Digital Channels – Page 2 – Digital Finance Analytics (DFA) Blog

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.

This 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.

Then 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.

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

This 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.

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

Then 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.

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

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.

Top Digital Suburbs In Brisbane Region

We continue our series looking at Australia’s top digital suburbs by looking at households in QLD. The top postcode is 4670, in the Bundaberg region about 297 kms from Brisbane. In fact across the state, there are a number of regional hot spots where digital usage is very high.

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

Then 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.

Here is the top 10 listing by number of digitally aligned – mobile first – households across QLD. They vary by segment, age, zone and region.

Households are leading the way.

Next time we will look at the state of play in Adelaide and subsequently explore developments in other regions, before revealing the top ten digital suburbs across Australia.

The Top Digital Suburbs In Melbourne

We continue our series on where most digitally active households reside. Today we look in the Melbourne district. The largest number of digitally active households reside in the post code of 3977 which includes Botanic Ridge, Cannons Creek, Cranbourne, Cranbourne East, Cranbourne North, Cranbourne South, Cranbourne West, Devon Meadows, Devon Meadows, Five Ways, Junction Village, Junction Village, Sandhurst and Skye.

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

Then 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.

Here is the top 10 listing by number of digitally aligned – mobile first – households in VIC. They vary by segment, age, zone and region.

Households are leading the way.

Next time we will look at the state of play in Brisbane and subsequently explore developments in other regions, before revealing the top ten digital suburbs across Australia.

The Top Digital Suburbs In The Sydney Region

Where do most digitally active households reside? This is becoming an increasingly important question, as mobile penetration and use climbs. It fundamentally changes the optimal marketing approach and channel strategy.

To illustrate this we have mapped the number of households by digital segments – identifying those seeking a mobile first solution – to postcodes. Then we also map the current branch representation, based on the latest APRA points of Presence report. There is a striking mismatch between the two.

Lets take the Sydney area as an example. Below is the branch representation, with the largest number of branches in the Sydney CBD, and a smattering across the region.

Now looking at the representation of mobile first households, we see a very large number in Sydney CBD, as well as hot spots across the Sydney basin.

Here is the top 10 listing by number of digitally aligned – mobile first – households in NSW. They vary by segment, age, zone and region.

Households are leading the way.

Next time we will look at the state of play in Brisbane and subsequently explore developments in other regions, before revealing the top ten digital suburbs in Australia.

Will The Banking Revolution Will Kill Off Credit Cards and Internet Banking?

In the first episode of a three-part series on the future of fintech, Baker & McKenzie explores the vast number of fintech ventures that are innovating at a fast pace, often unencumbered by stringent banking regulations.

Appearing in Episode 1 of Baker & McKenzie’s The future of fintech video series, Rubik chief executive Iain Dunstan said that 60 cents in every dollar is now transacted on a phone or tablet.

“It wasn’t that long ago that phone banking was new. And that died when internet banking came along,” Mr Dunstan said.

Smartphones are likely to have the same effect on internet banking, he said – because that is the way that Generations X and Y want to transact, he said.

“Internet banking now is generally only done between 7pm and 10pm at night. Hardly at all during the day,” Mr Dunstan said.

Just as cheques have disappeared, so too will credit cards – and their demise will be much faster, he predicted.

Baker & McKenzie partner Astrid Raetze said many of the smaller fintech players will get “knocked out” over the next five years, leaving only the companies that provide a quality mobile customer experience.

“The ones who are going to be successful are going to be the ones who are marrying the perfect customer-tailored online experience with the excellent technology that achieves the customer’s purpose,” Ms Raetze said.

“It wouldn’t surprise me if in five years’ time you don’t have a wallet at all and instead everything’s on your mobile phone,” she said.

In the future, the big players in the fintech space could well be some of the major technology companies, said Ms Raetze.

“There are a lot of players who are afraid that if the technology companies get serious in this space, lots of customers are going to move to them because they already trust their relationship with Apple, with Amazon – it’s a good experience that they keep coming back for,” she said.

From FintechBusiness.

The Sacrosanct Branch?

Digital Finance Analytics is working on the next edition of our household channel survey analysis. The 2013 edition of “The Quiet Revolution”is still available meantime.

However, latest results from our surveys indicate that ever more households want to bank digitally. So, given the compelling data from our surveys, what has happened to the number of branches in Australia in recent years? As branches are expensive, have outlets been closed in response to the digital migration?

Analysis from the APRA Point of Presence databases shows that the total number of branch outlets has grown slightly between 2013 and 2015. There were 5,478 outlets in 2013, 5,496 in 2014 and 5,480 in 2015. Overall almost no change.

Analysis of the count of branches by selected banks, which includes agency outlets, shows that most have reduced their footprints slightly, other than Bendigo/Adelaide Bank, who grew their footprint by 5.6% in 204-15.

On the other hand, Bank of Queensland has reduced the number of franchise branches and recorded a drop of 8.1% in 2014-15.

We conclude that so far banks are not responding to the digital revolution by closing branches, although some have reconfigured existing ones into smaller and more efficient units.

We segment households into three groups. Digital Luddites are the last bastions of traditional banking and centre on branch and ATM access, value face to face conversations, and the bank brand. They are migrating from PC’s to smart devices to access online bank services (if they use them).

In contrast, Digital Natives expect 24×7 access, mobile banking, near-field payments and online applications. They expect their bank to be in the social media environment, and would value video-conferencing with the bank advisor. Branch access, bank brand and face to face conversations are not important to this group.

Digital migrants are somewhere in between, however, more are demanding more from online services.

We think that existing players need to be thinking about how they will deploy appropriate services through digital channels, as their customers are rapidly migrating there.

We see this migration to digital is more advanced among higher income households. So players which are slow to catch the wave will be left with potentially less valuable customers longer term.

Here is a glimpse of our latest profitability index which shows how much less valuable Digital Luddites are compared with digitally aligned households. There is a real risk of stranded costs in the branch network.

Players need to adapt more quickly to the digital world. We are past an omni-channel (let them choose a channel) strategy. Digital migration needs to become central strategy because the winners will be those with the technical capability, customer sense and flexibility to reinvent banking in the digital age.

The bank branch has limited life expectancy. Banks should be planning accordingly.