In Tech We Trust: A Report From The Economist Intelligence Unit
In Tech We Trust: A Report From The Economist Intelligence Unit
In Tech We Trust: A Report From The Economist Intelligence Unit
In tech we trust
Sponsored by
RETAIL BANKING
IN TECH WE TRUST
CONTENTS
2 EXECUTIVE SUMMARY 12 SECTION TWO – TIMES,
ALREADY CHANGING
4 ABOUT THIS REPORT
18 SECTION THREE – ADAPT OR
6 INTRODUCTION: NOW IT GETS DIE
SERIOUS
24 CONCLUSION: IN BANKS WE
7 SECTION ONE – THE FUTURE IS TRUST
HERE
EXECUTIVE SUMMARY
The digital revolution has moved from existential threat to potential survival strategy for the world’s retail banks.
For the first time in three years, the post-crisis regulatory squeeze no longer tops our retail banking trends. Banks may not like
the renewed regulatory focus on know-your-client and suitability, but they now have a more pressing draw on their resources:
financial technology (fintech).
The Economist Intelligence Unit’s previous reports reflected a somewhat defensive attitude from incumbents about the rise
of non-financial sector competitors. Times change quickly, however, and banks are risking their own existence if they choose
to ignore the rise of smartphones and the proliferation of real-time, low-cost competitors.
The scale of disruption is unprecedented, across every market, every distribution channel and every single product line.
Fintech poses a potentially fatal risk and will be a severe test of banks’ IT systems and their ability to respond to rapid changes
in customer expectations, short product development times and growing cyber risks.
Discussions now centre on just how quickly and how far transactional banking will be unbundled and margins slashed.
Strategically, banks have a number of potential responses; the correct path is not yet clear-cut.
Some banks are building their own technological solutions, where resources allow. Others are buying the fintech upstarts
outright, a quicker but increasingly expensive option to molly-coddling fintech hubs.
Partnering or opening up bank platforms to give third parties access to customers are two other strategies that are gaining
ground. A European regulatory push would allow retailers and aggregators unhindered access to account information for
client-approved payments and data-mining.
The question is who will survive the disruption. Trust and customer experience are at the heart of the battle; banks have the
upper hand on the former, not on the latter.
Even if access to information is eased, tougher data protection and liability rules may delay the death of the banking
laggards; customer apathy may buttress their market share for a few more years. Regulators will also have to stay ahead of
the game, and will have to ensure that cyber crime does not become the next big global crisis.
In the meantime, why not let the fintechs burn cash experimenting with what works? In order for that strategy to work,
bankers must ensure that they have the resources and architecture to embrace emerging channels, products and services
quickly. Failure to do so will leave them as mere “dumb pipes”, providing the infrastructure for others, with few touchpoints to
drive growth and higher-margin cross-selling.
To gauge the pace and extent of this revolution, The Economist Intelligence Unit surveyed 203 senior retail banking executives
around the world about customer expectation, regulatory and technological developments. The key findings are as follows.
l The banking world of the future. By 2020 bankers expect the banking environment to be shaped strongly by technology
and non-traditional competitors. They believe that retail peer-to-peer (P2P) lending will be available via banking platforms
(65%); retail banking will be fully automated (64%); and more money will flow via fintech firms than traditional retail banks
(57%).
l Profits face multiple attacks. Business models must adapt to survive. Individually, the “scare scores” attached to changing
customer behaviour (22%), new entrants (26%) and new technology (24%) are significantly lower than in previous years;
collectively, however, they still represent a significant threat.
l A multi-headed monster. That competitive threat will come from many quarters. Apple Pay and its ilk (20%) and other
non-financials (20%) may yet emerge to really upset the traditional banking sector. As keen as regulators are to encourage
competition, new banks are seen as less of a threat (16%). Robo-advisers could lure away more profitable wealthy (and the
not-so-wealthy) clients (17%), and P2P lenders attract dissatisfied borrowers and savers (21%).
l Regulators still watching. The too-big-to-fail rules are almost complete, but there is still plenty to keep compliance
departments busy. Regulators now have time to cast an eye over consumer protection issues, with product design and
transparency (24%) and fines and recompense orders (19%) still in play.
l Banks are adapting. Bankers see three main areas that they must change in order to survive: adapting the role of the
branch network (36%); getting the right talent (35%); and modernising their technology (31%). Banks still have the relationships
and the data, but can they maintain and build on that advantage?
Respondents were drawn from across the world, with 61 from Asia Pacific, 62 from Europe, 60 from North America and 20
from the rest of the world. Over one-half (135) of the respondents work for banks with assets of less than US$50bn. Some 44
have assets of US$250bn or more. The split between C-suite (101 respondents) and executives and managers (102) reflects a
balance between strategic and implementation concerns.
In addition, in-depth interviews were conducted with 33 senior executives from banks of all sizes, start-ups, venture capitalists
and mutual fund managers. Our thanks are due to the following for their time and insight (listed alphabetically).
Chad Ballard, director of mobility and new digital business technologies, BBVA Compass
Neil Hiltz, head of financial services for global vertical strategy, Facebook
Neira Jones, adviser and ambassador, Emerging Payments Association, and non-executive director, Cognosec
Severin Mayer-Heinisch, deputy head, business management & development, Raiffeissen Bank International
Pralay Mondal, senior group president for retail and business banking, YES BANK
Simon Pickering, Head of retail financial services, Department of Economic Development, Isle of Man
Peter Schlebusch, head of personal and business banking, Standard Bank Group
Ashok Vaswani, chief executive, Barclays Personal and Corporate Banking, Barclays
The report was written by Paul Burgin and edited by Monica Woodley of The Economist Intelligence Unit.
At the front-end, customers want quick, cheap, simple access to banking by any means they choose. But the smartphone
cannot do it all; banks must be multi-channel. Branch, call centre, remote video, phone, PC and automated teller machine
(ATM) must function as one. Right now, they often operate in separate silos.
Digitisation could be a godsend, lowering costs and upping functionality for bank and customer. However, it is also the
biggest threat; new transaction services may have already fatally wounded existing national and international payment
architectures. Blockchain distributed ledger networks (as opposed to pseudo-currency bitcoin) could be what finally kills them
off.
“Paytech” is where the big money is being invested. Card, contactless and e-wallet payments have largely rendered cash
obsolete in Denmark and Norway. With cash declining, in-branch human interface is rarer with every passing day.
High-margin lines are also being squeezed. Robo-advice is front-page news, with cheap, functional, index-tracking model
portfolios and fancy rebalancing tools. Hefty bank adviser and wealth unit fees will not last as consumers come to realise that
they are paying a lot for fund managers who largely fail to deliver.
If there is a bright side for banks, it could be that P2P lenders and robo-advisers may struggle to establish harmonised global
franchises. Their business models are easily copied; local credit, tax and advice law is harder to assimilate. Both markets may
remain fragmented.
“Regtech” is the next battleground. Overseeing this wave of new technology is fast replacing post-crisis measures on the
regulatory to-do list. Cyber security is a genuine threat to the trust that billions of customers place in their banks, apps and
e-wallets. Whatever their faults, banks do take compliance and security seriously; fintechs typically focus more on customer
experience. If the traditional players can maintain their hold on keeping their customers’ money safe, system integrity may
also be the key to securing the future role of the traditional bank.
Chart 1
Do you agree/disagree with the following statements?
(% respondents)
49% 64%
19% 32% 15% 21%
The traditional transaction/branch-based Retail banking will be
banking model will be dead fully automated
Modern banking has not changed much since the moneylenders of Renaissance Italy
employed a trust-based system to move money from one merchant to another for a
hefty fee. That transaction model is the basis for relationship banking, the high-profit lines
on which bankers rely.
Denmark’s Jyske Bank will have no teller desks by the end of this year. Branch numbers
have fallen to 97; they may dip further. The challenge is how the bank stays close and
relevant to customers who no longer visit branches regularly, says Jyske’s network head,
Ivan Stendal Hansen.
“With self-servicing, the number of branches will continue to reduce. However, financial
advisers still need to be in the local environment for bigger financial decisions,” he says.
Mobile banking can even counter declining footfall. At Bank of America, clients are now
scheduling as many as 18,000 adviser appointments per week via a phone app.
While Asia, Africa and Latin America remain more cash dependent than Europe and
the US, the demise of cash may be speedier than in developed markets. Some 62% of
Asia Pacific respondents say that cash will represent fewer than 5% of transactions by
2020.
Early movers can benefit from the transition to mobile payments. Danske Bank launched
MobilePay in 2013, and the service is now used by 2.7m Danes; they transferred just
shy of Dkr22bn (US3.3bn) last year. Two-thirds of them are not Danske clients, but they
represent a great source of insight into consumer expectations and may be receptive
to other products and services.
Even ATM providers need to rethink their game. Next-generation machines will have
no screen and no PIN access as routine transactions like reporting lost cards will be
initiated from your mobile phone. Opening up accounts and other functionality will see
manufacturers move into bespoke bank back-end software provision, predicts Raja
Bose of machine manufacturer, Diebold.
Many bank customers have never written a cheque, and. even credit cards are at risk
of becoming obsolete, thinks Ms Moore of Bank of America. Near Field Communication
(NFC) payments in shops and one-click app payments to friends and family will all be
completed on a mobile phone.
But if the banks are not even handling the digital payments (and upselling to customers),
then who will be? Fintech has stepped into the breach, on the premise that cheap, fast
and convenient will supplant the human touch.
Banks struggle to match the efficiency of their challengers, hampered by their own
internal structures, where customer services, account management, foreign exchange
Chart 3
Do you agree/disagree with the following statements?
(% respondents)
57% 52%
18% 25% 25% 24%
More payments will flow via fintech firms than Customers will be willing to forgo human
through traditional bank networks contact if services are cheap or free
trading and reconciliation operate as individual fiefdoms, each with its own costly IT
system. The World Bank says that bank fees for account-to-account remittances are
more than 10%; online products cost less than 6%.
Yet fintechs, merchants and individual users cannot avoid banks altogether; cash
has to enter and exit the fintech
Chart 4 ecosystem somehow. Deposit-taking
institutions still have an important role.
Do you agree/disagree with the
As Currency Cloud’s Michael Laven
following statement?
(% respondents) points out: “The actual currency
Agree No opinion Disagree translation and putting money into
bank accounts still has to be done by
the banks.”
“At the end of the day, we are a data analytics business with ten years of through-the-
cycle data. Banks cannot match our analytics,” says Andrews.
“You squeeze fraud in one place, it pops up in another. Cyber-security and fraud
prevention are joined at the hip,” she says.
Banks are already raising the alarm about fintech security weaknesses. After being
criticised over their surly response to the launch of Apple Pay, Australian bankers have
countered that it and other mobile wallets are not subject to the same prudential
regulation and supervision of their privacy compliance.
Bank directors in the UK could even face imprisonment under the Bank of England’s new
Senior Managers’ Regime if security breaches were to lead to a bank’s failure on their
watch. They will not want to do prison time on behalf of lax customers, retailers and app
suppliers.
Moreover, customers may be unwilling to ditch their banks entirely. Deposit guarantee
schemes make savings 100% safe, even if a bank collapses, and balances may be
better off in a bank, not stored somewhere in “the cloud”.
Chart 6
Which trends will have the biggest impact on retail banks in your country
in the years to 2020?
(% respondents)
31% 30%
29%
27% 26% 27%
22% 21% 20% 20%
16% 15%
In saturated European and North American markets, the focus is on newcomers wanting
a slice of an already large and profitable pie. As Maximilian Tayenthal of the Berlin-
based pan-European online bank Number26 points out: “If you had just 1% of the
German market, you would already have quite a valuable company.”
The Asian picture is different, possibly because the penetration rates for traditional
banking can be low in certain parts of the region. Rapid economic growth and
urbanisation are a chance to pull people into the system and to grow the whole
banking sector.
Players in less mature markets may have already stumbled on the strategic solution for
other banks: cooperation.
In India, YES BANK operates a dual implementation strategy. In urban and metropolitan
areas, the bank is full-service and multi-channel. Customers want everything
everywhere, closely monitored by a relationship manager who can anticipate their
every need.
“You cannot be a one- or two-product niche player,” says Pralay Mondal, senior group
president for retail and business banking at YES BANK.
But for rural customers it is entirely different, he adds. Banks do not have the physical
infrastructure or expertise to reach the country’s unbanked. So they provide the
backbone correspondent banking facilities to Mobile Network Operator (MNO)
transfer services, often through SIM card stickers, to add functionality for those without
smartphones, or to local co-operatives and micro-finance lenders.
South Africa’s Standard Bank Group, the country’s biggest, works with M-Pesa to convert
mobile credits into cash machine withdrawals. Partnering with Shoprite, Africa’s largest
retailer, has lowered the cost of cross-border remittances.
“We do not have to invent everything ourselves, we are very open-minded about
working with others,” says Peter Schlebush, the bank’s head of personal and business
banking.
In Central Africa, EcoBank is also keen on co-operation with multiple partners. MPesa
aside, MNO market shares are more fragmented in other markets, and inter-operability
is weak. EcoBank has links to other banks, such as Nedbank in South Africa, in order to
extend its footprint across the continent.
Chart 7
Which non-traditional entrant to the retail banking industry will be your
company’s biggest competition in the years to 2020?
(% respondents)
Payment players
(ie, PayPal/Alipay/Apple Pay) 20%
Robo-advisers/automated
17%
wealth management services
New banks (traditional, branch,
online, telephone etc.) 16%
While the US has been quick to close down its smallest, shakiest lenders, other global
regulators want to break the stranglehold that bigger banks have on retail business.
Client distrust also makes customers more receptive to new players and ideas,
particularly as fintech has a distinct time-to-market advantage over incumbents.
However, consumers should not expect a slew of new banking names on the high
street. The reason is simple: becoming and being a bank is a complex, capital-intensive,
regulatory minefield. Competition will come from non-financial services firms, payment
players and P2P lenders, suggesting a “pic’n’mix” for customers rather than lots of new
one-stop shops. Indeed, even many “challenger” banks are opting for lighter regulatory
options, suggesting that they do not want to be full-licence either.
Chart 8
What is the main area where you expect new entrants to gain the most
market share?
(% respondents)
Investment or life-based
investment products 17%
Transactions 10%
Mortgage lending 8%
Bill payment 7%
Comparison with the online stockbroker revolution of the 1990s is wrong, say interviewees.
Back then, online outfits such as E-trade slashed the cost of buying equities, and banks
had to follow suit. Even though transaction costs plummeted, top-line revenue was
largely maintained as investors merely traded more often.
Today’s emerging price wars will cut top-line income, while banks struggle to protect the
bottom line. As fee levels fall, mutual fund and pension contribution volumes are unlikely
to rise to compensate for the growing banking compliance and IT cost burden.
“Wealth managers and private banks have woken up to the fact that customers are no
longer willing to pay the margin,” says Nadeem Shaikh of advisory and venture capital
firm, Anthemis Group.
Chart 9
What are the top priorities for your company in the years to 2020?
(% respondents)
Chart 10
What is the biggest challenge faced by fintech entrants?
(% respondents)
Regulatory authorisation/
licencing 16%
Staffing 8%
Cyber security 8%
Third-party distribution
(third parties other than banks) 8%
Reputation 6%
Customer adoption 3%
The good news, of sorts, is that the banks are not alone. The revolution is no pushover for
the newcomers either.
Fintechs face significant barriers as a result of the current regulatory structures. That may
explain why we have not seen an Apple Bank, Google Bank or Facebook Bank and
perhaps never will, according to our interviewees.
Regulation may curb global ambitions too. Robo-adviser Betterment says that
expanding from its home in the US even to neighbouring Canada would be too
much of a distraction, and despite the attractiveness of the UK wealth or Australian
superannuation market, the compliance burden is something that the company can
do without right now.
Newcomers still have a small share in most of their markets. As they are under less
regulatory pressure (for now), reputational issues are not yet a big challenge. That is
expected to change, particularly if their strategic plans include partnering with banks
in order to gain bulk. And when complaints and outages go viral on social media in
minutes, the importance of reputational and complaint resolution issues may rocket,
with serious implications for e-businesses without the staff or expertise to remedy their
mistakes quickly.
Regulators are piling on the pressure with tougher know-your-client and anti-money-
laundering rules, and are demanding more responsive remedial action when systems
and product suitability fall short.
Chart 11
What are the top priorities for your company in the years to 2020?
(% respondents)
Modernising technology,
updating legacy systems 31%
Chart 12
What is the primary driver of your digital investment?
(% respondents)
Customer complaints
resolution 11%
Cyber security 5%
If technology is the competitive threat, it has to be part of the solution. “In tech we
trust” may be the banking industry’s new motto, but implementation is complicated. The
past looms large. Banks have more than one legacy system, and national networks and
global infrastructure add layer upon layer of IT issues.
Banks are spending significantly on digital solutions, but the reasons why are increasingly
diverse. With growth and cost bases under pressure, client acquisition and pricing are still
the main drivers, but not by much. Customers are already multi-channel, whether they
want higher-priced products or a speedy resolution to a complaint.
At Nordea, five legacy systems are being replaced in four countries to create a
modern “product factory”, says Michal Panowicz, deputy head of digital banking. The
progressive rollout will take four or more years and cost €1bn; it is certainly not “mobile
only”, nor even “mobile first”.
“There will be a proliferation of devices, even though mobile is growing rapidly and is
always in your pocket,” says Mr Panowicz.
The IT upgrade bill will be worth it. Mr Panowicz believes that the most exciting
technological development for banks is video banking, known as telepresence
technology, as it offers banks the chance to capitalise on the human touch. As
such, banks have an advantage over the fintechs when it comes to selling profitable
mortgages, investments and pensions. Secure, well-executed remote advice retains
those vital touchpoints, he thinks.
Chart 13
What are biggest talent challenges your company currently faces?
(% respondents)
Reputational issues of
the banking industry 41%
Productivity 32%
It should come as no surprise that attracting the brains to solve these issues is rapidly
becoming a top priority. It is particularly urgent in North America, where tech geeks can
chose between Silicon Valley and Wall Street, and in less developed markets, where
remuneration and living standards may not appeal.
Banks still need to spruce up their reputations, which does not help when trying to attract
the best graduates and employees. The option of retraining existing staff to work with
19 © The Economist Intelligence Unit Limited 2016
RETAIL BANKING
IN TECH WE TRUST
new technologies should not be overlooked; for example, Nordea staff undergo 240
hours of training, some with trained actors, before they are allowed to work in video
banking.
Chart 14
Where is technology having the biggest impact on your business?
(% respondents)
Reducing compliance
21%
and reporting costs
Reducing overall cost
18%
base/servicing costs
Reducing product charges
15%
passed to clients
In order to survive, banks must improve the customer experience, but they must do it
profitably and legally. For those who do it well, the benefits are huge.
Raiffeissen Bank, a mid-sized central and eastern European player, is learning both from
outsiders and from within. It operates as a network of 14 banks in different territories with
different systems, making economies of scale difficult. Slovak subsidiary, Tatra Bank, is its
innovation leader, recently transferring its voice recognition expertise for digital lending
to Romania, Belarus and the Czech Republic.
“In the digital arena, our position is a smart follower, leveraging the 14 in-house
innovation partners. We do not intend to reinvent the wheel in each and every one of
the 14 units,” says Severin Mayer-Heinisch.
Fast-growing fintechs know that data management is their unique selling point, and
a barrier to stop others from threatening their intellectual property and market share.
Banks know that they have to get better at data too; why do customers still have to
submit proof of income for loans when their bank sees their salary come in every month?
Smart banking means integrating products and channels in order to better leverage
them. Poland provides a useful case study of how upgrading core systems, integrating
front-end channels and cooperating can lead to multiple benefits.
Chart 15
Where is your company focusing its digital investment?
(% respondents)
Polish banks have worked together to deliver seamless mobile payments, P2P transfers
and ATM withdrawals by phone through the new BLIK system. NFC payments have
increased dramatically.
Yet each bank has to maintain its own competitive advantage. So Bank Millennium
has gone further, removing internal product and channel silo structures to deliver true
omni-channel banking. Even with a relatively modern IT backbone, head of electronic
banking, Ricardo Campos, says that different areas of the bank did not always
communicate. Now all front-ends, from call centre to online, function as one. Customers
can start a loan application online, ask questions in branch, sign a contract and get the
cash from an ATM.
Chart 16
What is the biggest challenge your bank faces concerning data?
(% respondents)
“Omni-channel is not about doing the same process on every channel, but about being
able to do the same process using several channels,” says Mr Campos.
Even banks with poorly integrated systems already collect vast pools of data. Alas, few
have the tools to interpret them well. Nor are they ready to share these, as they will be
compelled to do in the EU from next year.
While Polish banks are IT-savvy, they need to get better and faster at delivering new
ideas to customers. Tomasz Motyl of Alior Bank says that no bank wants to become
a mere back-office or white label for new market entrants. Aggregation is a new war
zone.
Mr Motyl and his colleagues are working on apps for private banking advisers that will
aggregate client products and investments from Alior and other financial firms. As Polish
customers expect free transactional banking and interchange fees are now capped,
banks need to monetise higher margin opportunities wherever they can. Shared data
should improve Alior’s ability to sell profitable loans.
“It will only work if the client values your services in the first place,” he admits.
Newcomers have yet to be as harshly tested as the global banking system was in 2008.
There will be casualties when they are.
Yet the banks know that they must up their game. Wim Raymaekers, head of
correspondent banking at SWIFT, the payment messaging network, says the fact that
45 banks signed up within three months for a new initiative is proof that they want to
improve the customer experience.
Fintech has set many benchmarks. Real-time is the “North Star”, admits Mr Raymaekers.
But banks can set benchmarks too, given their existing customer reach, infrastructure
and compliance prowess. Indeed, SWIFT comfortably beat its own 50% price cut targets
in three successive five-year plans from 2001 onwards.
But even SWIFT member banks will no longer be able to work solely within a closed
network, as many in India, Africa and Asia have found. Getting comfortable with that is
part of the battle.
The true winners will have the technology to cope with co-operation. SWIFT, other
networks and their member banks may still be the backbone that holds the whole
system together. Security and integrity will be as important as cost, efficiency and speed.
But they may also be a little more humble; the mighty bank brand could be reduced to
a mere screen icon for many customers. In an unbundled world, many banks will aim to
be the partners of choice for back-office functions, savings and loans, offering low cost
and efficiency. The clever ones will aim to rebundle, using their reach, brand and data
skills to harvest clients from others.
APPENDIX
Which trends will have the biggest impact on retail banks in your country in the years to 2020?
(% respondents)
Which non-traditional entrant to the retail banking industry will be your company’s biggest
competition in the years to 2020?
(% respondents)
Peer-to-peer lenders
21
Non-financial service firms (ie, retailers, telecom firms)
20
Payment players (ie, PayPal/Alipay/Apple Pay)
20
Robo-advisers/automated wealth management services
17
New banks (traditional, branch, online, telephone etc.)
16
Shadow banks (including hedge funds, asset managers and private equity)
6
Other (please specify)
0
None of the above
0
What is the main area where you expect new entrants to gain the most market share?
(% respondents)
What are the top priorities for your company in the years to 2020?
(% respondents)
Data management
25
Multi/cross-channel capabilities
22
Individual delivery capabilities (through branch, ATM, internet, mobile devices etc)
22
Applications (software)
17
Cyber security
14
Other (please specify)
0
Regulatory authorisation/licencing
16
Regulatory compliance
13
Cross-border regulation
13
Partnering with banks to access their clients
12
Customer service/problem resolution
11
Staffing
8
Cyber security
8
Third-party distribution (third parties other than banks)
8
Reputation
6
Customer adoption
3
Finance
27
General management
16
IT
13
Operations and production
12
Strategy and business development
9
Marketing and sales
8
Risk
6
Customer service
2
Legal
1
Supply-chain management
1
Human resources
1
Procurement
1
Information and research
0
R&D
0
Other
0
Region
(% respondents)
Europe
31
Asia-Pacific
30
North America
30
Rest of World
10
C-suite
50
Non C-suite
50
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