Innovation in Banking Forum Financial Innovation Sofia 16
Innovation in Banking Forum Financial Innovation Sofia, 16 th June 2015 Sophie Bertin Group Head of Corporate Development SIX Group
Every day life behaviour changes with digital technology 2005 2013 Source: Bain & Company Innovation@SIX | 21 May 2021 Page 2
In banking, customer needs remain unaltered… CUSTOMER NEEDS Customers want to … Save money Spend money Transfer money in a … secure environment and with … convenient access Source: Bain & Company Basic customer needs remain unaltered by digitalization Innovation@SIX | 21 May 2021 Page 3
… but behaviours also change FUTURE CUSTOMER BEHAVIOUR Customers will … • …use more channels simultaneously without differentiation (omni-channel) • …use digital channels more intensively • …use digital channels to enforce behaviour patterns along customer journey and across channels: Cocreation Source: Bain & Company Network building Personalisation Customer behaviour will change along the entire customer journey Innovation@SIX | 21 May 2021 Page 4
Historically, banks have innovated relatively slowly compared to leaders in digital business RETAIL BANKING INNOVATES SLOWLY LEADERS OF DIGITAL BUSINESSES INNOVATE MUCH FASTER THAN BANKS “The Googly thing is to launch [products] early on Google Labs and then iterate, learning what the market wants — and making it great. ' The beauty of experimenting in this way is that you never get too far from what the market wants. The market pulls you back. ” Marissa Meyer, VP of Google Digitalisation Online and mobile banking introduced in 2000 s and 2010 s ATMs were introduced in the 1970 s and become popular in the 1980 s “Move fast and break things. Unless you are breaking stuff, you are not moving fast enough. ” Mark Zuckerberg, CEO of Facebook Time “Innovation is this amazing intersection between someone's imagination and the reality in which they live. The problem is, many companies don't have great imagination, but their view of reality tells them that it's impossible to do what they imagine. ” Ron Johnson, Former CEO of JCPenney, Former VP of Retail Operations at Apple Innovation@SIX | 21 May 2021 Page 5
Digital innovation cycles are shortening to unprecedented levels inside and outside banking TIME TO REACH 50 M ACTIVE USERS 38 27 17 12 3. 5 1. 5 Years Years Radio 1958 Mobile 1983 Internet 1993 Google 1998 Facebook 2004 i. Pad 2010 TIME TO REACH 70% HOUSEHOLD PENETRATION 26 20 15 10 7 ? ? Years Years ATM channel Online consumer banking Online small business banking Mobile banking Social media Next generation? ? Innovation@SIX | 21 May 2021 Page 6
Customer behaviour is changing with rapid adoption of digital channels, especially in older age groups INCREASE OF DIGITAL CHANNEL USE BY ACTIVITY AND AGE GROUP EXAMPLE AUSTRALIA Explore/research Open account Get advice Note: Computed % after excluding respondents who “Did/would not use” any channel for a particular transaction from total Source: 2013 Online Consumer Financial Services Digitalization Survey (N=663); Bain & Company Innovation@SIX | 21 May 2021 Page 7
Regulations focused on improving supervision and resolution also strongly impact banking sector Banking Union (Participants: EU 19+) Supervision: „Single Supervisory Mechanism“ (SSM) • Responsible: European Central Bank (ECB) and national supervisors (overall supervision ECB) • ECB directly supervises ~120 important banks, national supervisors work closely together within an integrated system • Status: Agreement 2013, coming into force November 2014 Resolution: „Single Resolution Mechanism“ (SRM) • Responsible: Single Resolution Board (SRB) • If all else fails, as a last resort the SRB can decide to resolve failing banks, backed by the Single Resolution Fund (SRF) that banks themselves pay into • Status: Agreement April 2014; SRB coming into force until 2015, Bail-In until beginning of 2016 Funding agreements: „Deposit Guarantee Scheme“ (DGS) • Common rules will also ensure, that EU savers deposits up to € 100, 000 are protected at all times and everywhere in the EU • Integration of national systems for funding protection necessary • Status: Agreement pending „Single Rule Book“ as foundation of the banking union Regulatory framework with common rules for banks in all 28 member states (EU 28) • Capital Requirements (CRD IV, i. e. Basel III): Directive and regulation regarding capital and risk in order to prevent crises in the first place • Resolution (BRRD): Directive on Bank Recovery and Resolution, setting out a common framework to manage the resolution process, including a means to wind them down in an orderly way, if banks do end up in difficulty (incl. bail-in mechanism) • „European Stability Mechanism“ (ESM): Only if after bail-in and SRF public funds are still necessary and cannot be raised by the Euro-state alone, the ESM can recapitalise a bank under certain conditions Source: EU-COM; Bain analysis Innovation@SIX | 21 May 2021 Page 8
Big threat arises from new entrants who are ‘thin slicing’ the banking profit pool with new business models Payments Save & Invest Finance Protect (Borrow/Lend) Digital Payments Remittances (int’l) New Financing - P 2 P/Marketplace Lending and Crowdfunding Reward-based Crowdfunding P 2 P Insurance P 2 P Payments Equity-based Crowdfunding Embedded Payments P 2 P/Marketplace Lending Closed Loop Payment Loyalty/reward Payment Big data-enabled Lending Signature Experience Lending Social Investing Automated Wealth Automated Advisors Digital Wallets Online Aggregator Direct Life Insurance Reward/Incentive-based Insurance Usage-based Insurance Transaction Process Infrastructure Tokenisation/Block Chain Origination Software Payment Service Providers O RIA platform Trading Platform for P 2 P Loans Virtual Currency Automated Trading POS Payments Solutions White-label Banking Utility Full-Service Virtual Bank Innovation@SIX | 21 May 2021 Page 9
Banks Rapid changes in the profit pool of payments are likely in coming years Key Network (eg. Visa, Master. Card) Acquirer, Processor New entrants TODAY INCUMBENT BANKS OWN UP TO ~80% OF $65 B PROFIT POOL TOMORROW POOL POSSIBLY HALVED AND INCUMBENTS ONLY GET 50% FUTURE PROFITTODAY POOL HALVED, BANKS GET BANKS ~80% GET OF~45%, $65 B PROFIT NEW SEGMENTS POOL WORTH 40% US Payment Industry Profit Pool, Illustrative example of a scenario EBIT by segment (2020) (2013) 80% TRANSACTIONS Total Profit = $35 B $65 B LENDING 70 60 50 Margins ~$53 bn compress and volume drops in core revenue segments New entrants change disrupt payment process 40 30 ~$15 bn 9. 4 20 3. 0 0. 7 0. 3 1. 0 e N Da ta an a Ac l y t w q ic p l pa uires at P y fo ro m r r mc en sess t or Ac Nq e Pr twuior e oc rkr e N s so et r w or k 10 3. 0 2. 4 2. 0 0 Bar width – Net Revenue 21. 2 31. 4 9. 9 5. 1 9. 6 Issuer Other lending Issuer (Interest & other fees) (E. g. P 2 P, other fees) installment Bar width loans, etc. ) – Net Revenue Bar width – Net Revenue Issuer (transaction (Interchange)fees) Note: Includes credit, debit and alternative payments; EBIT estimates based on average of following industry leaders: Acquirer = avg. (Moneygram, Global payments, and Heartland payments Systems), Processor = avg. (First Data, Vantiv, Total System Services), Nework = avg. over last 4 years (Visa, Mastercard), Issuer = avg. card related EBIT Source: Nilson Report (Dec 2013); JP Morgan Payments Market Share Handbook (5 th ed. , May 2014); 2013 Federal Reserve Payments Study; Lit. search, Company financials, Bain analysis Innovation@SIX | 21 May 2021 Page 10
Extensive benchmarking study identified five imperatives for the Retail Bank of the Future I Create digitally enabled customer experiences II Build an omni-channel sales and service model III Position technology at the heart of strategy and execution IV Fund investments through efficiency gains and reprioritization V Organize as an innovative enterprise Source: Bain & Company Innovation@SIX | 21 May 2021 Page 11
I The Customer Experience is rapidly digitalizing covering the entire journey TODAY Awareness Advice Purchase Transaction/ service TOMORROW Buy more Share Awareness Advice Purchase Transaction/ service Buy more Share • Stages of customer journey mainly covered by offline measures, only transaction/service complemented by comprehensive digital options • All stages of customer journey covered by interlinked offline and digital measures • Digital services as perceived nice-to-have add-on features but not as stand alone channel • Gradual expansion of digital offer until equivalent to offline options • Digital service as fully established end-toend channel, feasible to stand alone • Gradual expansion of digital offer to allow purchase of simple products (e. g. additional credit card) Focus on transaction/service Focus on entire customer journey Source: Bain & Company Innovation@SIX | 21 May 2021 Page 12
II True integration into an omni-channel model is still in early stages Source: Bain Retail Bank of the Future Benchmarking 2013 (Questions B 4. 2 & 4. 3) Innovation@SIX | 21 May 2021 Page 13
III Technology enablement of branches is expected to increase significantly over the next 3 -5 years Source: Bain Retail Bank of the Future Benchmarking 2013 (Question C 1. 2 -1. 3) Innovation@SIX | 21 May 2021 Page 14
IV Overall costs of digital transition remain poorly understood with 20% lacking budget for transition Source: Bain Retail Bank of the Future Benchmarking 2013 (Questions D 4. 1 & 4. 2) Innovation@SIX | 21 May 2021 Page 15
V More than 50% of banks have direct report from digital leaders to CEO and single digital department Source: Bain Retail Bank of the Future Benchmarking 2013 (Questions E 1. 6. 3 & E. 1. 6) Innovation@SIX | 21 May 2021 Page 16
Financial Services companies create innovation labs – already 30% of Fortune 100 have innovation lab COMPANIES WITH INNOVATION LABS V Note: IG&S includes car manufacturers and airlines, Source: Forrester, Company Websites Innovation@SIX | 21 May 2021 Page 17
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