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“zeb.digital pulse check” study: Banks are letting digital transformation wash over them

Netflix instead of the local video store, Airbnb instead of a hotel—digitalization has had a lasting effect on many aspects of our lives and has led to vast changes in a large number of industries. In banking, at least the most important customer needs have remained the same: Just like ten years ago, transparency, convenience and performance are still the cornerstones of a successful relationship between customer and bank. A huge change has however taken place in customers’ expectations as to how their needs should be fulfilled. Ten years ago, convenience meant having a bank branch located on the way home, longer opening hours on Thursdays and pre-filled wire transfer slips so that customers could do their banking after work. Today, “convenience” means online contract closing and 24/7. Many companies in other sectors (Netflix, Airbnb, Apple, DriveNow, etc.) are already fulfilling these demands—they are transparent, always available, connected and yet they are regional. Established service providers are faced with growing—sometimes overwhelming—challenges. Banks also have to take on these challenges. But how strong are the disruptive forces in banking in reality? zeb put this question to more than 250 executives from all parts of the banking sector at the end of 2015. The answers paint a clear picture: Many German banks are not sufficiently preparing for digital transformation. On the one hand, most managers realize the urgency of the need for action—55% of all executives believe that a lack of digitalization efforts could cost their institution at least 10% of earnings in just a few years’ time. On the other hand however, banks remain hesitant to implement concrete measures.

Figure 1: Risks of digitalization—customer migration and decline in earnings are key issues

Only one out of five financial institutions sees a particularly large need for action for instance in updating their own IT architecture. “We would have thought that banks were actively driving the modernization of their IT forward, especially with regard to the integration of cooperation partners into their own portfolio of products and services, as those who wait too long are bound to fall behind sooner or later. Therefore we were surprised to see this hesitant attitude”, explains Dr. André Ehlerding, the initiator of the study.

“Yes” to online contract conclusion, “no” to comparison sites

Top managers give the highest priority to their bank’s website—almost two thirds of respondents feel that they will need to improve their Internet presence in the near future. The same applies to the adjustment of traditional sales structures. For instance, 57% of executives regard the reduction of branches or the expansion of alternative sales channels as urgently required. This matches the fact that 61 percent of respondents intend to improve the ability to conclude contracts for standard products online—although this is inconsistent with the low priority given to updating the IT architecture.

Figure 2: Online availability versus IT

By contrast, many bankers regard the use of comparison sites as well as the topic of banner advertising as irrelevant—only 7% of respondents expressed high levels of agreement in these areas. “I would wish for a lot more open-mindedness in this context. We know from our projects just how useful the intelligent integration of comparison sites can be. Institutions are thus neglecting a relevant sales channel,” says Ehlerding.

With regard to fintech, most banks are also biding their time

Most banks are also biding their time as far as cooperations with fintech companies are concerned—only one out of seven respondents currently sees this as a priority issue. Nevertheless, most executives believe that the financial start-ups will in the short term become relevant in payment transactions, settlement and infrastructure as well as big data and scoring. Online asset management (aka robo-advice) is however of no importance for most executives in the near future—a danger from zeb’s point of view as this innovative technology could become significant for the retail business more quickly than many bankers think.

Figure 3: Relevance of fintech solutions over time from respondents’ perspective

All in all, Mathias Gans, author of the study, believes that “German banks have fundamentally realized how important the digitalization of their business models is. However, they are (still) avoiding particularly challenging fields of action with customer-orientation and IT focus. We argue the case for addressing the mega trend of digitalization more comprehensively. After all, banks as we know them today will no longer exist in the long run.”