World banks play digital catch-up

A joint study on global banking trends by the consultancies Capgemini and Efma found financial institutions are adopting digital technologies to attract, retain and upsell bank customers. The World Banking Report, published in April 2016, is based on surveys of 16,000 customers in 32 countries.

Nearly two-thirds of the world's consumers are using fintech solutions in lieu of banks, posing the threat of bank disintermediation and making it imperative for banks to communicate with customers in mobile and online channels, the report stated.

"Consumers have become accustomed to using mobile technology to transfer funds in and out of their accounts," said Michael Leyva, Vice President, Global Banking Practice at Capgemini. "They'd still be able to do these things without digital; what's more interesting are just-in-time value-added offers, such as triple points or short-term loans based on segmented, collected data."

Leyva has seen banks try to reinvent themselves to compete in multiple channels and expects increasing collaboration among banks and fintech firms to enhance product offerings, particularly those related to peer-to-peer lending, fraud protection and digital currency solutions. "Banks are buying pieces of fintech to create unique product sets," he sid. "But I think the word 'fintech,' like other buzzwords before it, has been overused and may soon be obsolete. When was the last time you heard anyone say 'object oriented'?

Collaborate, incubate, acquire

The report cited three approaches to digitizing banking services: collaborating with fintech firms, creating homegrown systems through innovation labs, and acquiring fintech firms. These strategies can help banks reduce the risk of being marginalized in the increasingly mobile, digital world, report authors stated. The authors noted the following findings support such methods:

• Partnership: 65.3 percent of banking executives surveyed view fintech firms as partners. The most popular partnership models are collaboration (45.5 percent) and investment (43.6 percent). "Fintech firms excel in their ability to move quickly, innovate, and exploit new technology, while the banks have capital, deep customer bases and expertise in dealing with regulators," the authors wrote.

• Homegrown digital systems: Transforming legacy systems will enable banks to leverage digital assets while maintaining a 360-degree view of their customers by facilitating both financial and nonfinancial transactions. Barclays Bank in the United Kingdom and Wells Fargo & Co. in the United States are testing ideas in innovation labs designed to improve customer relationships.

• Acquisition: Banks are also acquiring technology firms. One notable example is the U.S. unit of Spain's Banco Bilbao Vizcaya Argentina S.A., which acquired online banking startup Simple in 2014. The acquisition has helped Simple double its customer base at a rate of 10 percent per month. Leyva expects these acquisitions to continue, due to high volume banks' need for super fast database technologies.

Step-wise approach to innovation

Transforming a closed legacy infrastructure into an open digital banking ecosystem will require patience, perseverance and a measured approach, the report stated. "[Banks] will first have to identify their focus areas," the authors wrote. "The next step would involve making strategic decisions around planning and execution." These recommended approaches would help banks collaborate with fintech firms to create an open application programming interface (API) system designed to leverage new technologies, products and services.

An infographic in the report highlights the phased road map from static banking infrastructures to open source, collaborative marketplaces:

• Identify: The first step for banks is identifying core areas in need of transformation, where added capabilities can make them more competitive and sustainable.

• Strategize: Once the areas requiring improvement are identified, banks will need to decide on how to add capabilities. They can build, buy, collaborate or make strategic investments to achieve these goals.

• Collaborate: Banks can collaborate with fintech firms in a number of ways, including creating APIs to foster collaboration and innovation and using technologies to create new products and services.

• Transform: When banks transform their legacy systems, they will be able to participate in the global digital banking ecosystem and gain additional competitive advantages. They will become more agile by improving time to market from concept to implementation. They can adopt service-oriented architecture to open their systems through APIs. They can remove data duplication by enabling real-time analytics.

A long way to profitable

Like many fintech firms before them, banks may face a steep uphill climb toward more profitable customer relationships. The report provides numerous snapshots of leading banks around the world, contrasting consumer adoption by region and age group, and identifying Gen Y consumers as largely indifferent to bank efforts to drive digital engagement.

"Rising levels of trust in fintech firms may threaten what bank executives see as their greatest strength," the authors wrote. "Nearly three-quarters (70.3 percent) view customer trust as the most potent advantage banks have over fintech firms, followed by established customer relationships (65.3 percent) and robust risk management (65.3 percent)."

Positive consumer experiences may improve customer retention and referrals, but the report found only marginal improvements in profitability, concluding, "Despite the overall rise in CEI [customer experience improvement], profitable customer behavior improved only marginally, and was especially low in terms of additional purchases, pointing to the need for banks to continue to improve the customer experience, especially through more innovative product development."

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