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WHAT BANKS CAN LEARN FROM SILICON VALLEY

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Bertrand Lavayssiere, managing partner at international financial management consultancy, zeb

 

Five success factors which explain why Europe’s most digitalised banks outperform their peers

More than a decade after the global financial crash, most of Europe’s banks are profitable. It is therefore tempting to assume that the region’s banking sector has almost fully recovered from the 2007-08 meltdown, but this is to miss a crucial point. Overall, Europe’s top 50 banks earnings are insufficient to cover their cost of capital, meaning that their core banking services might lead to long-term stagnation and decline.

 

There is, however, a promising escape route from this grim fate for banks with sufficient foresight, as revealed in zeb’s latest annual European Banking Study. Digitalisation—the hottest topic across the whole industry—could be the “silver bullet” that delivers long-term profits. Research by zeb reveals that banks which are digitalisation pioneers outperform less digitalised peers across all significant banking and capital market KPIs.

 

Further analysis shows that these pioneers have absorbed the example set by Big Tech giants such as Google and Amazon and focused on five key success factors that are equally applicable to the banking industry: a consistent customer focus, a simple, flexible product portfolio, an innovation-led operating model, an expandable infrastructure and omnipresence in their customers’ daily lives.

 

Bertrand Lavayssiere

Look at the earnings profile of many European banks and one can see immediately why it is no longer an option to rely on traditional, pre-digital solutions to restore long-term profitability. Based on data compiled by zeb, average post-tax return on equity (RoE) among Europe’s top 50 banks reached 7.2% in 2018, 0.6 percentage points higher than in 2017. On paper, the region’s leading banks look like they are moving closer to delivering the returns expected by investors, with a current cost of equity of around 8.0%. However, appearances are deceptive.

 

When we drilled deeper into these numbers, we found that the incremental increase in the top 50’s RoE over the last five years was solely due to non-operational factors: principally, reduced loan loss provisions, lower litigation costs and lower taxes. In stark terms, Europe’s largest banks are making less money from their core banking services than five years ago.

 

How, then, can Europe’s leading banks boost their earnings in a stagnant market with a host of new competitors, from digital start-ups and personal finance portals to online brokerages? In this difficult market, we believe banks have four strategic options. They can consolidate and gain economies of scale through M&A; specialise by focusing on certain products, customers and sales channels; break up the value chain by outsourcing and concentrating on core banking products and services; or go “beyond banking” by building or joining ecosystems. For all four options, digitalisation is the key enabler.

 

The next question is how far Europe’s top 50 banks have pursued digitalisation and it is not easy to answer this in the absence of external benchmarks. In our study, we measured the degree of digitalisation across all banks using a proprietary zeb algorithm which determined how often these financial institutions referred to digitalisation in their annual reports, not an exact measure but something which revealed very stark results. This enabled us to cluster banks into three groups: 13 digitalisation “pioneers”, which emphasised digitalisation very early and continue to stress it strongly; 14 digitalisation “challengers”, which took longer to start communicating on the subject and still do not emphasise it greatly; and lastly, 23 banks that we classified as digitalisation “followers”. Of course, the bias is the potential discrepancy between the intensity of the communication and the reality on the ground.

 

Meanwhile, the difference between the performances of these three groups in recent years is striking. On average, digitalisation pioneers outperformed challengers and followers according to every significant banking KPI: for example, pioneers registered an average post-tax RoE of 8.7% between 2013 and 2018, compared with 6.0% for challengers and just 2.1% for followers. In the same period, pioneers increased their average operating profit by 5.1%, while the average returns of challengers and followers shrank by 10.1% and 9.6 % respectively. Digital pioneers were also clearly ahead of the other two groups when comparing efficiency ratios and especially the cost-income ratio. Given this performance gap, it is hardly surprising that digital pioneers generally performed better on capital markets than challengers and followers. Indeed, pioneers were the only group that achieved a price-to-book ratio of more than 1.0x (while BigTechs are largely above 10).

 

It is not enough, however, for banks simply to entrench digitalisation across all operations for profits to follow. Digitalisation will only work for banks which understand its implications for their businesses. In this regard, there is no better role model for Europe’s profit-starved banks than US technology giants like Google, Amazon and Apple, the original digitalisation pioneers. To complete our study, we looked in depth at these tech giants’ business models and identified the five key success factors, based on digitalisation, which banks need to adopt.

 

Arguably the most important lesson for banks to learn from the tech giants is that digitalisation is not an end in itself. A banking app on a smart phone is not automatically a profit generator any more than the latest back office banking software. Instead, banks need to see digitalisation as a means to achieving sharper, value-adding customer focus and engagement, combined with efficient, scalable delivery of offerings.

 

Our research indicates that even Europe’s digitalisation pioneer banks have yet to absorb this lesson fully. For instance, pioneers have to become faster and more dynamic in expanding their offering and in using customer data to tailor products and services to individual needs, without increased complexity. Meanwhile, followers and challengers are in a catch-up race where they must still address such basic issues as developing authentically customer-centric businesses and automating back office systems.

 

The hopeful conclusion from our study therefore comes with a cautionary note. Digitalisation can indeed be the “silver bullet” that enables Europe’s banks to return to stable profits. As with any bullet, though, one must aim accurately and pull the trigger at the right time, because banks need to apply digitalisation in line with their own digital maturity. Above all, they must make sure not to mistake the means for the end.

 

 

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Banking

WHY THE TIME IS NOW TO BANK BEYOND BORDERS

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by Lili Metodieva, MD of Monneo

 

As our world becomes more interconnected, so too does the need for banking systems to follow suit. In the past, businesses and individuals were often restricted to banking in a single country, but the rise of borderless banking is enabling both to benefit from greater financial freedoms. In this article, we will examine why this trend is so important and explain how Fintech companies are helping to make it possible.

 

What is borderless banking?

Simply put, borderless banking refers to any bank account, which allows users to spend, send and receive money across different countries and currencies, without incurring heavy fees. The concept has become increasingly popular in recent years, with more people now working in cross-border job roles and with many businesses requiring capital in a different currency than that of their country of origin.

For customers, borderless banking is making cross-border financial transactions more efficient and cost-effective. Through its rise, businesses and individuals can gain easier access to international streams of capital, which is crucial in this current moment of economic uncertainty. In fact, 74% of companies say cross-border payments have helped their business to survive [1].

 

Where do IBANs come in?

International Banking Account Numbers (IBAN) play a crucial role in facilitating borderless banking. The globally recognised system enables cross-border transactions to happen safely, by providing each international bank account with its own unique 36-digit alphanumerical code. On account of this code, financial institutions can quickly identify where funds are coming from, as well as where they’re going to.

More recently, providers such as us have been able to deliver Virtual IBANs (vIBAN). Working alongside a network of well-established European and International banks, we’re able to offer businesses a single platform interface that consolidates the management of all IBAN accounts. In turn, our multi-currency service makes conducting global financial transactions incredibly straightforward.

 

How has Brexit affected borderless banking?

The COVID-19 pandemic has accelerated the growth of borderless banking and services related to it, but other developments, such as Brexit are beginning to stand in its way. Most notably, the drawn-out withdrawal process has seeded a growing reluctance amongst risk averse, larger organisations to settle transactions using UK bank accounts or IBANs, due to unfounded concerns around regulatory complexity.

Despite leaving the EU, the UK remains a member of the Single Euro Payments Area (SEPA), so it’s unclear why these concerns around British IBAN accounts exist. Regardless, this unfortunate development must be addressed quickly as it has the potential to adversely affect the livelihood of businesses and individuals at a time of critical need.

 

What does the future hold for borderless banking?

There’s clear demand for borderless banking and borderless payments, but the discrimination of certain IBAN accounts represents a major obstacle, which could stand in the way of their widescale adoption. Moving forward, there needs to be a push towards borderless IBANs, which will make international financial transactions more reliable. At the end of the day, this is what IBANs were originally created for, so it’s important the current problems are rectified quickly.

To ensure this can happen, the industry needs protection and clarity from regulators. Likewise, it’s now time for membership organisations to stand up on behalf of the sector and lobby for the financial inclusion of businesses.

If the confusion regarding UK IBAN accounts can be sorted in a timely manner, businesses across the nation, as well as those further afield can look forward to a future of more streamlined and effective financial services. With this support, the diverse sector can deliver further access to innovative financial services and products, which improve outcomes for businesses and consumers alike.

As a sector, Fintech has the potential to provide vital assistance to the wider economy, particularly in an era of increased cross-border business. At Monneo, we’re committed to being part of that change and as a part of organisations like ‘Accept my IBAN’, are working towards reporting and ending IBAN discrimination.

[1] – https://www.mastercard.com/news/research-reports/2021/borderless-payments-report/

 

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Banking

IT’S TIME FOR BANKS TO SIT THEIR CUSTOMERS DOWN AND TALK OPEN BANKING

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Eugene Danilkis, CEO at Mambu

 

We are living in an experience economy, and banking is no different. Customers need innovative payment and finance management solutions. New entrants are edging into the landscape and challenging existing players. This should mean users have a better view of their finances and the tools they need to manage their money – but banks are failing to deliver.

Personal finances are a complex beast, emotional pulls are strong, and the worry of financial security is always on the mind. It’s the job of banks to be the shoulders customers can lean on and trust.

Open banking was supposed to take this to the next level, enabling banks to deliver personalised products and services based on improved data sharing and customer insights. But three years on, adoption remains sluggish. So, why is open banking failing to live up to its promise?

 

A missed opportunity

Open banking was introduced to the UK in 2018, but consumers are still mired in confusion as to what it means and how it helps them. According to Mambu’s global open banking survey, 61% of consumers say they’ve never used open banking, despite more than 8 in 10 using one or more mobile banking apps.

Eugene Danilkis

This is a problem for banks and consumers alike. Lack of understanding around the technology is hindering its adoption, despite this being in the best interests of both. By enabling the secure sharing of financial information, open banking creates an improved customer experience. Not only does this minimise friction and make online payments faster and easier, but allows for personalised services and greater automation, enabling customers to take advantage of tools like budgeting apps.

For banks, open banking is an opportunity to build innovative new products that will improve the customer journey, helping them retain accounts and acquire new ones. By collaborating with third parties, banks can hyper-target customers and build services that address specific user needs, increasing customer satisfaction and in turn brand loyalty.

It’s true there’s been a recent spike in open banking users. According to Juniper Research global, open banking users rose from 18 million in 2018 to 40 million in 2021. But this can be traced to the necessities of a pandemic rather than any sudden clarity in communications.

 

Putting customers at the heart of communication

Mambu’s research shows more than half of consumers (52%) have never heard of open banking. COVID-19 may have increased the uptake of the technology, but it hasn’t increased understanding among users.

So, what can banks do to encourage consumers to embrace open banking? Fundamentally, they must better educate their customers in terms they understand. This means talking to them like human beings, using clear and transparent language to simply explain the personal benefits open banking brings and why it’s really just smart banking.

The understanding gap between technology and terminology shows that consumer demand is there, but better communication is needed. Making sure consumers truly understand the tools they’re using, the control they now have over their finances and how open banking improves the customer experience is vital to dispersing the current fog of confusion. It’s the benefits of this technology that banks need to hone in on: customers ultimately care about what open banking can do for them and how it’s going to make their lives easier.

Centering the customer and their needs in this way will allow banks to fully realise open banking’s potential. The technology has already given them the opportunity to develop valuable services for customers that help build brand loyalty. But the industry has failed to put the customer at the heart of their communications and processes, and show them how much better banking can be.

 

Building trust

Key to reversing this trend is addressing consumer concerns around data privacy and financial safety. Yes, banks need to prioritise simplicity and clarity in messaging, but this isn’t an excuse to shy away from important conversations. Just because there’s an understanding gap around open banking doesn’t mean consumers aren’t switched on about tech and financial issues.

Mambu’s survey found nearly three in five customers have concerns about privacy and security in relation to open banking. So, it’s vital that banks provide reassurance and relevant information about data sharing from the outset if they’re to assuage these fears.

The industry can also encourage greater adoption by developing and improving open banking interfaces. Banks are the gatekeepers to how easily end-users can authorise certain actions, manage third-party access and navigate different open banking functions. If the interface is user-friendly, customers will have a better experience of the technology and be more likely to use and recommend these services.

 

Time to get talking

Customer communication is holding the industry back.. The ability of open banking to transform financial services is a concept that industry players are well-versed in. But the feeling isn’t mutual for customers.

Banks are failing to capitalise on the open banking opportunity by engaging with new and existing customers about what the technology can do for them. Debunking  common myths can open the door to increased growth and trust for banks, as they seek to open up new revenue streams post pandemic..

Make no mistake, open banking isn’t going away. But customers will if banks don’t get talking.

 

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