6 ways banks can profit from the digital age

As a widespread phenomenon, the digital revolution has disrupted many industries, including retail, telecommunications and consumer goods. Financial services is not an exception. For many emerging markets, this as a huge opportunity. The success of pioneering digital players, such as mBank in Poland and Alibaba in China, have proven that it is possible to become a market leader through digital innovation.

Today in Indonesia, there are many indications that people are ready for digital banks. The country is one of the largest users of social media and more than 60% of middle-class and affluent consumers are already actively seeking information online before making purchases. Furthermore, Indonesia’s current internet penetration is around 30%, and growing. Compare this with 21% in Poland in 2002, when mBank first launched its digital bank. Furthermore, e-commerce penetration is at 1.1%, compared with 0.9% in Poland in 2002. The affluent and young, in particular, are ready and eager to adopt a digital proposition. Of these sections of society, 42% want an online-only model and a mere 16% prefer to bank through their branch.

Indeed, in today’s market, the expectations of retail-banking customers are increasingly complex. Customers naturally want a bank that protects their assets and helps them achieve their financial goals, but they also want regular and convenient interactions, total reliability, simple ways of doing things, and adaptability when life circumstances change.

Yet financial institutions of all types are still adjusting to the digital and data revolutions. Building a completely new digital bank such as Alibaba or mBank might prove difficult for many Indonesian institutions at the moment, given the growth of the incumbent businesses. It might be difficult to marshal support for a future digital bank that might not generate significant returns in the short term.

What can banks do to overcome this? They should consider a two-pronged approach: first, build a dedicated, independent venture to focus on creating a disruptive digital proposition for a selected segment of the market.

Second, they should move towards digitizing their current business models. This is where banks need to become more “bionic”. According to the Boston Consulting Group’s proposed definition of the word, this means “blending digital technology and a human touch”. It’s what retail banks must do if they are to meet customer expectations. Offering just one or the other is no longer enough; they must provide digital functionality for speed and convenience, as well as thoughtful human interaction when the customer wishes it.

Leading retail banks around the world are at varying stages of becoming bionic, and the transformational roadmap differs for each one. But the prize will be significant for the winners, who could see returns on equity improve by eight to 10 percentage points.

There are six key elements to building a bionic bank.

1. Clear vision. This means targeting a customer group, building in a geographic focus, and settling on products and delivery channels.

2. A multichannel delivery model should focus on technology that enables quick sales and convenient execution, while human interaction continues to provide relationship-driven sales. A bionic bank keeps distribution reach at variable costs and constantly reviews its branch network, with 80-90% of revenues generated by 50 to 65 of the branches in a given network.Banks can gain a competitive advantage of 15% in cost-to-income ratio by improving their telephony and digital-channel services through “one click” sales or “click to call” support, among other things.

3. Customer centricity is when a bank uses its customer knowledge to achieve sustainable relationships; these can lead to around 11% higher income per customer and about 5% lower cost. Customer insight is a method of determining demographic profiles, financial needs, behaviours and life stages. It considers the offer, execution and tone of service, thereby satisfying the technical and emotional demands of its customers.

4. Technology and operational excellence. This is the largest difference between bionic and traditional banks. The best banks have more staff front-of-office than back – a ratio of 80:20 rather than 60:40, or even 50:50. Successful banks simplify business processes, which leads to a reduction in operational risks.

5. Organizational vitality refers to a simplified and agile organization that has an eight-layer and eight-person span of control, maximum. Talent is cultivated and managed, and there is a cooperative culture for strong risk and regulatory relations.

6. Financial and risk control refers to balance sheet rigour. Proactive risk management and built-in conduct and compliance codes are central to the success of retail banks.

Digital agility allows a bank to respond to technological progress in a more practical manner, and to focus on the bigger, bolder task of building a disruptive digital venture. There is little doubt that such innovation will attract the next generation, and with it more efficient, more bionic banking.

Author: Ernest Saudjana is a Principal in the Jakarta office of the Boston Consulting Group and a Global Shaper.

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