 27 Nov 17]

We have made a short video describing the approach, and discussing the elements in the diagram. We also highlight what we judge to be the top three most important innovations.

You can obtain a free copy of our Quiet Revolution report,”Time For Digital First“,  which includes our latest consumer research, and is discussed in the video.

 

2018 Crunch Time For Digital Transformation

In a new report, Forrester says that Digital transformation is not elective surgery. It is the critical response needed to meet rising customer expectations, deliver individualized experiences at scale, and operate at the speed of the market. This echoes our Quiet Revolution report, released just yesterday.

They say the results are sobering:

Over 60% of executives believe they are behind in their digital transformation. Lagging results have created a loss of confidence in the CIO, driving up the number of chief digital officers and business units creating their own digital strategies.

But that misses the point. Digital transformation is a CEO issue and an economic question.

Digital transformation is expensive; CEOs can’t drive operational savings fast enough to fund it and are cautious about destroying margins.

In 2018, CEOs must show the political will and, with the CIO and CMO, orchestrate digital transformation across the enterprise.

Some CEOs will use their balance sheet to acquire digital assets and buy time. But 20% of CEOs will fail to act: As a result, those firms will be acquired or begin to perish.

More on this from  IT Wire.

Companies face a year of more uncertainty in 2018 and the window of opportunity is closing for many looking to digitally transform, and revitalise customer experiences, according to a new report.

According to the report from research firm Forrester, 2018 will force decisive action on the digital front for companies to take control of their destiny.

“The dynamics favour those taking aggressive action and create existential risks for those still holding on to old ways of doing business,” Forrester warns.

And Forrester predicts that the chief information officer’s agenda for 2018 will focus on fully embracing digital transformation, cultivating talent, and implementing (not just testing) new technologies.

It says that the rapid maturation of artificial intelligence, blockchain and conversational interfaces will force organisations to create new customer experiences, transform jobs and forge new partnerships.

“As technology continues to disrupt business, digital will disrupt the role of the CIO. A new breed of digital-savvy CIOs with digital backgrounds will emerge and demand a new title to fit their transformation,” Forrester says.

The research firm also predicts that AI and Internet of Things will remain hot, “blockchain will simmer, and quantum will gather steam”, while digital business platforms are just “a wave” and companies will either build them or deliver through them.

In a further prediction, Forrester says the pace of automation across industries will pick up significantly around the world in 2018, altering the shape of the global workforce.

Forrester expects the global market for automation will accelerate faster in the New Year as enterprises aim to enhance performance and garner insights from commodity tasks.

And, according to Forrester, automation will eliminate 9% of US jobs but create 2% more and “a political automation backlash” will briefly impede progress – and lose, while bots, backed by AI, will alter traditional information management.

Other predictions for 2018 from Forrester include:

Artificial intelligence: the honeymoon for AI is over: blended AI will Disrupt customer service and sales strategy

CIOs will move away from the lift-and-shift approach to AI tech implementations, and new applications of blended AI will increasingly be used to improve customer service and sales processes in the New Year. In addition, Forrester predicts that AI will make decisions and provide real-time instructions at 20% of firms and will increasingly be used for visual experience.

Blockchain: be ready to face the realities behind the blockchain hype

It says 2018 will be the year CIOs will exploit the potential of blockchain technology. While there will be steady improvement and a few breakthroughs, don’t expect a major leap in technology maturity in 2018. In addition, CIOs, CISOs will pay greater attention to blockchain security, and blockchain will start to transform fraud management and identity verification. Banking processes will also see heterogeneous blockchain adoption in 2018.

Cloud computing accelerates enterprise transformation everywhere

Public cloud adoption will reach a 50% adoption rate in 2018, which is a significant milestone for enterprises. Looking at the factors shaping the cloud computing landscape next year, Forrester also predicts that the market should expect further consolidation through 2020. Enterprises will shift 10% of their traffic from carrier backbones to other providers, and telecom providers will feel the effects.

Cyber security: businesses will face even more challenges In 2018

Rising tensions in international relations, ubiquitous connectivity, digital transformation initiatives and the data economy will have a large impact on cyber security. Forrester has six predictions for cyber security in 2018, including: Governments will no longer be the sole providers of reliable, verified identities; More IoT attacks will be motivated by financial gain than chaos; and blockchain will overtake AI in VC funding and security vendor roadmaps.

IoT moves from experimentation to business scale

IoT technologies will dictate how companies deliver high-value experiences for their customers next year. Increased consumer adoption and advances in AI are fuelling the improvement of connected devices, and the quality of voice services will boost adoption of IoT devices. In addition, IoT will be at the center of broader and more damaging cyber attacks as hackers seek to compromise systems to extract sensitive data.

Employee experience powers the future of work

An engaged workforce boosts customer experience and revenue performance. While Forrester predicts that employee engagement won’t improve in 2018, technology leaders must stay on top of micro trends like collaboration and employee technology as well as macro issues, such as how automation is reshaping labor, as they are thrust into the forefront to help create the conditions for a positive employee experience.

Mobile evolves into the digital experience conductor

Next year is the year that mobile becomes core to the digital ecosystem. While many firms believe that they’ve checked the box on mobile, they also should note that what is changing is the next generation of consumer experiences on these devices. Smart firms will continue to invest heavily in the underlying technology: the architecture, talent, and process to deliver these experiences. Emerging tech like AR, AI and chatbots will continue to pique interest but mainstream breakthrough is still further off.

Time For “Digital First” – The Quiet Revolution Report Vol 3 Released

Digital Finance Analytics has released the latest edition of our flagship channel preferences report – “The Quiet Revolution” Volume 3, now available free on request, using the form below.

This report contains the latest results from our household surveys with a focus on their use of banking channels, preferred devices and social media trends.

Our research shows that consumers have largely migrated into the digital world and have a strong expectation that existing banking services will be delivered via mobile devices and new enhanced services will be extended to them. Even “Digital Luddites”, the least willing to migrate are nevertheless finally moving into the digital domain. Now the gap between expectation and reality is larger than ever.

Looking across the transaction life cycle, from search, apply, transact and service; universally the desire by households to engage digitally is now so compelling that banks have no choice but to respond more completely.

We also identified a number of compelling new services which consumers indicated they were expecting to see, and players need to develop plans to move into these next generation banking offerings. Many centre around bots, smart agents and “Siri-Like” capabilities.

We have developed a mud-map to illustrate the journey of investment and disinvestment in banking. The DFA Banking Innovation Life Cycle, which is informed by our research, highlights the number of current assets and functions which are in the slope of decline, and those climbing the hill of innovation.  A number of current “fixtures” in the banking landscape will decline in importance, and in relatively short order.

We are now at a critical inflection point in the development of banking as digital now takes the lead.  Players must move from omni-channel towards digital first strategies, where the deployment of existing services via mobile is just the first stage in the development of new services, designed from the customers point of view and offering real value added capabilities. These must be delivered via mobile devices, and leverage the capabilities of social media, big data and advanced analytics.

This is certainly not a cost reduction exercise, although the reduction in branch footprint, which we already see as 10% of outlets have closed in the past 2 years, does offer the opportunity to reduce the running costs of the physical infrastructure. Significant investment will need to be made in new core capabilities, as well as the reengineering of existing back-end systems and processes. At the same time banks must deal with their “stranded costs”.

The biggest challenges in this migration are cultural and managerial. But the evidence is clear that customers are already way ahead of where most banks are in Australia today. This means there is early mover advantage, for those who handle the transition swiftly. It is time to get off the fence, and on the digital transformation fast track. Now, banking has to be rebuilt from the bottom up. Digitally.

Request the report [44 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.

Note this will NOT automatically send you our research updates, for that register here. You can find details of our other research programmes here.

The first edition is still available, in which we discuss the digital branding of incumbents and challengers, using our thought experiment.

Volume 2 from 2016 is also available.

Banks Must Go Digital To Protect Margins

Looking across the world of banking, there is one striking trend according to the latest Mckinsey Global Banking Report. Profit remains elusive as margins are crushed. Return on equity is stuck in a range of 8 to 10 per cent (though we note Australian Banks’ are higher!, but are still falling). Recovery from the 2007 banking crisis has, they say, been tepid.

Underlying this is a slowing in revenue growth, currently as low as 3%, half that of the previous five years – so margins are down 35 basis points in China and 46 basis points in the USA. They suggest that in a fully disrupted world ROE could fall to around 5%, compared with around 9.3% without disruption.

They claim the biggest contribution to profitability is not geography, but a bank’s business model.

We found that “manufacturing”—the core businesses of financing and lending that pivot off the bank’s balance sheet—generated 53.0 percent of industry revenues, but only 35.0 percent of profits, with an ROE of 4.4 percent. “Distribution,” on the other hand—the origination and sales side of banking—produced 47 percent of revenues and 65 percent of profits, with an ROE of 20 percent.

Now new digital platform players are threatening customer relationships and stealing margin. But Fintechs, which were seen as an outright threat initially, are now collaborating with major players, for example Standard Chartered and GlobalTrade, Royal Bank of Scotland and Taulia, and Barclays and Wave.

“digital pioneers are bridging the value chains of various industries to create “ecosystems” that reduce customers’ costs, increase convenience, provide them with new experiences, and whet their appetites for more.”

So they argue, banks are at a cross roads. Should banks participate in this new digital ecosystem or resit it? To participate, banks will have to deploy a vast digital toolkit. This offers a path to sustainable higher ROE, perhaps. This is a substantive digital transformation, designed from customer centricity.

The point, we would add from our Quiet Revolution banking channel analysis, is that customers are already ahead of banks, demanding more and better digital services, so first in best dressed!

 

ATMs Out-evolved By Mobile Phones

There is an inevitable decline in the volume of transactions through Australian ATMs as alternative, mainly non-cash alternatives bloom.

Data from the RBA shows the volume of ATM cash withdrawal transactions has fallen by 15% over 3 years, whilst the gross value has slipped a little (and fallen in post-inflation adjusted terms). Debit card transactions are more than taking up the slack. But there is also more going on here.

We had the chance to discuss this on Perth radio and coverage in an article in the Herald-Sun.

There is a generation shift in play as digital natives continue to adopt smartphone based payment options, from Applepay, to NFC transactions in shops, or apps like paypal as well as the move to debt. Even digital migrants are using electronic mechanisms, such as smart phones,  internet banking, contactless payments and Bpay is also a popular option.

We are approaching a tipping point where the economics of ATMs will not make sense, other than at a few high traffic locations, as there a fixed costs relating to installation and maintenance (including the cash top-up) and income is linked to volumes. There was a proliferation of third party ATMs in for example retail sites in the 1990’s, but these are getting less use too. So we think the number of machines will fall.

Meantime the ubiquitous smart phone is set to become your personal finance assistant, your electronic wallet and electronic credit card. Just do not loose your phone!

As a result, traditional channels such the the branch, ATM and even plastic are all under threat. Cash will become less important in every day life, but it will remain, used perhaps by people less comfortable with the technology, or in the black economy. It would not surprise me if down the track larger bank notes started to disappear under the guise of migration to digitally based more cost-efficient payment solutions, which just happen also to be easier to track.

Meantime, the ATM just got out-evolved by the smartphone.

Revealed – The Top-Ten Digital Suburbs Across Australia

We finish our review of the top digital suburbs across Australia by revealing the top ten post codes with the highest counts of households who are digitally inclined.

10-digital-suburbsThis is an interesting list because it consists of a wide spread of household segments, locations and states. This means that counter to the initial idea of a standardised “digital first” approach, effective digital strategy needs to be tailored and targetted to each group. Segmentation is still required.

The truth is that effective digital strategy still requires intimate knoweldge of the target groups. This is something which can be done more easily via digital channels, if the strategy is built correctly. However, many players are yet to harness the potential this offers, and to appreciate the full implications for those with a strong physical geographic footprint.

Read more about “digital first” in our report – The Quiet Revolution.

The Top Digital Suburbs Around Perth

As we continue our series on Australia’s top digital suburbs, today we look at WA, and the region around Perth. The top postcode is 6210, which includes Coodanup, Dudley Park, Erskine, Falcon, Greenfields, Halls Head, Madora Bay, Mandurah, Meadow Springs, San Remo, Silver Sands, and Wannanup around 65 kms from Perth.

The location of digitally active households is becoming an increasingly important question, as mobile penetration and use climbs. It fundamentally changes the optimal marketing approach and channel strategy.

Using data from our household surveys we track the proportion of households with a preference for using digital devices – especially smartphones – for their banking interactions and other online activities. The latest data, which will flow in due course to our next edition of the Quiet Revolution – our channel analysis report – shows that there are large numbers of digitally savvy consumers and small businesses who want more digital, and less branch. They want a “mobile first” offering.

To illustrate this we map the current branch representation around Brisbane, based on the latest APRA points of Presence report.

branch-mapping-waThen we mapped the number of households by digital segments – identifying those seeking a mobile first solution – to postcodes.  There is a striking mismatch between the two.

digital-footprint-perthHere is the top 10 listing by number of digitally aligned – mobile first – households across SA. They vary by segment, age, zone and region.

digital-suburbs-waThis information is useful to anyone wishing to engage with these households because it highlights where the centre of gravity for online initiatives should be focussed. The point is that although households are in the digital world, they still have a geographic centre. Digital still has a geographic sense.

Looking at the banks, it seems that they are not heeding the geographic concentration of mobile first households, and nor are they fully comprehending the changes afoot. We think it likely there will be significant stranded costs in the branch network, and insufficient focus on “mobile first”banking offerings.

Households are leading the way.

Next time we will reveal the top ten digital suburbs across Australia.

The Top Digital Suburbs Around Adelaide

As we continue our series on Australia’s top digital suburbs, today we look at SA, and the region around Adelaide. The top postcode is 5159, which includes Aberfoyle Park, Chandlers Hill, Flagstaff Hill and Happy Valley in South Australia. The area is about 17 kms from Adelaide.

The location of digitally active households is becoming an increasingly important question, as mobile penetration and use climbs. It fundamentally changes the optimal marketing approach and channel strategy.

Using data from our household surveys we track the proportion of households with a preference for using digital devices – especially smartphones – for their banking interactions and other online activities. The latest data, which will flow in due course to our next edition of the Quiet Revolution – our channel analysis report – shows that there are large numbers of digitally savvy consumers and small businesses who want more digital, and less branch. They want a “mobile first” offering.

To illustrate this we map the current branch representation around Brisbane, based on the latest APRA points of Presence report.

branch-mapping-saThen we mapped the number of households by digital segments – identifying those seeking a mobile first solution – to postcodes.  There is a striking mismatch between the two.

digital-footprint-adelaideHere is the top 10 listing by number of digitally aligned – mobile first – households across SA. They vary by segment, age, zone and region.

digital-suburbs-adelaideThis information is useful to anyone wishing to engage with these households because it highlights where the centre of gravity for online initiatives should be focussed. The point is that although households are in the digital world, they still have a geographic centre. Digital still has a geographic sense.

Looking at the banks, it seems that they are not heeding the geographic concentration of mobile first households, and nor are they fully comprehending the changes afoot. We think it likely there will be significant stranded costs in the branch network, and insufficient focus on “mobile first”banking offerings.

Households are leading the way.

Next time we will look at the state of play in Perth and then reveal the top ten digital suburbs across Australia.