Backbase presents

The ROI of
omni-channel
digital banking

1
Contents

01. Why start a conversation on the value of The value of higher engagement 05. The digital-first banking platform
digital banking? Sidebar:
What this whitepaper offers you Attrition and Hidden Defection hurt About Backbase
The omni-channel customer experience customer value. Backbase named leader by analysts
is more relevant than ever Sidebar:
Better understanding promotes action Engagement builds customer intimacy
Banks are leaving money on the table The costs of onboarding
Meet our banks The value of speed

02. What is your retail customer worth to you? 04. The costs of everyday service
The back-of-the-envelope method The costs of routine service interactions
A more detailed approach The costs of systems maintenance
Sidebar:
03. The value of onboarding and origination Platforms are paramount
The value of increases in conversion
Sidebar:
Why do new customers churn at higher rates?
Why start a conversation
on the value of digital banking?

3
 01. Why start a conversation on the value of digital banking?

What this whitepaper offers you The omni-channel customer experience

is more relevant than ever
In this paper we intend to move away from the fea- Over the past decade customers’ expectations of Central to meeting customers’ expectations is the
ture show that so often dominates the conversation digital banking have rapidly changed. Digital banking idea of providing an omnichannel customer experi-
on digital banking. We would like to raise awareness was perceived as a modern ‘nice-to-have’ a decade ence for digital banking. Banking does not take place
of the value that digital banking can bring to your or- ago, but its acceptance came about quickly. Online in a vacuum. Customers demand service that is avail-
ganization by illustrating the impact of some of the retailers, streaming music, taxi hailing apps, and in- able at all times and on any device they may have
most salient value drivers. Through simple quantita- stant messaging have all contributed to the expecta- at hand. For shopping, communications, music, and
tive models this paper aims to explicitly show the val- tion of instant digital services. Presently, customers travel this is already a reality.
ue banks can derive from digital banking initiatives. not only expect to interact with their bank online and
Of course, it cannot provide definitive answers spe- via mobile, they increasingly expect to complete all
cific to a particular bank, as different countries and banking tasks online.
market segments face different economic challeng-
es. It is however, a great starting point for anyone Where does this leave banks? The service level they
wishing to build an internal business case for invest- provided yesterday no longer meets customers’ ex-
ments in the banking customer experience. We are pectations today. Banks need to step up and make
happy to start a conversation with you on the value banking easier, more available and more personal to
of digital banking. please customers and retain their business.

4
 01. Why start a conversation on the value of digital banking?

Better understanding promotes action

Many banks understand the strategic importance dustry leading digital banking implementation will equity for the majority of banks. This lack of perfor-
of keeping pace with innovations in digital banking. help to speed up decision making. Finally, some or- mance has exerted a downward pressure on share
At the same time, we observe that the same banks ganizations simply consider digital banking to be a prices across the sector. To achieve meaningful im-
struggle to make concrete plans for innovation. cost item rather than a value driver (We’ve always provements in financial performance a combination
The reasons for these delays take different forms. done things this way, so why change?), when in fact, of substantial cost reduction and revenue growth is
Some organizations have trouble getting buy-in for digital banking offers tremendous potential for cost needed. This makes it all the more surprising that
a change that is culturally and technically impactful. savings, customer retention, and upsell or cross-sell banks have not invested more aggressively in digital
In this case, a better understanding of the value of opportunities. banking. Digital banking is both a necessary invest-
such a project can resolve this apparent impasse. ment in future competitiveness and a controllable in-
Other organizations struggle with the ‘build-versus- Banks are leaving money on the table vestment with large, quickly realized benefits.
buy’ question and have difficulties articulating the Financial performance in the banking sector has been
value of better outcomes and faster delivery. In this lackluster in the wake of the financial crisis. Recent
case a clearer understanding of the value of an in- years have seen a lower return on equity than cost of

5
 01. Why start a conversation on the value of digital banking?

Meet our banks

Throughout this paper you will be guided through
a number of simple quantitative models. For these Bank NationalEaston Schuester & Heidelberg EZ Bank General State
models the same ‘example bank’ is used in all calcu- Large retail Wealth Management Digital Challenger Credit Union

lations: a mid-sized retail bank with 650,000 users. Country United States Switzerland France United States

Description Large brick-and-mortar Small traditional wealth EZ Bank is a neobank proj- General State is one of the
Because digital banking is a relevant topic for all retail bank on the Atlantic management bank with ect about to be launched. largest credit unions in the
Seabord. National Easton relatively few customers, The bank is a subsidiary of country. Though opera-
banks, not just mid-sized retail banks, we include cal- has an extensive branch but considerable assets. EZTel, a large french tions are still very focused
culation examples for a number of ‘prototype banks’ network that was built over Customers stay for genera- mobile telecom operator. on the branches, it is less
a period of 100 years. The tions and have a personal The bank will launch as a centralized than the other
as well. These fictitious banks are loosely modeled on bank has trouble living up banker. The lack of om- fully digital bank without a retail banks in the area.
actual banks in the market. They represent realistic to customer’s expectations ni-channel banking is ham- branch network. It also The online banking applica-
on digital and is facing pering customer growth. intends to increase the tion of the bank reached
examples of a large retail bank called NationalEaston, competition from banks customer lifetime of telco the end-of-life stage and
with a more advanced digi- customers by offering a customers are asking the
a wealth management bank called Schuester & Hei- tal offering. checking account on top of bank for a banking app
delberg, a digital challenger bank called EZ Bank and the mobile phone offering. similar to what competi-
tors already present.
a credit union called General State Credit Union.
Customers 4,500,000 20,000 150,000 700,000

Employees 16,400 815 129 1,415

Branches 1,100 4 – 121

Assets 112.3B 18.2B 710M 7.6B

6
What is your retail
customer worth to you?

7
 02. What is your retail customer worth to you?

The back-of-the-envelope method

Banks create value through the services they offer to To start simple, let’s consider a quick and easy way ly as it has done before. Finally, add the average fee
companies and individual customers. The simplest to estimate what a customer is worth to the bank. income per customer to arrive at the yearly revenue
way to think about growing revenues in banking is to Firstly, divide customers’ deposits by the number per customer. This yearly revenue value per custom-
add customers or to increase banks’ share-of-wallet of customers the bank has. This gives the average er can be converted into the customer lifetime value
with the customer. But, before we do that, let’s con- deposits per customer, and such underlying data (expressed in revenue) by dividing by the churn rate.
sider what the individual retail customer is actually should be readily available. Subsequently, multiply
worth. This really helps to put into perspective the the average deposits per customer by the net inter-
cost savings and revenue gains of a digital banking est margin to arrive at the average interest income
project: once you know what a customer is worth you per customer. The implicit assumption here is that
can think about how many new customers a project when the bank gains customers, it will convert the
can add per year. deposits of these customers into loans as effective-

8
 02. What is your retail customer worth to you?

1_Calculation table for the back-of-the envelope method

The table 1 guides you through the calculations.
Item Calculation Example Bank Source
For our example bank of 650,000 retail customers
the average customer yields about $890 in revenue A Number of customers 650,000 Customer

per year. B Total deposit of customers 17,134,000,000 –

C Average deposits B/A 26,360 Customer

D Net interest margin 2.5% Customer

E Average interest income CxD 659

F Average fee income 230 Customer

G Customer value E+F 889 –

H Churn 5% Industry Average

I Customer lifetime value G/H 17,780 –

9
 02. What is your retail customer worth to you?

2_Example of calculation for prototype banks

In table 2 the customer value for the prototype
Item NE S&H EZ GS
bank is calculated. Clearly, there are large differenc-
es. Wealth management banks generate over 10x Number of customers 4,500,000 20,000 150,000 700,000

as much revenue from a single customer than retail Total deposit of customers 85,000,000,000 12,000,000,000 684,000,000 7,000,000,000
banks, and for digital challengers the reverse is true.
Average deposits 18,889 600,000 4,560 10,000

Net interest margin 3.2% 2.1% 1.3% 2.5%

Average interest income 604 12,600 59 250

Average fee income 272 11,340 9 100

Customer value 876 23,940 68 350

Churn 6% 3% 7% 3%

Customer lifetime value 14,607 798,000 974 11,667

10
 02. What is your retail customer worth to you?

A more detailed approach of 3_Calculation table for detailed approach

customer value
With a product-based estimate of customer value, Item Calculation Example Bank Source

we can generate even more insights. By considering A Number of customers 650,000 Customer

the penetration, size, and spread of the various loan B Revenue split by product and penetration
products in the bank we can estimate not only the B1: B2: B2:
value of the customer, but also which products con- Product Penetration Average Size Spread Revenue/ year

tribute most. This type of analysis highlights, as an 1 - Mortgage 2.5% 175,000 3.5% 99,531,250
2 - Home equity loan 2.5% 20,000 6.0% 19,500,000
example, how improvements in onboarding and orig-
3 - Home equity line of credit 15.0% 25,000 3.5% 85,312,500
ination for mortgages will be more impactful than for Car loan 12.0% 28,000 3.5% 76,730,063
unsecured personal loans. Student loan 5.0% 47,000 5.5% 84,012,500
Credit card 5.0% 16,000 10.0% 52,000,000
n - Unsecured loan 5.0% 5,000 7.0% 11,375,000
The calculation is very straightforward. For each loan
∑ (A x B1n x B2n x B3n) 428,461,313 Customer
product, the number of customers with that prod- 1-n

uct is multiplied by the average product size and the C Average NII per customer B/A 659 –

spread of the product. This gives you the revenues D Fee income ratio 35% Customer
by product. From the resulting total revenue, the net
E Fee income per customer CxD 231 –
interest income per customer is calculated. The re-
maining calculations are similar to the earlier back- F Total income per customer C+E 890 –

of-the-envelope method 3. G Churn 5% Industry average

H Customer lifetime value F/G 17,798 –

I Weighted average value 1 product 1,401.13 – 11

The value of onboarding
and origination

12
 03. The value of onboarding and origination

The value of increases in conversion

One of the advantages of digital onboarding relative The same cannot be said for physical onboarding. • Firstly, there is effort: If signing-up for a bank ac-
to physical onboarding is the visibility companies You may know how many people come into your count cannot be completed digitally and in one ses-
can create in their onboarding funnel. What do we branch offices per week. You will probably know what sion, the prospective customer must plan next steps
mean by this? In e-commerce it is completely normal these customers require. However, you have limited and make time to follow-up later.
to analyze the revenue of a webstore in terms of traf- understanding of what happened before that cus- • Secondly, there is purchase intent: when an appli-
fic to the website, time spent on the site, the volume tomer walked into the branch, as you only see the cation is started, the prospective customer is ready
of product baskets created, and the percentage of end of the customer journey. Between the advertis- to open the account. If there is a delay he or she might
product baskets ordered and paid for. To the average ing spend and the physical transaction, there is lim- reconsider or open an account with a competitor.
e-commerce professional this is a completely stan- ited understanding and influence. • Lastly, there is opportunity: most banks have open-
dard way of looking at performance. It creates a lot of ing hours from 09:00-18:00 on weekdays, and per-
insight and control over the process: bottlenecks are Even though there is limited visibility, it is not hard to haps also Saturday mornings. Most customers work
easily identified, and improvements are easily tested think of a few compelling reasons why people fail to full-time jobs and hate to sacrifice their family time
and implemented. become your customer, when they need to go to a during the weekend.
branch office to do so:

13
 03. The value of onboarding and origination

The value of increases in conversion 4_Calculation table for increases in conversion

Taking all of this into account it’s easy to see why
Item Calculation Example Bank Source
digital onboarding can increase the conversion rate
of onboarding processes. Let’s consider the value of A End of year ‘net new’ customers 52,000 Cost of onboarding

a marginal improvement in onboarding: our example B Year 1 churn 10% Industry average
bank needs to successfully onboard 52,000 custom-
C Onboarded customers before churn A / (1 - B) 57,778 –
ers to achieve a growth of 3%. This means that at
the end of the year, there must be 52,000 people left D Typical onboarding leakage 50% Industry average

at the bottom of the onboarding funnel. How many E Customers who started onboarding C / (1 - D) 115,556 –
people entered at the top of the funnel to start the
F 1% improvement on leakage D - 1% 49% Assumption
onboarding process, and what is the drop-off?
G Onboarded customers before churn E x (1 - F) 58,993 –

Typically, digital onboarding flows have a drop-off H 1% improvement on churn B - 1% 9% Assumption

of 50% [1]. On top of that new customers churn at a
I End of the year ‘net new’ customers G x (1 - H) 53,629 –
much higher rate than customers with longer tenure,
at 10-20% over the first year [See page 16: Why do J Additional customers I-A 1,629 –

new customers churn at higher rates?]. This means K Customer value per year 890 Value of customer
that to arrive at 52,000 new customers there needs
L Revenue increase per year JxK 1,449,931 –
to be an inflow in the onboarding process of 116,000
customers (116,000 x (1 - 50%) x (1 - 10%)).

[1] McKinsey | McKinseyGlobal Banking Annual Review (2016) 14

 03. The value of onboarding and origination

5_Calculation table for increases in conversion for prototype banks

What would be the value of a single percentage
Item NE S&H EZ GS
point improvement in the onboarding process? In
terms of customers if would be 1,600 customers End of year ‘net new’ customers 360,000 1,000 54,000 42,000

(116,000 x (1 - 49%) x (1 - 9%)). With a yearly revenue Year 1 churn 6% 3% 7%

of USD 890 per customer this represents USD 1.45M
Onboarded customers before churn 382,979 1,031 58,065 43,299
per year… for every percent of improvement! 45
Typical onboarding leakage 50% 50% 20% 50%

Typically, a modern industry leading digital banking Customers who started onboarding 765,957 2,062 72,581 86,598
implementation does not just improve the conver-
1% improvement on leakage 49% 49% 19% 49%
sion by 1%, but in the range of 10 - 15% in year 1.
The improvements are attributable to a better cus- Onboarded customers before churn 390,638 1,052 58,790 44,165

tomer interface, faster performance, retargeting of 1% improvement on churn 5% 2% 6% 2%

incompletely onboarded customers, and of course
End of the year ‘net new’ customers 371,106 1,031 55,263 43,282
straight-through-processing.
Additional customers 11,106 31 1,263 1,282

Customer value per year 876 23,940 68 350

Revenue increase per year 9,734,128 730,540 86,095 448,577

15
Why do new customers
churn at higher rates?
Your newest customers are your least loyal customers. energy getting things done. This affords a level of
Churn is not uniform across all cohorts. The customers convenience.
who have been with your bank for longer are more
loyal. There are a couple of reasons for this. Customers Conversely, new customers are completely unfamiliar
with longer tenure tend to have more products with with the basics of your bank and have to figure this out
you and so they are less inclined to leave. Leaving as they go along. On top of that new customers have
would mean changing a lot of financial arrangements often just given up on their former bank. Whatever
at once. Additionally, customers who have longer the reason was that they left, they are, ipso facto,
tenure are familiar with the products and procedures disloyal customers who need to be won over.
of the bank. They don’t need to spend a lot of mental

16
 03. The value of onboarding and origination

The value of higher engagement 6_Average number of products with main bank by level of digital engagement
Customer acquisition is not complete once people
sign-up for a checking account. On the contrary, it
is just the start. Customers only become profitable Highly digitally engaged 4.4

once they buy additional products from the bank,

such as mortgages, personal loans and credit cards. Digitally engaged 3.8
Banks compete with each other to become the pri-
mary banking relationship for customers. The check-
Less digitally engaged 3.2
ing account is merely a foot in the door.

On average consumers have about 5 to 7 banking Digitally disengaged 2.7

products, but not all these products are bought from

a single financial institution (that is rarely the case).
However, the more engaged customers are with their A large-scale questionnaire from The Financial Brand to the digitally disengaged customers who have only
bank, the more likely it is that they will have more [2]
illustrates this for digital engagement. Customers 3 products on average and it becomes clear that dig-
products from that bank. In other words, engage- who are highly digitally engaged with their bank have ital engagement promotes share-of-wallet.6
ment correlates with share-of-wallet. more than 4 products with their bank. Compare this

[2] The Financial Brand | How Retail Banks Can Snag More Wallet Share (2016) 17
 03. The value of onboarding and origination

7_Calculation table for value in higher engagement

How digitally engaged are your customers? How
Item Calculation Example Bank Source
much room for improvement is there? Let’s make an
estimate for our example bank. National statistics A Number of customers 650,000 Customer

for the US suggest that at least 75% of customers B Internet broadband adoption 75% National Statistics
have access to the internet, but only 45% of custom-
C Online banking adoption 45% Customer
ers use online banking. This represents a gap of at
least 30%. That gap of 30% represents 195,000 cus- D Gap in adoption B-C 30% –

tomers. If we could increase the digital engagement E Year 1 increase in adoption 5% Estimate
of 5% of this group and sell one additional product
F Additional engaged customers AxDxE 9,750 –
via digital channels, what revenue would this repre-
sent? One additional product has an estimated value G Value of 1 additional product Weighted average 1,401 Value of customers

of $1,400 per year. Selling one additional product to H Revenue uplift FxG 13,661,062
9,750 customers yields $13.6M.78

18
 03. The value of onboarding and origination

8_Calculation table for value in higher engagement for prototype banks

Digital banking doesn’t only increase the likelihood
Item NE S&H EZ GS
that people will sign-up for an account with your
bank. Increased engagement due to digital banking Number of customers 4,500,000 20,000 150,000 700,000

also promotes share-of- wallet. Internet broadband adoption 85% 85% 75% 80%

Online banking adoption 60% 40% 100% 45%

Gap in adoption 25% 45% - 25% 35%

Year 1 increase in adoption 3% 10% 0% 5%

Additional engaged customers 33,750 900 – 12,250

Value of 1 additional product 1,285 26,783 126 531

Revenue uplift 43,362,244 24,104,306 – 6,509,651

19
Attrition and Hidden Defection hurt
customer value
Account Card Mortgage Loan
All banks work hard to grow their customer numbers.
When growth levels disappoint, the underlying causes Customer 1
are not always apparent. One of the more visible
drivers is increased attrition: when customers leave
the bank to begin a primary banking relationship Customer 2
elsewhere alarm bells should go off. However, there is
also a second form of attrition, which is more insidious:
hidden defection. When a bank’s relationship with its Customer 3

customers isn’t strong enough, competition creeps

in. Banks don’t necessarily lose these customers
completely, but they will not buy a second, third or Customer 4

fourth product from the bank. Instead they move to

competing institutions and the primary bank loses
an opportunity to grow share of wallet.
Attrition Hidden defection

Clients lost due to attrition Product purchases lost due to hidden defection

20
 03. The value of onboarding and origination

The costs of onboarding 9_Onboarding costs estimated by bank’s business model

Customer onboarding remains the most important
customer facing activity, regardless whether you are
a brick-and-mortar bank or a fully digital bank. You Traditional bank 300
cannot grow deposits or write loans without reach-
ing new customers. Every bank in the world knows
Direct bank 110
this, and as a result a large portion of operational
expenses is dedicated to branch offices, back office
processes, IT, cards, direct mail, checkbooks, mar- Digital challenger 5

keting, and other standard expenses related to on-

boarding. McKinsey estimates that these costs add
up to $300 per customer for customers who open a
new checking account [3]. profitable. This means that the bank needs to reduce completely. This model was first popularized by di-
onboarding costs in order to make a profit on more rect banks such has ING Direct. The onboarding cost
For a lot of banks this is an investment that will only of their customers (banks that tried to increase fees for these direct banks is estimated by McKinsey at
pay off after new customers start generating revenue instead dealt with severe criticism from customers). $100 per customer. A $200 per customer cost sav-
by taking a loan or generating enough fee income ing! Furthermore, fully digital banks that have neither
on, e.g., a new credit card. Customers who are not One way of reducing onboarding costs is to take away a front office nor a back office have almost negligible
buying additional products from the bank remain un- the need for a branch visit and digitize onboarding costs when it comes to onboarding.9

[3] Mckinsey | The Future of Face-to-Face (2012) 21

Engagement builds customer intimacy
Banks need to reconnect with customers in the digital world
As users increasingly migrate to digital channels,
banks who haven’t invested in creating a strong Customer ss
cce
digital presence run the risk of losing relevance engagement
ning of s
u
3
amongst their customer base. Digital banking ea
M
provides an opportunity to interact more frequently
with customers, and with much higher customer action
no
of
satisfaction levels. Banks who successfully transform Co
st 2 “My bank is
my trusted
their operations become their customer’s trusted advisor.”
advisor. As a result, when that customer makes a
financial decision the bank is part of the consideration
set, getting the chance to provide additional services.
1 “My bank
provides me
with transactional
“My bank keeps convenience.”
Conversely, when banks haven’t been able to keep my money for me.”
pace with innovation they run the risk of becoming
Strength of bank’s
irrelevant and losing the customer relationship. If
digital presence
you are not present in the digital world where your
customer chooses to do business, you will not sell.
The worst-case scenario is that customers consider
the bank a place that holds his or her money, but just
for now.

22
 03. The value of onboarding and origination

q_Calculation table for cost savings from digital onboarding processes

For banks with a branch network the first step to save
Item Calculation Example Bank Source
costs is to make onboarding independent from the
branch, or any other physical interaction. What could A Number of customers with a current account 650,000 Customer

banks save if they would reach the level of cost of B Percent churn per year 5% Industry average
a typical direct bank? Let’s do the math: If we con-
C Percent growth per year (net) 3% Customer
sider a medium-sized bank with 650,000 customers
that has a net growth in customers of 3% per year D Percent customers to onboard B+C 8% –

that growth alone represents 19,500 new custom- E Customers to onboard DxA 52,000 –
ers. Additionally, replacing yearly churn of 5% adds
F Cost of onboarding - traditional 300 McKinsey
another 32,500 customers to onboard. In total this
makes 52,000 customers. The onboarding for these G Cost of onboarding - direct 100 McKinsey

customers would traditionally cost $300 per person, H Difference in onboarding cost F-G 200 –
but would be reduced to $100 per person. The re-
I Cost savings HxE 10,400,000 –
sulting cost savings of $200 per person for 52,000
new customers amounts to $10.4M per year. J Discount for time-to-value year 1 30% Backbase analysis

K Value I x (1 - J) 7,280,000 –

23
 03. The value of onboarding and origination

w_Calculation table for cost savings from digital onboarding processes for prototype banks
Even adoption of digital onboarding is not immedi-
Item NE S&H EZ GS
ate, the cost savings are very attractive. One look at
the income statement of a direct or fully digital bank Number of customers with a current account 4,500,000 20,000 – 700,000

confirms this of course. In fact, we are only express- Percent churn per year 6% 3% – 3%
ing in numbers what most bankers already know:
Percent growth per year (net) 2% 2% – 3%
digital onboarding is a big value driver. To see how
your costs could be reduced, please take a look at Percent customers to onboard 8% 5% – 6%

the calculation tables q and w. Customers to onboard 360,000 1,000 – 42,000

Cost of onboarding - traditional 300 300 – 300

Cost of onboarding - direct 100 100 – 100

Difference in onboarding cost 200 200 – 200

Cost savings 72,000,000 200,000 – 8,400,000

Discount for time-to-value year 1 30% 30% – 30%

Value 50,400,000 140,000 – 5,880,000

24
 Don’t allow digital onboarding to be rate limiting to growth
Onboarding is a rate-limiting factor
Unless your digital onboarding is designed to be
omni-channel and completely frictionless from the
Customers
ground up, it is likely that you will experience 50%
leakage. Onboarding customers is crucial to grow Onboarding
For accounts
and maintain deposits. Moreover, it’s a precursor to
the steps customers take in purchasing additional
products, which make them more valuable to the
bank. In short: you cannot grow share-of-wallet with
people who are not your customers.
Customers

Improvements in onboarding, therefore, also improve

Origination
origination downstream. Onboarding is one of the Low value products
key activities a bank must perform well to sustain e.g. Personal loan

itself in a digital world.

Customers

Origination
High value products
e.g. Mortgage

25
 03. The value of onboarding and origination

The value of fast implementation e_The value of a 6-month delay in deployment of the example bank results in a loss of $5.4M in revenue.
In most digital transformation projects there is a mo-
*Revenue per customer $890/year
ment when a decision is made to either build or buy a Customers
new solution. This can often be a real dilemma. Most
banks have a lot of IT staff who could work on a digi-
Gain 16k customers in year 1
tal banking project, but the project would take longer
15,000
to complete due to the lack of experience. A commer-
cial digital banking software solution is usually much
faster to implement. Not only do most capabilities 10,000 $7.2M
come ready made, the vendors employ domain spe-
cialists who can deliver compelling solutions faster.
5,000

Let’s consider what the value of on-time project deliv- lay

ery is, from the perspective of customer acquisition. mo n t h s de $1.8M
6
Leaving cost aside for a moment, what extra reve- 0 6 12 Months
nue could you make in a medium-sized retail bank by
realizing an improvement in onboarding conversion? onboarded yearly as the result of a successful proj- is actually only half that, or over $7M in revenue. This
Earlier we showed that for our calculation example ect. When each customer yields $890 a year in net is shown in the diagram below where the surface
a 1% improvement in conversion would yield 1,600 interest income and fee income, this would repre- area of the whole triangle represents the revenue of
new customers a year. Let’s assume an increase of sent over $14M in revenue. As these customers are on-time delivery. e
10% is realised and that 16,000 new customers are brought in gradually over the year however, the value

26
 03. The value of onboarding and origination

r_Calculation table for value of speed

Now consider a delay of 6 months. In this case only
Item Calculation Example Bank Source
half the customers are onboarded for the year be-
cause in the first half of the year the project has not Project delivery on time, at the start of the year

been completed yet. On top of that new customers A Number of customers gained due to 10% onboarding improvement 16,293 Value of conservation
do not generate the previously mentioned $890. Only
B Customer value for 12 months 890 Value of customer
half the revenue per customer is realized as lending
starts later and fee income for the first 6 months is C Revenue gained starting on time (surface area triangle) (A x B) / 2 7,249,565 –

lost. In the diagram below the dark area shows the Project delivery delayed by 6 months
revenue made when project delivery is delayed by 6
D Number of customers gained due to 10% onboarding improvement A / 2 8,147 –
months. The orange area shows the revenue made
in case of on-time delivery. In this case on time deliv- E Customer value for 6 months B/2 445 –

ery is worth an additional $5.4M. The tables on page F Revenue gained at 6 month delay (surface area triangle) (D x E) / 2 1,812,391 –
25 show the calculation of time-to-market, for the
G Revenue lost due to 6 month delay C-F 5,437,174 –
example below and for our prototype banks.r

27
 03. The value of onboarding and origination

t_Calculation table for value of speed for prototype banks

When you can make a similar calculation for your
Item NE S&H EZ GS
own bank, it is likely that you will arrive at a similarly
impressive number. Project delays have a big impact Project delivery on time, at the start of the year
not just on cost, but also on revenue. In a lot of inter-
Number of customers gained due to 10% onboarding improvement 111,064 305 12,629 12,816
nal business cases the value of time-to-market is not
taken into account. This is a real shame, because a Customer value for 12 months 876 23,940 68 350

lot of value is lost because of it.t Revenue gained starting on time (surface area triangle) 48,670,638 3,652,701 430,473 2,242,887

Project delivery delayed by 6 months

Number of customers gained due to 10% onboarding improvement 55,532 153 6,315 6,408

Customer value for 6 months 438 11,970 34 175

Revenue gained at 6 month delay (surface area triangle) 12,167,660 913,175 107,618 560,722

Revenue lost due to 6 month delay 36,502,979 2,739,526 322,855 1,682,165

28
The costs of
everyday service

29
 04. The cost of everyday service

The costs of routine service interactions

90% of the interactions that your customer has with your rather straightforward. We can compare how customers Accenture’s Banking 2020 report [4]
gives an overview of
bank are routine tasks. The customer wants to get these interact with their bank in a country that is at the forefront the interactions consumers have with their bank in dif-
tasks done quickly and the bank wants them to get done of digital banking, i.e., the Netherlands, with the interac- ferent parts of the world. This data, supplemented with
cheaply. Sadly, most banks achieve neither of these goals. tions customers have with their bank in countries that are in-house knowledge, give a reliable picture of how cus-
Banks still make customers come to the branch for trans- lagging in digital banking. tomers interact with their banks. In the US for instance,
actions that should be fully automated. Even if transac- people visit a branch twice a month on average. In the
tions are automated, bad customer experiences cause By costing each transaction we can show how digitiza- Netherlands customers only visit branches once a quar-
calls to the call centre and increase cost even further. So, tion of routine interactions yields substantial cost savings ter. On the other hand, the volume of mobile interactions
what is the value of a good customer experience? A good for banks. Of course, those savings cannot be realized is much higher in the Netherlands compared to the US at
customer experience will move costly transactions from overnight. Reducing your physical footprint takes time. 12 times per month on average compared to 4 timers per
the branch and the call centre to online and mobile appli- But, even when a transition period is considered the sav- month respectively.
cations. ings are still considerable. Also, only a part of these cost
savings is attributable to digital banking. This is a judge-
How can we forecast the cost reductions that a digitization ment call you must make yourself in your internal busi-
of service interaction will bring? Actually, the approach is ness case. Let’s investigate the numbers.

[4] Accenture | Banking Customer 2020 (2015) 30

 04. The cost of everyday service

y_Total cost (USD) of the transactions of 1 customer per year.

When US consumers adopt the usage pattern of Dutch consumers costs drop dramatically.
Bain has calculated the cost for the most important bank-
Reduced
Improved Fewer uses
ing interactions [5]
resulting in estimated values of $4 per Improved Branch
Mobile of ATM
Online visits
branch visit, $2.20 per call centre call, $0.20 per ATM vis- +$9.60 – $7.20
$148.00 +$1.20 – $80.00
it, and $0.10 per online and mobile interaction. When we
combine this data with the interaction frequencies per Reduced
Call center
country in table y, the following picture emerges: US calls
– $22.00
banks spend $148 per customer per year for service in-
$49.60
teractions. This is $98 more than Dutch banks, that spend
$49 per customer per year. The largest part of these cost
savings is explained by reductions in branch visits and call
center calls.yu USA NL
Customer Customer
cost/ year cost/ year

[5] Bain | Customer Loyalty in Retail Banking – Global Edition 31

 04. The cost of everyday service

u_Frequency, cost of customer interactions in the US and the Netherlands

For our example bank with 650,000 customers, a $98 cost
Interaction Cost US frequency/year NL frequency/year Cost Difference
saving per customer represents a cost saving potential of
$64M. Even if this would take 10 years to materialize, there Online $ 0.10 84 96 + $ 1.20
is still a potential cumulative cost saving of $6.4M per year
Mobile $ 0.10 48 144 + $ 9.60
for the next 10 years, and these are recurring costs! The
tables u,i and o illustrate the model used and the im- ATM $ 0.20 60 24 – $ 7.20

pact for our various prototype banks. Branch $ 4.00 24 4 – $ 80.00

Call Center $ 2.20 12 2 – $ 22.00

So far, many of the value drivers for digital banking have
focused on creating value at the customer facing side of – $ 98.40

the business. There are however, large gains to be made

in the IT department too.

32
 04. The cost of everyday service

The costs of codebase maintenance i_Calculation of customer interactions in the US and the Netherlands
Many banks find themselves hostage to a highly complex
IT landscape that is difficult to control. As a result, the Item Calculation Example Bank Source

costs of IT staff are ballooning. Even though banks have A Number of customers 650,000 Customer

a lot of IT staff, most of their effort goes into keeping cur- B Total cost to serve US customers 148 Accenture, Bb analysis
rent systems running, rather than innovating. Often, a skill
C Total cost to serve NL customers 49 Accenture, Bb analysis
gap prevents banks from making in-house improvements.
D Cost savings potential per customer B–C 98 –

The largest contributor to the increasing maintenance E Total cost savings potential AxD 63,960,000 –
costs, however, is complexity.
F Time to transition (years) 10 Estimate

As a result of the gradual introduction of new channels in G Year 1 cost savings E/F 6,396,000 –

banking, banks have acquired independent disconnected H Attribution to digital banking platform 30% Estimate
channels, each with its own equally disconnected code. A
I Year 1 attributable savings GxH 1,918,800
typical retail bank easily operates up to 8 separate chan-
nels. For instance: Branch, Call Center, Advisory, ATM, In-
ternet Banking, Mobile Banking, Public Website, and one
or more product or segment based online platforms.

33
 04. The cost of everyday service

o_Calculation of customer interactions in the US and the Netherlands for prototype banks
All these channels require access to customer informa-
Item NE S&H EZ GS
tion and (largely) need to facilitate the same functional-
ities across a bank’s products. An example of such nec- Number of customers 4,500,000 20,000 – 700,000

essary information would be the products a customer Total cost to serve US customer 148 125 – 148
has bought, the accounts they have, or their balances and
Total cost to serve NL customer 49 42 – 49
transaction histories. In addition, most channels need to
know the bank’s contact history with a client, alongside Cost savings potential per customer 98 84 – 98

other information. Total cost savings potential 442,800,000 1,672,800 – 68,880,000

Time to transition (years) 7 5 – 10

Whenever a change to the front-end is needed, for exam-
ple to respond to new regulations, all channels need to be Year 1 cost savings 63,257,143 334,560 – 6,888,000

updated. This is inefficient in many ways. Code duplica- Attribution to digital banking platform 30% 30% – 30%
tion leads to higher development costs, highly complex
Year 1 attributable savings 18,977,143 100,368 n.a. 2,066,400
testing scenarios, and it lengthens the release cycle sig-
nificantly. All of this reduces the resources available for
innovation and slows banks down: most IT staff are tied
up in projects that simply ‘keep the lights on’.

34
 04. The cost of everyday service

p_List of recent or upcoming banking trends and events that warrant changes in banking
Changes that have an impact on the channels are not as
Political — Brexit
rare as one might think either. The list p summarizes
— New or reinstated sanctions
some recent or upcoming banking trends and events, all
of which warrant changes. Regulatory — GDPR
— PSD2

What can be done to reduce this expenditure? This is Technical — Channel migration
— Introduction of APIs
where the digital banking platform comes in. Instead of
— Security threats online
updating each channel separately, it’s possible to just up- — Move to cloud computing
date the platform. This removes the need to constantly — New AI features such as chatbots
rewrite the relevant code for each channel. On top of that, — Blockchain

the platform reuses code across channels and connects Product introductions — New payment forms such as Zelle or Paypal.
each channel to create a single omni-channel experience. — New lending products.

[See page 27: Platforms are paramount] Competitive pressure — Prevent attrition and improve onboarding in response to digital challenger banks.

Economical climate — Stricter lending criteria to reduce NPLs.

35
Platforms are paramount
Just consider the number of possible connections
the IT department must build between disconnected
channels. The number of paths between channels
shows geometric growth as the number of channels
rises. If you have ever wondered why the IT
department has a hard time keeping up, this is a key Branch +Call centre +ATM +Internet +Mobile
1 channel 2 channels 4 channels 5 channels
reason. Platforms are needed to reduce complexity 0 paths 1 paths 6 paths 10 paths
and enable consistent customer journeys.

In order to offer customers a seamless omni-channel

experience, switching between different channels
should be easy and fully functional. This is almost
impossible to achieve without the use of a platform to
centralize customers’ data and shared functionalities.
Omni-channel platform

Any given number of channels

0 paths | 1 platform

36
 04. The cost of everyday service

a_Calculation table for cost savings on system maintenance on implementation of omni-channel platform
When it comes to maintenance costs, rather than updat-
Item Calculation Example Bank Source
ing a multitude of channels, only one platform is updated,
cutting costs in our example by 88% or $1.68M. See the A Number of front-end channels 8 Customer

calculation example and calculation tables a and s for B Number of front-end updates per year 2 Customer
reference.
C Number of channel updates per year AxB 16 –

D Man-days per channel update 240 Customer

E Total man-days CxD 3,840 –

F Daily (blended) rate 500 Estimate

G Total current cost ExF 1,920,000 Industry Average

H Platform cost BxDxF 240,000 –

I Cost savings G-H 1,680,000

37
 04. The cost of everyday service

s_Calculation table for cost savings on system maintenance for prototype banks
A simple calculation shows the high costs of replac-
Item NE S&H EZ GS
ing back-end systems. Consider that most banks,
even simple ones, have at least 8 separate channels. Number of front-end channels 13 9 4 8

Assuming at least 2 impactful changes to the front Number of front-end updates per year 4 2 2 3
end are needed yearly, the IT department must up-
Number of channel updates per year 52 18 8 24
date 16 channels a year. If it takes a squad of 6 peo-
ple 8 weeks to code, test and release a single channel Man-days per channel update 1,200 240 180 320

update, that adds up to 240 man-days per channel Total man-days 62,400 4,320 1,440 7,680
update. At a blended day rate of $500 this translates
Daily (blended) rate 600 510 750 600
into a cost of $120,000 per update, or $1.9M in total.
Now consider the platform approach: rather than 16 Total current cost 37,440,000 2,203,200 1,080,000 4,608,000

channel updates, only 2 platform updates are needed, Platform cost 2,880,000 244,800 270,000 576,000
saving an impressive $1.7M. Add to this that 3,360
Cost savings 34,560,000 1,958,400 810,000 4,032,000
man-days could also be applied to different projects.

38
The digital-first
banking platform

39
 05. The digital-first banking platform

d_The components of the digital-first banking platform

Tailored Real-time Digital Financial Front-office
Advice Support Sales Insight Empowerment

01. User Experience Management

02. Digital Banking Capabilities

03. Identity & Access Management

04. Process Digitization Capabilities

05. Cloud Deployment

d_ strong digital banking platform is a function of well-
managed user experiences, backed by digital capabilities,
security, smart processes and cloud deployment.
Source: Backbase

40
 05. The digital-first banking platform

Google owns information, Amazon owns ecom- When all systems talk to each other, tailored ad-
merce, Facebook owns communication - these play- vice and real-time support are instantly available to
ers dominate in their areas. Now it’s time for banks to customers. Frontline staff are freed from slow, pa-
own finance. They must reinvent themselves and go per-based processes and empowered to deliver ex-
beyond a digital transformation to achieving a busi- cellent service, with the right information at their fin-
ness transformation. Banks that work the digital-first gertips. The user experience works, from onboarding
banking platform properly will empower themselves to upselling, and this drives digital sales. Enhanced
to do things 10 times better. That’s how they will hold financial insights help customers to manage their
onto their customers at a time when the threat of at- financial lives and banks to strategize. The digital
trition is bigger than ever. banking platform connects all the dots to deliver for
the end customer and ensure the bank can compete
A robust, agile digital-first banking platform will con- into the future.
nect and empower all parts of the organization to
optimize omni-channel customer journeys. It works
alongside legacy systems, connecting, aligning and
informing to support staff and customers.

41
 05. The digital-first banking platform

01. User experience management

Behind every great user experience is a smooth in- edit content and navigation, add widgets, update the
tegration with back-end services. When customer mobile app, run digital marketing campaigns across
data can be quickly sourced, frontline staff are em- multiple channels, and more.
powered with real-time, accurate data, and custom-
ers enjoy superior self-service capabilities. A modular, flexible orchestration layer will connect
and streamline existing core banking and back-end
Digital marketing professionals should be able to tai- systems for frictionless, personalized, omni-channel
lor the end-user’s experience, without the need to call experiences. This empowers banks to deliver opti-
on IT for every change. Backbase offers a range of mal, relevant customer journeys, reduce time to mar-
user-friendly tools that empower digital marketers to ket, and ease the burden on the IT department.

42
 05. The digital-first banking platform

02. Digital banking capabilities

To compete in a digital world, banks must offer smart systems. Modular architecture enables easy cus-
digital products and services that are easily acces- tomization, while both classic and cloud deployment
sible over every device. Banks need a platform that are facilitated.
supports their efforts to stay competitive by provid-
ing innovative digital excellence. This leading omni-channel digital banking platform
helps financial institutions create, manage, and opti-
Backbase is the digital banking platform that em- mize superior customer journeys, on any device and
powers banks with superior Banking-as-a-Platform over multiple channels. Functionality can be tailored
capabilities. Built on a state-of-the-art microservices for seamless, omni-channel customer experiences
architecture and with API-based banking capabili- that normally would not be available directly from
ties, Backbase complements existing core banking the core banking or back-end systems.

43
 05. The digital-first banking platform

03. Identity and access management

Identity and access management is key to ensur- nations, tokens, Integrated Multi-Factor-Authentica-
ing access security in today’s open banking market- tion (MFA) and alerts strengthen and simplify access
place. A sophisticated entitlements solution makes control.
this easy, by automating and managing the process
of granting access rights to trusted users. Access to permitted functions and data can be limit-
ed and authentication can be stepped-up in high-risk
Backbase offers a sophisticated entitlements solu- situations. Users can fully customize to create their
tion that lets a bank integrate the existing entitle- own views, and select preferred accounts or busi-
ments system, or leverage Backbase Entitlements to ness performance metrics. Payments can be autho-
tailor access levels and permissions to view, create rized on-the-go and mobile alerts and access to out-
or approve transactions. Various password combi- standing approval requests are also available.

44
 05. The digital-first banking platform

04. Process digitization capabilities

Smart online forms and logical processes are key to nal systems for straight-through processing (STP).
efficient customer journeys. When they don’t work Banks can actively streamline their online customer
properly, abandonment increases, impacting the dialogs and manage their self-service and customer
success of online initiatives. Smart forms and dy- enrolment processes.
namic process management increase efficiency and
remove manual, paper-based tasks - making life eas- Backbase automates daily tasks, connecting people
ier for both customers and employees. and information to handle each case quickly and ac-
curately. Built-in mobile and social capabilities simpli-
Backbase Digital Forms simplify and streamline all fy collaboration via any device or channel, and com-
customer dialogs across multiple channels, while on- munication with legacy systems is also possible via
boarding or self-service dialogs integrate with inter- configurable connectors.

45
 05. The digital-first banking platform

05. Cloud deployment

Cloud deployment powers constant feature or func- The Backbase platform supports both traditional app
tionality updates, without any impact on day-to-day servers and new native cloud deployment models,
business. New code can be deployed thousands of enabling banks to safely make the transition from
times per month, and fast. Development teams can a classic deployment to a native cloud deployment,
bring new capabilities to market via a highly auto- without re-engineering. Backbase has done the hard
mated platform that scales with the business. Secu- work of abstracting the platform capabilities from
rity can also be automated, making it easier to keep the various cloud deployment models, The Back-
pace with industry regulations and compliance stan- base Cloud is supported by an ecosystem of certi-
dards. fied technology and infrastructure providers that fa-
cilitate service provision across multiple countries,
all with a proven track record in financial services.

46
Backbase Named a Leader in the Ovum Decision
Matrix for digital channel banking platforms
“Backbase hits the most important aspects of Ovum Decision Matrix is emphasizing the impor-
digital channels, which are in demand for banks tance of developing an effective omni-channel
looking for a very modern, agile, and neat solu- banking strategy, selecting a future-proof digital
tion. Backbase allows a rapid time-to-market banking platform and taking into account the
with its responsive design approach to the dig- emergence of new technologies - all in order to
ital channels. empower banks to stay relevant to their custom-
ers, improve their customer banking experience
With this solution banks are getting a number and not lose out to digital challengers. The eval-
of features that are well aligned with current uation criteria for the Ovum Decision Matrix in-
trends in the digital economy, not only allowing cludes market impact, business functionality,
for efficient servicing but also effective sales and product execution - across which Backbase
and marketing actions.” scored exceptionally high. This is the second
time in a row that Backbase is nominated within
the Matrix as Market Leader.
Backbase Named a Leader in the Forrester
Wave™ for Omni-Channel Digital Banking
“Backbase offers broad business capabilities, rent Offering category. Being named a leader in
rich support of customer experience, and very the Forrester Wave provides the market with fur-
solid technology and architecture. With Back- ther validation of Backbase being at the forefront
base being a pure-play vendor, it is not a sur- of digital innovation. We are very happy with this
prise that its commitment to its omni-channel recognition and are energized to help our cus-
banking solution is high.” tomers accelerate their digital transformation.
Our software is used by leading banks around
Backbase was among a group of select vendors the world, and we are 100% committed to ena-
that Forrester included in its most recent Wave bling them to create superior digital customer
for Omni-Channel Digital Banking software. The experiences, any time, any place, and on any de-
Backbase Digital Banking Platform is listed as vice.
leader and received the highest score in the Cur-
About Backbase
Backbase is a fast growing fintech software experiences are essential to stay relevant, and terms of omni-channel banking platform capa-
provider that empowers financial institutions our software enables financials to rapidly grow bilities, and award the company high marks for
to accelerate their digital transformation and their digital business. its deep focus on customer experience man-
effectively compete in a digital-first world. agement and unparalleled speed of implemen-
More than 100 large financials around the world tation. Forrester named us a leader in the For-
We are the creators of the Backbase Omni-Chan- have standardized on the Backbase platform to rester Wave for Omni-Channel Banking. Ovum
nel Banking Platform, a state-of-the-art digital streamline their digital self-service and online nominates Backbase as the market leading pro-
banking software solution that unifies data and sales operations across all digital touchpoints. vider of next-generation digital channel banking
functionality from traditional core systems and Our customer base includes HSBC, ABN AM- platforms, from both a functionality perspective
new fintech players into a seamless digital cus- RO,CheBanca!, Credit Suisse, Fidelity, HDFC, His- and execution perspective.
tomer experience. cox, ING, KeyBank, Legal & General, NBAD, OTP,
PZU, PostFinance, Navy Federal CU and West- Backbase was founded in 2003, is privately fund-
We give financials the speed and flexibility to cre- pac. ed, with headquarters in Amsterdam (HQ Global)
ate and manage seamless customer experienc- and Atlanta (HQ Americas) and regional opera-
es across any device, and deliver measurable Industry analysts Gartner, Forrester and Ovum tions in London, Mumbai and Singapore.
business results. We believe that superior digital recognize Backbase as an industry leader in
Americas HQ European HQ
10 10th Street, Suite 325 Jacob Bontiusplaats 9
Atlanta, GA 30309, United States 1018 LL Amsterdam,
Toll-Free Number: +1 866 800 8996 The Netherlands
Office Number: +1 470 881 8780 Phone: +31 20 465 8888
[email protected] [email protected]

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