Digitalisation, defined by research house Gartner as “the use of digital technologies to change a business model and provide new revenue and value-producing opportunities”, has been mooted as a massive opportunity for financial services companies. It is more advanced than ‘digitisation’, which, according to Gartner, “takes an analogue process and changes it to a digital form without any different-in-kind changes to the process itself”. Where do the opportunities and threats of digitalisation for firms in financial services lie?
Opportunities
Cost cutting
Global management consultancy Boston Consulting Group (BCG), in its 2017 report titled Why aren’t banks getting more from digital? says retail banks that digitalise can achieve a 20% revenue boost and a 30% reduction in expenses. It cites an example of a North American bank that achieved this level of cost reduction by redesigning and digitalising its credit lending function. By automating processes – such as applicants submitting information electronically that then feeds directly into back office systems – the time from application to funding was halved, client satisfaction was boosted, and the number of exceptions requiring manual intervention reduced.
Philippa Fielding, Chartered FCSI, manager of capital markets at Accenture Consulting, says the cost savings potential is huge: “We have seen the move to digital reduce wealth managers’ total costs by as much as 30%. In areas such as digital onboarding and client profiling, there are cases where the amount of ‘manual labour’ has been reduced from over seven hours to as little as ten minutes. This will involve automating things like anti-money laundering checks and risk profiling.”
Growing the top line and efficiency
For wealth managers, BCG’s Global wealth 2018: seizing the analytics advantage report estimates that digitalisation has the potential to grow the top line by 15%–30% and drive efficiency gains of 10%–15%.
The Coutts Invest digital platform was launched in April 2017. Nick Johnson, head of digital investing at Coutts and NatWest, says that clients can view their portfolio details online; receive digital reminders of their regular and more straightforward financial transactions; and execute a simple online transaction without seeing, and incurring the costs of, a wealth manager. He says: “In 2018, about 20% of our new investment assets into the group will come from digital channels, and we’re only at the start of the journey.”
Protecting existing business
A November 2017 research presentation on attracting and retaining wealth management clients by Compeer finds that more than 50% of wealth management clients who consider websites, client portals and mobile applications in need of significant improvements are likely to look for another provider if changes are not made.
Hybrid offerings
Gareth Johnson MCSI, head of digital channels and investment solutions at Brewin Dolphin, says their approach to digital has been to design initiatives around customer needs, resulting in a non-advised, online only investment channel, Brewin Portfolio Services (BPS), and a ‘hybrid’ channel, which is much larger.
He says BPS allows the company to service customers at lower cost and target customers with relatively small investment pots (minimum £10,000). BPS now makes up £0.1bn funds under management.
Threats
Negative returns
A July 2018 McKinsey report shows that 21% of financial institutions say their digital investments are generating negative returns. Nearly 50% say returns are below their cost of capital, which McKinsey says is around 10% for banks.
Silver surfers
Tim Jones CBE, former CEO of retail banking at NatWest, says: “The blunt reality is that for an incumbent bank, the vast majority of the most valuable customers are older. And many of them just don’t care about digital. The ‘silver surfers’ – the older generation that do embrace digital – are often in the minority. So, because the majority of valuable customers prefer the way things are done now, like using telephones and paper forms, banks have to keep the infrastructure to service them, and digital investments end up adding to banks’ costs. And these investments don’t bring in much additional revenue either. Digital banking services are more attractive to a younger demographic, and younger people generally have less money than older people. For a bank, people with less money are less profitable. Therefore, banks’ digital investments lose them money!”
Project execution
BCG’s Why aren’t banks getting more from digital? report flags difficulties with project execution: “In the majority of cases, implementation results are disappointing. The pace of delivery is slower than initially expected; it is difficult to scale digital solutions across the bank ... or the impact on the bottom line is insufficient.”
It finds that the number one cause of digital failure in banking is related to the complexity of dealing with legacy IT systems; followed by data architecture problems; key talent gaps; and organisational resistance to change.
Finding the right workforce to deal with digitalisation
A 2015 survey by Accenture, Bridging the technology gap in financial services boardrooms, finds that only 6% of board members and 3% of CEOs in leading banks have professional technology backgrounds, while 43% of banks don’t have any board members with professional technology backgrounds.
The human touch
Gareth Johnson MCSI says: “We find that people with more complex needs want more human interaction. A client with £1m invested is thinking about their own future, as well as their children and grandchildren, and that requires a level of planning.”
The full version of this article appears in the Q4 2018 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.
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