We live today in an increasingly digital world. We are plugged in, connected, and accessible anytime, anywhere.
We communicate via text message and social networks. We are increasingly surrounded by the Internet of Things, the network of products equipped with sensors, software, and wireless connectivity.
These new players are using different business models that capitalize on inefficiencies in traditional banking models. For example, loans are approved in minutes, not days. Payments are made via services like PayPal that completely bypass the banking system. Retailers and telcos offer financing options in real time at the point of sale.
Even tech players like Google and Apple are entering the space. They offer mobile wallets and procure-to-pay systems to their billions of users.
Traditional banks can thrive in this new digital environment.
Banks need to embrace the digital revolution as a disruptive force. The first step is to examine business models, processes, and work itself. Doing so, retail banks are likely to discover new revenue streams.
In reality, this change is not an option but a necessity. Banks face increasing pressure to improve efficiency, develop innovations faster, and offer customers more personalized service. With agile, full-spectrum digitalized processes, banks will meet the expectations of customers and investors.
Let’s take a closer look at four ways banks can address this digital shift and be at the forefront of innovation.
1. Beyond banking
Retail banks are looking to extend the value chain to become a crucial part of their customers’ daily lives. They are proactively offering to manage customers’ financial matters by anticipating customers’ needs.
Leading banks integrate services with other products, online providers, and others to allow pervasive payments. They offer value-added financial services.
For example, when offering a loan, a bank provides buyers with other relevant information. These items may include recent sales prices, neighborhood resources, and school information along with bank offers on new accounts and services.
As another example, banks can leverage the use of smart devices to embed digital wallets, allowing machine-to-machine payments.
For banks, this new approach to banking has considerable advantages. They increase their share of accounts, provide higher-margin services, and improve customer loyalty, ultimately driving more business.
2. The bank’s marketplace
Thriving banks will create their own financial services marketplace or establish powerful partner networks.
Banks should leverage their vast network of providers, customers, and partners to become service organizations. They can become active in forging business relationships between commercial and retail customers. The bank can offer platforms allowing for these transactions. In addition, banks can play a role in these relationships by offering financing, insurance, payment, and other services.
Banks should consider ways to become one-stop shopping for customers. Partnering to offer products and services gives customers unique value-added access to provide more financial and e-commerce offerings. In some cases, banks’ competitors may be worthy partners in such offerings.
The advantages to this approach are considerable. They can generate incremental transaction fees. By leveraging the information they collect, banks can also monetize both buyer and seller data.
3. Banking as a service
Retail banks need to integrate financing opportunities throughout their value chain.
By positioning the bank as a service provider, new relationships emerge. These partners can include retailers, manufacturers, and digital communities.
Banks can leverage economies of scale in these relationships. All parties can benefit from partners’ strengths and expertise.
In so doing, banks can gain back some revenue traditionally lost to these non-bank entities. In addition, banks can provide servicing and financial transaction processing to non-traditional customers.
4. Inclusive banking
The digital, connected world gives retail banks an opportunity to provide services to the unbanked. Worldwide, that figure is estimated to be 2 billion adults.
Traditionally, building and supporting a branch network have been the primary barriers to reaching these audiences. In addition, there are considerable costs with servicing low-balance accounts.
Today, however, inexpensive cloud platforms and the growth of mobile services let banks reach the unbanked profitably.
Latin American example
One bank that has made this transformation is Compartamos Banco. Based in Mexico City, the bank was founded in 1990 to provide financing to female small-business owners. Since then it’s grown to more than 2.8 million customers, 90% of whom are women.
Focusing on microfinancing, the bank offers savings accounts, loans, insurance, and transaction points. However, as the bank grew, it needed technology to assist with complex operations throughout Central America.
Technological solutions were needed to expand into new segments and markets. Mounting data volumes were an issue. So too were the need for efficiency in origination and portfolio management and enhanced customer banking experiences.
Bank leadership decided to go big. It began in 2014 with 21 service offices in Mexico with a goal of 530 total offices. The plan involves integrating operations in multiple countries, with an aim to push localized growth and expansion into new markets.
Part of that push is to offer more than financial services and deliver services online and via mobile devices. After Mexico, the bank plans expansion into Guatemala and Peru, and eventually other countries. With disparate systems in the three countries, the bank needed to establish a new platform to bring together data from operations in each country. The bank is projecting to grow to 10 million customers.
Digital technologies exist today that allow banks to engage in powerful transformation. By examining their business models and processes through a digital lens, retail banks can identify new opportunities to serve customers in different ways with different partners. In doing so, banks can establish new relationships with customers, build loyalty, and provide new revenue streams.
To learn more, view this IDC Report, which highlights the progress banks are making in their digital transformation and the best practices of the top performers.