Banks struggle to make digital sustainable

Those who excel in digital could reduce their costs by up to 30%.

The exponential rise of companies like Airbnb, Spotify, Netflix, Uber, and Alibaba serves as a testament to the great potential of getting digital right, but we have yet to see a success story this great in the banking sector. Even with serious investments in digital since 2011, analysts at AT Kearney say return on equity for major retail banks have stagnated at a single-digit figure. Turning the focus on digital into commercial value seems to elude even the greatest of organisations. Banks have been struggling with the rise of fintech, ever-changing consumer demands, and tougher regulatory requirements.

“The opportunities from more than 4,500 fintech companies are reinforced by venture capital investments in financial services that have driven their growth—rising from $4.1b in 2012 to an unprecedented $27b by 2016. New technologies combined with greater adoption of smartphones, growth of banking by millennials, and lost trust in big banks in the wake of the global financial crisis have all boosted the demand for new solutions and alternative ways of banking. In addition, consumers have become less loyal, and the market has become more competitive,” says Andrew Steward, partner at AT Kearney.

Whilst competition is not a new concept for banks, KPMG analysts say the type and volume of new entrants have evolved since 2015. “The first wave of entrants included largely unknown companies offering expanded connectivity and customer insights through new technologies, data and advanced analytics. Future waves included larger, more established but non-traditional banking competitors such as PayPal, Walmart and investment banks. The landscape is further evolving to include platform providers such as Amazon, mobile payment services such as Venmo, and e-commerce companies such as Alibaba.”

Winners and losers
Stewart notes that to be truly digital, banks must see digital not simply as a tool but as a way of operating. “Banks that can embed digital into their core corporate strategies could achieve a double-digit revenue uplift, 20% to 30% cost reduction, and a double-digit ROE in mature markets.”

Meanwhile, KPMG says winners will be characterised as those with a clear strategic vision, an appetite for customer analytics and technologies, and a stomach for volatile innovation returns. “Winners will recognise and actively manage the material impact digital will have on its people and culture. Winners will embrace digital not simply as a disrupter, but as an agent for change and an opportunity to better serve their clients and segments,” say KPMG analysts.