Top 10 Trends in Retail Banking 2018 - Capgemini

Top 10 Trends in Retail Banking 2018

What You Need to Know

Contents

Introduction

3

Trend 01: Banks Make Significant Investment in Digital Transformation

4

Trend 02: More and More, Banks Collaborating With FinTechs Through Different Models

6

Trend 03: Banks Look To Leverage Digital IDs beyond Authentication

8

Trend 04: Banks Strive to Bring Distributed Ledger Technology Out of Labs,

Into the Real World

10

Trend 05: Banks Deploy AI and RPA to Increase Productivity and Efficiency

12

Trend 06: Banks Leverage Analytics to Transform End-To-End Customer Journeys

14

Trend 07: As Security Threats Recede, Banks Leverage the Cloud to Cost-effectively

Streamline Processes

16

Trend 08: Digital-Only Challenger Banks Threaten to Beat Retail Banks at Their Own Game

18

Trend 09: Alternate Lenders Leverage Alternative Data for Providing Credit Facility

to a Wide Range of Customers

20

Trend 10: Banks Connect With Third-Party Providers to Drive Customer-Centricity and

Implement New Models

22

References

24

About the Authors

27

2 Top 10 Trends in Retail Banking 2018

Introduction

The global financial services industry continues to be disrupted, as FinTech adoption gains momentum among banking customers. Augmenting customer experience is the need of the hour as customers increasingly adopt digital products and services and digital-only banks challenge incumbents to deliver better digital innovation. As a result, banks are investing aggressively in digital transformation to enable nimbler processes and support digital products and services. They are also collaborating with FinTechs to learn and acquire innovative approaches and technological capabilities.

Under pressure to boost revenue, cut costs, and at the same time deliver a better customer experience, banks are investing in emerging technologies and processes such as digital identity systems, artificial intelligence, and blockchain. In order to provide seamless customer journeys, banks are automating their processes, making increasing use of cloud implementations, leveraging analytics for better customer engagement, and providing a more personalized and enriching customer experience. Regulations are also spurring banks and FinTech collaboration through various Open Banking initiatives, with banks now being mandated to share data with third-parties through APIs.

To stay competitive, banks must remain cognizant of numerous implications from within and from outside the financial services industry. This document aims to understand and analyze the top-10 trends in the retail banking industry expected to drive future dynamics of the banking ecosystem.

3

Trend 01: Banks Make Significant Investment in Digital Transformation

Banks are investing aggressively to digitally transform as competitive pressures and customer expectations rise.

Background

? FinTechs have accelerated the digital disruption and are maximizing the use of technology, giving stiff competition to traditional banks

? Legacy systems and complex process architectures are limiting banks' ability to enhance customer experience, impacting their advanced analytics capabilities

? Increasingly, customers are choosing their primary financial services provider based on the ease with which they can operate their financial products, and are demanding a personalized experience: ??Experiences with companies across different industries, such as telecom and retail, have reshaped customer expectations

Key Drivers

? Banks are facing stiff competition from agile FinTechs and digital-only banks that offer superior customer experience

? Banks have a high focus on automation, big data, analytics, and innovation that require an agile architecture to support the digital ecosystem

? Customers are getting more digital and tech-savvy, and this is creating demands on legacy bank infrastructure to support new modes of engagement: ??More and more, customers are migrating to digital channels that now form the bulk of banking transactions

? To leverage the latest technologies and optimize cost efficiencies, banks are looking at end-to-end digital transformation

Exhibit 1: Banking Executives Strategic Priorities

Redesign / enhance

71 digital experience % for consumer

Digital enhancements

41 for improving customer % experience

Migrating customers

30 from physical to % digital channels

Digital laggards in FS industry could

35 potentially lose up to 35% of the total % market share to digital pure-plays

Digital business/ digitalization is the #1 strategic business priority for industry CIOs in 2016-2017

Source: Capgemini Financial Services Analysis, 2017; "The Digital Banking Revolution: Who Will Survive?", Jeffrey Pilcher, The Financial Brand, Jan 31, 2017; "How a bank bet on fintech for its digital reboot", Bryan Yurcan, American Banker, Aug 30, 2017; Top 10 Strategic Priorities for Banking in 2017, Jim Marous, The Financial Brand, Dec 7, 2017

4 Top 10 Trends in Retail Banking 2018

Trend Overview

? Digital disruption has impacted the financial services industry, and banks are investing heavily in digital transformation: ??BBVA has invested extensively in digital transformation and its number of digital customers increased from 33% in June 2016 to 39% in June 20171 ??When advising customers on mortgages, ABN Amro uses a webcam to eliminate the need for customers to hand over documents at a branch2 ??BNP Paribas is investing 3bn on digital transformation, boosting spending on digital initiatives by 50% over the next three years3

? Banks are bogged down by legacy systems, thereby hindering their ability to innovate new products and services, thus impacting customer experience: ??Banks having conventional paper-based processes and legacy systems are finding it extremely tough to compete with financial institutions who have new-age digital platforms

? Rapid growth in online and mobile banking, as well as empowered customers embracing digital touchpoints, is further fueling the need for investments in digital transformation

? Superior digital banking capabilities leads to better data aggregation and predictive analytics capabilities, thereby improving cross-selling

Implications

? Digital transformation will be imperative for banks to automate processes and lower their costs

? Effective digital transformation will help banks to drive agility and quickly launch new products and services: ??Banks will look to integrate User Experience (UX) design into their digital transformation projects for a more accurate analysis of customers' needs and preferences

? Banks will either reinvent themselves by transforming digitally or risk their relevance in the fast-evolving digital economy: ??With Gen Y and tech-savvy customers driving digital adoption, digital transformation is no longer an option but a survival need

? Innovating on digital products and services will be the key to enhancing customer experience

1 BBVA 2Q17 Results, July 27, 2017, accessed October 2017 at

2 "The Future of Retail Banking: Are Bots Ready to be Your Next Banker?", Eric Kline, Nov 28, 2016, accessed October 2017 at

3 "BNP Paribas to spend 3bn on digital transformation", Michael Stothard, Martin Arnold, Feb 7, 2017, accessed October 2017 at c57ac5ca-ec9b-11e6-ba01-119a44939bb6

5

Trend 02: More and More, Banks Collaborating With FinTechs Through Different Models

Increasingly, banks are collaborating with FinTechs to leverage their technological know-how and for costeffective offerings.

Background

? Over the last few years, FinTechs have continued to disrupt the financial services industry through innovative approaches: ??FinTechs generally specialize in specific products within the banking value chain and adopt a customer-focused approach ??FinTechs have lower fixed and investment costs, a lean and agile IT infrastructure, and have leveraged emerging technologies to provide a superior customer experience

? Rapid growth in technologies, increased competition, greater regulatory spend, and slow economic growth is impacting banks' topline and eroding their profitability: ??Banks are now targeting new revenue streams, looking to cater to increasing customer expectations and to bring products and services to the market quickly

Key Drivers

? Technological innovations and disintermediation within the financial services industry is driving banks to adopt a collaborative approach

? New banking regulations such as PSD2 that involve sharing of customer data are also facilitating collaboration, especially by APIs being leveraged to share this data: ??Regulators are encouraging Open Banking initiatives, and banks are having to open up their systems via APIs to third parties in providing access to account information and to initiate payments

? Banks have a burning need to innovate faster but have not been very successful with digital innovation through in-house efforts

? The complementary strengths and needs of both entities (banks seek new approaches to deliver innovation while FinTechs seek capital, scale, data, customer trust, and regulatory support) require their win-win collaboration

Exhibit 2: Bank-FinTech Collaboration

6 Top 10 Trends in Retail Banking 2018

91%

Banks want to collaborate with

FinTechs

Partnering with FinTechs

? HSBC ? Metro Bank ? TD Bank

75%

Incubation Centers for

FinTechs

FinTechs want to collaborate with Banks

? Credit Agricole ? Lloyds Bank ? Barclays

? ? ?

BDCBBitiVSbaAnkFundFViunengndtFsuinfroeTrechs

86%

Banks feel they will

suffer if they don't

? RBC

embrace FinTechs

? RBS

? Santander

42%

Conduct

Hackathons

Banks feel collaboration

will reduce their costs

Source: Capgemini Financial Services Analysis, 2017; Capgemini World Retail Banking Report, 2017; "Are Banks an Endangered Species?", Jeffrey Pilcher, The Financial Brand, 31 Oct 2016

Trend Overview

? Innovative FinTech entrants have disrupted the financial services industry Although banks initially viewed them as a threat, they are increasingly looking to leverage FinTechs' fresh approach to industry challenges

? Banks have been reacting differently to the disruption caused by FinTechs, by either acquiring, investing, or partnering with FinTechs (leveraging different approaches, such as by developing incubators / accelerators, conducting hackathons, or by using APIs to open up their systems to third parties): ??UBS partnered with blockchain startup Clearmatics through an incubator to explore the use cases of blockchain4 ??Barclays has a 13-week accelerator program wherein it provides tools, equipment, facilities, and dedicated mentorship for select FinTechs5 ??U.S. Bank and MasterCard conducted a hackathon focused on creating innovative solutions, and both companies provided access to some of their APIs to develop new products6

Implications

? Collaboration will become an expected way of doing business, with 91.3% of banks and 75.3% of FinTechs saying they expect to partner with each other7: ??An effective collaboration will complement both entities' competitive advantages and facilitate business viability

? Banks will be able to increase revenue streams, innovate faster, reduce costs, and focus on improving customer experience: ??Banks will be able to provide differentiated products and services, and leverage technology for deeper customer insights

? The industry will move toward an open API ecosystem that will create a connected network of banks and FinTechs: ??To realize positive synergies, an effective collaboration leveraging each other's strengths will be imperative for gaining a competitive advantage in the fastchanging financial services industry

4 "Cutting through the blockchain hype", UBS, Dec 5, 2016, accessed October 2017 at

5 Barclays Accelerator Program, accessed October 2017 at 6 "Can Hackathons Give Big Banks The Fintech Edge?", Lisa Rabasca Roepe, Oct 21, 2016, accessed October 2017 at

how-big-banks-are-using-hackathons-to-get-the-fintech-edge 7 Capgemini World Retail Banking Report, 2017

7

Trend 03: Banks Look To Leverage Digital IDs beyond Authentication

Banks can build and leverage digital identities to not only enhance cyber-security but also to improve efficiency and generate new revenue streams.

Background

? Enhanced digitization has resulted in increased cyber-risk for banks, and to counter these threats banks need to continually adopt new measures

? Verifying identities of a person/entity and cross-checking associations (such as person-entity, person-asset, etc.) has always been a challenging task for banks

? Disjointed banking systems make it necessary for customers to provide their credentials time and again

Key Drivers

? Availability of advanced biometrics-based solutions (e.g., fingerprints, iris, vein, face, voice, etc.) can help banks in creating and maintaining a credible identity system

? Manual processes of KYC and AML take a heavy toll on banks in terms of human and financial resources thus there is need of more automation to enhance efficiency and reduce costs

? Regulatory demand of increased transparency in transactions ? Generally, banks are the most trusted partners (after government entities) that

people can rely on for their ID management ? Customers expect seamless service across channels without going through

repetitive verification

Exhibit 3: Banks and Users Alike Will Benefit From Digital IDs

Governing Body

Inherent, Accumulated,

Assigned Attributes

Secure, Portable,

Controlled Digital ID

Drivers

Biometrics Cost Savings

CX Transparency

Source: Capgemini Financial Services Analysis, 2017

For Banks

For Users

Enhanced Security Access to Other Services Personalized Offerings Convenience with Control New Revenue Streams Enabler of Open Banking Enhanced Products Operational Efficiency

8 Top 10 Trends in Retail Banking 2018

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