Transcript Document

No Bank Is an Island
Felaban
Panama City, September 10, 2014
Daniel W. Latimore, CFA
Senior Vice President, Banking
© CELENT
Institutions must adjust their business models to adapt to a changed
banking ecosystem
Drastically changing
external forces…
…exacerbate ongoing pressures
and change the Ecosystem…
…necessitating changes
in the business model
New Business Model
Consumer
Pressure
on revenue
Technology
Channels
Economic
Changing
Ecosystem
Innovation
Architecture
Regulatory
Pressure
on costs
Competition
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Banks are part of a complex ecosystem that they have traditionally
tried to keep at as much of a distance as possible
Customers
Suppliers /
Vendors
Commentators
Bank
Competitors
Regulators
Counterparties
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The bank ecosystem, even among suppliers, is becoming more complicated
Vendor ecosystem used to be relatively straightforward
It is now much more complicated
Core
Core
ATM
Cloud
Security
Branch
Automation
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Analytics
Call Center
Social
Branch
Automation
ATM
Security
Mobile
Call Center
Risk
3
Consumers are changing the ways in which they interact with
banks; banks are paying more attention than ever before
• Other industries and experiences are shaping expectations
– Shopping and socializing have changed radically
– Retail-oriented technology now often outpaces what individuals experience at work –
“consumerization”
– User Experience is becoming more important, with simplicity being a core component
• Information is becoming more transparent
– Consumers find it easier to compare
– Consumers are better informed
• Switching banks has become simultaneously easier and more difficult
– Expressed intent has increased…
– …but inertia is a powerful force
• Millenials bringing new world view to financial services; banks view them with fascination and
puzzlement
Customers want what they want, how they want it, when they want it…
…and they don’t care how difficult it is for banks!
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Naïve customers ask: As a flier, I can pull up real time seat assignments on
my phone; why can’t my bank let me do cool and convenient stuff, too?
It sure would be nice to be
able to add payees from
my phone…
Source: iPhone apps for Delta and Bank of America, June 12, 2014
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Technology is advancing rapidly and is often outpacing banks’
capacity to adapt as fast as other industries
Mobile
Cloud
Security
Social
Big Data / Analytics
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Mobile banking adoption continues to outpace predictions and gain
immense traction
Current mobile evolution
Current
Developing Future
Transaction Engines
Interactive Devices
“Smart” Mobile
• Text banking
• Geolocation
• Gamification
• Check balance
• Targeted marketing
• Remote bill capture
• Pay bills
• Social media integration
• Voice recognition
• Move money
• Actionable alerts
• Various uses of camera/imaging
• Locate ATM/branch
• PFM tools
• P2P payments
• Merchant funded rewards
• Enhanced multifactor
authentication
• Mobile RDC
• Streamlined P2P
• Help content
• Digital Wallet
• NFC
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Banks require a concrete and structured social media strategy; most aren’t
there yet
Banks are starting to define social
media strategy
Financial institutions should start building
social features into online banking
• Most banks don’t know understand how they
can take advantage of social media to realize
business goals
Category
Element
Community
• Social media is about much more than building
a Facebook fan page, creating a Twitter
handle, publishing a blog, or building a private
community
• Blog
• User Community
Training
and
Education
• Interactive FAQ
(e.g. Quora)
• Video
• Demos
• E-Learning
Very High
High
• Banks need to focus on business goals and
incorporate social media into the process.
Social media activities need to be blended into
a bank’s sales, marketing, and customer
service activities
Present
priority
Moderate
Low
Future
priority
Very Low
Source: Celent
The first question to ask yourself prior to embarking on customer service related
social media activities: How long does it take your bank to answer an email?
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Banks are willing to use cloud to reduce costs; security concerns often
make bigger banks reluctant to cede control
Bank willingness to adopt cloud
• Cloud computing enables ubiquitous,
convenient, on-demand network access
to a shared pool of computing
resources that can be rapidly
provisioned and released with minimal
management effort or service provider
interaction
• Service models
– SaaS: Software as a Service
– PaaS: Platform as a Service
– IaaS: Infrastructure as a Service
• Deployment models
– Private Cloud
– Community Cloud
– Public Cloud
– Hybrid Cloud
• On/Off premise an important distinction
Source: National Institute of Standards and Technology; Celent Analysis
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Software
Platform
Infrastructure
Private
Community
Public
Hybrid
Larger Banks
Smaller Banks
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Big Data and Analytics hold great promise, but banks have some basic
work to do before taking on next-generation ambitions
• Big Data is trendy and ill-defined
– Celent defines it on three dimensions
- Volume: Large amounts of data, now in terabytes, some in petabytes, exabytes coming
- Velocity: Near real time collection and analysis of data
- Variety: Internal and external; structured and unstructured; includes social media
– 60% of firms we surveyed said that “information” holds the key to competitive advantage
– Only 24% of surveyed banks have hands-on experience with Big Data in production
– 70% of big data projects have met or exceeded business case expectations
– Deriving compelling value from Big Data requires deliberate and sustained effort
• Analytics has four main goals
– Increase customer centricity
– Improve customer engagement
– Improve marketing effectiveness
– Combat fraud
Our best advice: Pursue low-hanging fruit; Use 80/20 rule to judge success; Refine
approach over time through deliberate learning
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Security continues to be an ongoing and significant concern for banks
• Corporate Security
– Institutions continue to be bombarded by hackers intent on penetrating their defenses
– Multi-layered, multi-level approach is best practice
• Consumer Security
– The most significant barrier to increased consumer mobile adoption is security
– Banks must balance the tradeoff between security and ease-of-use (simplicity)
– Biometric startups abound, but none have yet cracked the code that has led to adoption by
major banks
Eye
Voice
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Fingerprint
(retina or blood
vessels)
Typing
behavior
QR codes
SMS
11
Economic trends have been difficult, although the federal
safety net has allowed banks to prosper, at least superficially
• Hangover from Great Recession has
depressed lending activity
Pre-tax Net Operating Income
$ Billions, US FDIC Insured Banks
190
• Persistently low interest rates have
decreased net interest income and
lowered bank top lines
• Smaller banks have suffered much
more than their larger brethren
90
40
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
• Fee income has decreased as a result
of Dodd-Frank
140
PT Op. Income Components
$ Billions
Net Interest Income
Non-Interest Income
Non Interest Expense
Provisions
500
400
300
200
100
0
-100
-200
-300
-400
-500
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Decreasing provisions have
contributed heavily to
earnings
-10
Source: FDIC; Celent Analysis
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Regulation affects investment priorities and requires an
inordinate amount of compliance effort
• Compliance activities are taking a huge portion of IT spend and management time
• A host of new regulations are in various stages of implementation, both domestically and
internationally
– Dodd-Frank
– Basel III
– FATCA
– OFAC
– FCRA
– AML
• Increased and changing capital requirements continue to change bank economics
• Too Big to Fail (TBTF) issue concerns largest institutions (SIFIs: Systematically Important
Financial Institutions)
Our best advice: Look for areas where marginal investments can turn mandatory
compliance activities into real business value
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Competition is tough; banks are being attacked from all sides
Other FS companies
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Overcapacity
Other industries
(telco, retailers)
Startups
14
Some companies use a two pronged approach to attack incumbents
Enabling other start-ups/firms and developers
1
2
Consumers and/or Merchants
Other Start-ups/Firms
Other examples:
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Uber is exploiting market inefficiencies to offer a valuable service
The payment has been reduced to a commodity
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Another two pronged approach works with incumbents to reach consumers
Enabling financial institutions
1
2
Consumers and/or Merchants
Financial Institutions
Other examples:
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The two pronged approach with a kick
Enabling consumers/merchants, other startups/firms, and financial institutions
1
2
Consumers and/or Merchants
3
Other Start-ups/Firms
Financial Institutions
Other examples:
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Technology breeds choice…
US centric view of the landscape supporting mobile commerce
Source: LUMA partners
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Square is letting customers into the formerly exclusive club of card
acceptors; other competitors are entering the fray
Square’s challenge questions to set up an account
Babysitters are now pulling
out their square dongle to
accept payment for taking
care of the kids!
How did Square know that I have an Audi?
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Square was the first to enter the
space; others, like Fiserv, are
mounting fast-follower
challenges
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Banks’s revenue sources are under immense and
continuing pressure
Quarterly Net Interest Margin (NIM)
4.90%
4.40%
3.90%
3.40%
2.90%
Assets > $10 Billion
Assets $1 Billion - $10 Billion
Assets $100 Million - $1 Billion
Assets < $100 Million
2.40%
$ Millions
Service charges on deposit accounts
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
FDIC-insured commercial banks and
savings institutions
Source: FDIC, Celent analysis
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Marginal expense improvements that might improve the
efficiency ratio by a point or two are no longer sufficient
• Tinkering at the edges won’t cut it; many banks are facing existential decisions
• Fundamental changes in major expense categories are critical
– Branch network: types and number of branches
– Core replacement
– Turning “capex into opex” / making fixed expenses variable
• Outsourcing certain functions is now up for discussion
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Many retail categories have witnessed an erosion of brick-and-mortar in
response to changing consumer demand and online growth
Locations/subscribers
40,000
7,000
35,000
6,000
30,000
US Retail banking has been an
anomaly; branch densities
have grown alongside usage
of digital channels
5,000
25,000
4,000
20,000
3,000
15,000
2,000
10,000
1,000
5,000
0
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Redbox
Netflix (Sub '000)
Blockbuster (US)
Establishments per million population
536
CAGR
486
500
Decline in video and music
has been most dramatic
-1.0%
600
-1.8%
400
270
300
200
100
349
1.6%
290
230
-3.1%
-9.5%
41 30
27 10
0
Book Stores Music Stores
Source: Celent, Branch Boom Gone Bust, May 2013
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Bank
Branches
2000
Grocery
Clothing
2010
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Banks want to increase revenue, better serve customers, and
reduce costs
• Improving sales results a
clear #1 strategic priority
overall
• Followed closely by improving
customer relationships and
service results
• Cost reduction is imperative,
but “can’t cut your way to
prosperity”
• Cost reduction grows in
importance with asset size
Q: What are your institution's top retail banking priorities?
Top retail banking priorities, weighted average
Improving sales results
3.9
Improving customer relationships and
service results
3.6
Cost reduction
2.8
Regulatory compliance
2.7
Fraud/risk mgmt.
2.1
0
1
2
Improving sales results
5
75%
59%
Cost reduction
32%
Regulatory compliance
27%
Fraud/risk management
9%
0%
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Top retail banking priorities, top priorities
Improving customer
relationships and service results
Source: Celent July 2012 Survey of 132 FIs
3
20%
40%
60%
% rating #1 or #2 priority
80%
24
The business model of abundant income from net interest and high fees,
generated as independently as possible, may never return
• The traditional retail bank business model – taking deposits, making loans, and earning fee
income – is no longer a path to prosperity
– Banks have done themselves a fundamental disservice over generations by teaching
customers that banking should be “free”
– Loans have often been made with little competition
– Much fee income has been punitive
• Banks must reconstruct their business models around three areas, recognizing that they are
part of a financial ecosystem
– Channels: How the bank serves customers
– Architecture: How the bank organizes to deliver value
– Innovation: How the bank delivers new ideas, products and services around both channels
and architecture
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The online channel was the top funding priority
But mobile has suddenly overtaken it
• Mobile is a top investment priority;
24% of banks ranked the mobile
channel #1 priority compared to just
5% in 2010
Q: Given limited resources, indicate the relative priority among
your delivery channels based on what gets funded in your
organization
• Branch is not dead, but its role is
changing; for the first time, more FIs
say online banking channel is #1 in
importance, overtaking the branch
channel’s historic spot
Branch network
• Developing an integrated omnichannel experience is the next
imperative
Delivery channel funding priority – all FIs1
Internet banking
channel
Mobile/tablet
banking channel
Call center
ATM network
1
• User interface and customer
experience are areas of focus for
certain forward-looking institutions
• All retail channels are key and FIs
must be competitive across all of
them
2
3
4
5
Ranking avg. (5 = highest priority)
June 2012
June 2010
Because mobile has been changing so fast, this
information is dated, even though it’s only a year old
Source: Celent Analysis; Celent Surveys
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ABN AMRO has seen mobile logins exceed online logins
Source: Presentation by ABN AMRO: Integrated Channel Transformation at EFMA, Brussels, May 2013
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Architectures are coming under increased scrutiny for agility,
cost and simplicity
• Core architectures may finally start seeing significant activity; the discussion has certainly
become more persistent
– Agility requirements
– Cost imperatives
– Simplicity: Increased interest in “process orchestration” technologies to change customer
experience without replacing core
• Banks increasingly willing to work within a partner ecosystem to deliver value to customers
– Increasing use of on-demand computing
– Selective outsourcing / partnerships to get more value out of existing assets
– Specific contracting arrangements to achieve specific tasks requiring specialized expertise
- Some have always been outsourced, at least partially, e.g., advertising, creative and legal
- Some have more recently been outsourced, e.g., call centers
- Some are now on the table
- Cloud
- Marketing services
- Analytics
- Innovation
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Innovation is a keen interest of a subset of bankers we speak to
Banking innovation is not a paradox
Illustrative payment innovations
Channel innovations
Ecosystem innovations
Architectural innovations
Bank A
5
Span of control
7
35
140
4
14
> 1.900
Degree of required local presence
high
Client
management
Sales
and
distribution
IT
Product
management
Support
functions
Processing & operations
low
low
• New payment products, like mobile
ticketing and mobile wallets
• New payment-enabling
technologies, like near field
communication (NFC)
• New payment platforms, like mobile
banking applications or on-line social
networking platforms, make
payments easier
• New promotion programs, like
incentives offers for customers and
sales promotion tools for merchants
Source: Oliver Wyman, Celent
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• New partnership models, like banks
and telcos to offer mobile payment
services, often to new markets
(i.e. unbanked population)
• New entrants to the market, offering
bank-like products like P2P
payments and lending, or financial
planning, like PayPal and Mint
• New product distribution models, like
Apple’s “AppStore”
Degree of centralisation
high
• New organisational and structural
designs, like shared services both
internally and externally
• New process design methodologies,
like “lean manufacturing”
• New architectural concepts, like
Payment Services Hubs
• New technological applications and
capabilities, e.g. cloud
29
Uncertainty around customer uptake is one of the key reasons why retail
banks are struggling with innovation
Other comments/findings
Why do banks reject innovative ideas?
Average score of jurors
4.0
3.8
Degree of Success: 5 = High, 1 = Low
3.6
3.5
3.1
3.0
3.0
2.5
2.5
2.0
1.5
1.0
0.5
0.0
Uncertainty, re:
Integration
customer uptake complexity/legacy
Costly upfront
development
Time to market
too slow
Compliance too
difficult
Average score of jurors
Who is best at driving innovation?
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
4.0
Degree of Success: 5 = High, 1 = Low
3.2
2.7
New
entrants
Tech
providers
Others
2.5
2.2
MasterCard/ Processors
Visa
2.1
2.0
• The inability to guarantee customer
uptake was the chief reason for
innovative ideas to be rejected by
organisations. Banks want “proven
innovation” – a contradiction in terms
– “Opportunities are often overanalysed. With many innovations
you just cannot predict how
customers will react, so you have
to make the developments and
then hope for the best; that just
isn’t how banks work”
• Third-party innovators or developers
have the greatest influence over
innovation. In-house teams are said
generally to be a ‘tick box’ for senior
management rather than bringing
true innovation
Retailers Retail Banks
Source: Payments Innovation 2011 – The Global Jury Decides, a report based on a poll of 22 payments experts representing 15 countries across 5 continents sponsored by Ixaris,
released February 2011
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Some should be building capabilities to execute a fast follower strategy:
close monitoring to identify winners and potential partners at an early stage
“The emerging ideas pipeline”
Best applicable when
Commoditize
(join utilities,
outsource)
Research and
monitor
Develop
strategic
options
Test and
learn
• Pilot selective
ideas to test for
• Engage potential
– Business model
partners
and economics
– Customer/
• Seek to influence
merchant
regulation or
• Cast a wide net, e.g. technical
adoption
standards
– Mobile payments
Acquire and make
proprietary
Partner
• Likely to become “table
stakes”
• Very expensive to develop
in-house
• Potential for IP protection
and a distinctive proposition
• Prize is worth the price
• IP protection not available,
but vendor offerings vary
in quality
• Lock up the best partner
before others can
– Social networking
– Web 2.0
All the time
When a winner is emerging
At execution readiness
Source: Oliver Wyman analysis, Celent
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Banks and their ecosystem partners must answer certain fundamental
questions in this rapidly changing environment
Banks
Differentiate the value proposition
Why do
customers use
me instead of
another bank?
What should
I partner
with others
to do?
Non-bank ecosystem participants
Partner with banks
What noncommodity
offerings can
banks provide
their customers?
What am I
uniquely – or
at least well
– positioned
to do?
Where do
banks
need
help?
I have more
expertise
What must I
do myself?
Risks of not
doing it myself
are too high
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Margins too
attractive to
give up
What are
current unmet
consumer
finance needs?
I’m
cheaper
I do it
uniquely
well
On which
dimension do I
excel when I
provide that
help?
I aggregate data
from multiple
banks
I reduce
risk
I do it more
quickly
32
Thank You
Daniel W. Latimore, CFA
Senior Vice President, Banking
[email protected]
Twitter: @danlatimore
Blog: http://bankingblog.celent.com/
Celent.com