Many banks are trying to transform themselves for the digital age but few have gone as far as Poland’s BRE Bank, which rebooted earlier this year by scrapping its traditional brand and redesigning itself from scratch.BRE, which launched in Poland in the 1980s and later became a strategic investment of Commerzbank, first tested Internet services by launching mBank, a pure-play online bank in 2000. As an Internet-only bank, mBank rose rapidly to become Poland’s biggest online bank and its third largest retail bank and then expanded into the Czech Republic and Slovakia.
Today mBank is so successful that BRE, the parent company, has decided to change its name to that of its Internet subsidiary. The commercial bank and its two retail brands will soon be using the name mBank. The “m” signifies not only that the bank has incorporated mobile but that it has undergone a true metamorphosis.
“It took courage to rebuild the bank,” says Michal Panowicz, who spent three years at Harvard Business School and five years at Microsoft in the U.S. before becoming managing director of the mBank project. Panowicz was brought on board to spearhead the radical transformation because BRE Bank determined that Big Data analytics, social networking and mobile are not just nice-to-have add-ons — these technologies need to permeate everything it does.
Change is necessary because interoperability and hyperconnectivity are allowing customers to switch providers easily. Peer-to-peer services and social network referrals and critiques are changing how relationships and trust are built. What’s more, there is a shift from a high-value low-frequency-based revenue model to one based on very low value but extremely high frequency, with micro-fees providing recurring revenue, undercutting the traditional banking margins and fees. Options for banks include unbundling the current model and excelling in one specific area, transforming into long-tail business model organizations or partnering with newcomers in the business.
“Our industry is being challenged by aggressive newcomers who are experimenting with creative strategies and dramatically different business models,” says Peter Vander Auwera, co-founder of Innotribe, the innovation arm of SWIFT, the financial services organization that each day handles wire transfers for over 10,000 banks. Vander Auwera is also the architect and content curator of Innotribe at Sibos, an annual banking conference which is organized by SWIFT and takes place this year in Dubai on September 16th-19th. “The focus of the Innotribe sessions at Sibos 2013 will be on preparing banks for a very different kind of future, one which will be centered around big data analytics, mobile, and social and which will require new tools, capabilities, and non-linear ways of thinking,” says Vander Auwera.
The new mBank online service, which was opened to customers in June of this year and won FinovateEurope’s Best of Show, gives a glimpse of what’s to come. mBank offers a state-of-the-art interactive user interface; a search engine that allows both commercial and retail customers to view their real-time transaction history as easily as using Google to look up something on the Internet; money transfers using phone numbers or social network connections instead of account numbers; personal finance management services which clearly explain when money was spent and on what and forecasts overall spending by the end of the month; video banking — an online, secure video stream connection to bank advisors to authenticate contracts and transactions; and gamification to encourage smart spending and saving. Within three months the new services have attracted over a million customers and accolades from banking industry observers. mBank is “the first bank-invented mobile social solution I’ve seen that even comes close to delivering the new retail bank reality,” banking industry expert Chris Skinner, a scheduled speaker at Sibos, said in a blog posting.
Skinner, the author of a book scheduled to be released at Sibos called Becoming a Digital Bank — Strategies for Success, considers that and other developments as an encouraging sign.“I am pleased to say that in 2013 banks have woken up to the 21st century challenges of banking,” he said in an interview with Informilo.
The Polish bank took action because “the ‘barbarians’ are at the gate,” says Panowicz, referring to start-ups offering innovative, cheaper, more efficient ways to move, manage and exchange money. “The last thing bankers want to lose is account relationships and payment relationships. I think that what we are showing is that if you integrate innovative technologies and can pull it off then banks, with all their assets and trust and relationships, can deliver way more than start-ups. We just need to change.”
Other banks are coming to the same realization. “To change our organization we need to figure out a way to be more nimble in product creation, to be more of a consumer Internet company and less of a bank,” says Jay Reinemann, executive director at California-based BBVA Ventures, the bank’s $100 million fund to invest and partner with start-ups. To that end, BBVA, which provides financial services in more than 30 countries, has invested in Square competitor SumUp, which enables merchants to take debit and credit card payments with their smartphones or tablets. The idea is to use SumUp’s technology in BBVA’s planned rollout of such services in the South American market.
A number of other banks have begun pioneering cutting-edge services, either by partnering with start-ups or developing them in-house.
In February, Banco Santander announced a strategic investment of €5 million ($6.6 million) into another Square competitor called iZettle. The deal enables self-employed professionals and small merchants to accept card payments via smartphones and tablets using iZettle’s Chip & PIN reader. Like BBVA, Banco Santander wants to target a new range of customers. In Spain alone there are more than one million self-employed professionals and micro-companies that need an option that is more flexible than conventional card terminals, according to the bank.
For its part, BNP Paribas recently launched a stand-alone digital mobile bank, Hello Bank!, in Belgium, Germany and France, with plans to open in Italy in October, to counter competition from digital banks like Fidor Bank, Holvi and Moven. BNP Paribas has said it hopes to attract 1.4 million customers for the service over the next five years.
In India ICICI Bank has launched an array of offerings on Facebook — a bank account app, money personality app, deal-of-the-day section, offers on banking products/services and a service called iWish which allows people to save money to fulfill a specific wish and solicit funds from family and friends. All customer grievances are integrated at the back end in a CRM module built especially for Twitter and Facebook. Launched in February 2012, ICICI Bank achieved a million likes in the first 10 months and more than double that after 15 months.
The impact of social media engagement has resonated with the bank’s clientele. In January 2012, before using Facebook for customer engagement, 24% of the online mentions about the bank were negative and only 19% positive. As of April of this year 49% of online mentions were positive and just 6% negative.
In Turkey Garanti Bank and mobile operator Turkcell have teamed up with MasterCard to launch a prepaid SIM called Cep-T Paracard which combines mobile and banking services. Turkcell customers can access payment systems offered by Garanti Bank without being a direct banking customer. With the launch of this new prepaid card service Garanti says it hopes to attract 1.5 million unbanked customers within three years.
The Commonwealth Bank of Australia has also introduced a number of digital innovations. The bank has worked with software provider Pegasystems to use case management and predictive analytics to improve the bank’s response to complaints and to customers’ changing needs. It is generating mortgage leads via a mobile property guide application that combines mobile augmented reality with licensed information on actual property selling prices, closing dates and estimated current values to help homebuyers in their search. And its “Kaching” mobile payment app allows customers with iPhones to make multiple types of payments — including transfers between a customer’s own accounts, transfers to other accounts, bill payments through Australia’s BPay service, MasterCard PayPass payments at the point of sale, payments to friends through email addresses and mobile numbers, and payments through Facebook.
The Forces of Change
Banks are beginning to launch cutting-edge services because changes are coming at warp speed. Société Générale told a banking conference in June that it took 10 years to get 20 million contacts per month through Internet banking but only 18 months for the bank to do the same via mobile.
People born in 1998 who never knew life without Google will establish their first bank relationship by 2014 while those born in 2007 — the year the first iPhone was launched — will begin opening their first bank accounts in 2024, so banks had better get prepared for a future that will have to be far more digital and mobile-centric, says serial entrepreneur Scott Bales, the Singapore-based director of user strategy at Next Bank and a board member of Moven, a digital-only bank which is targeting the millennials and has global ambitions. (See the story about Moven and other digital interlopers on page 2.)
Over 80 million strong,millennials rival baby boomers in their numbers. Their purchases already account for a little over one out of every five dollars spent on consumer goods and services, according to Moven. And in just over five years they will hit their peak and become a defining force.
For banks the impact has so far been minimal, but that is about to change. The rise of mobile applications has fundamentally redefined how millennials find, select and purchase services. Traditional banks are missing this shift towards “appification,” where constant experimentation and innovation are the new norm. Moven argues that banks would do well to take the following to heart:
· Without a streamlined mobile account signup, the app discovery and trial behaviors that millennials love is impossible;
· Millennials look to their friends and peer groups for recommendations and are quick to share when pleased. If getting an app takes minutes, it’s far easier to champion the brand. The best apps go further, creating shareable moments that complement millennials’ own personal social brands;
· When it comes to making money decisions, giving people their balance isn’t enough. Millennials want instant insights into their spending patterns and personalized suggestions about how to improve their financial health; and
· The increasing appeal of prepaid cards signals millennials’ willingness to choose consistency and transparency over hidden fees and the temptation of greater debt.
A Fresh Approach To Banking Services
As banks focus on current cash cows and struggle to add basic digital services on top of their legacy systems digital-only neo-banks have rushed to cater to digital natives who expect to be able to do their banking anywhere, anytime, on any type of device and are looking for much more than just online access to a plain vanilla bank account.
Take the case of Finland’s Holvi, which will present at an Innotribe session at Sibos. It is piloting a service in Berlin, Dublin and Amsterdam which allows customers to easily create an account online and do most of what you’d expect with a normal bank account plus send invoices, add comments or tag transactions, manage tasks and budgets, automatically build financial reports and even set up an online shop and accept credit card payments directly into their Holvi accounts. The target audience includes freelancers, small businesses and event organizers. Holvi, which plans to expand across Europe, has a ten-person team, including an iPhone developer and a video content blogger. Tellingly, none of the start-up’s employees come from the traditional banking sector.
Meanwhile other start-ups are revolutionizing payments and currency exchange, often offering customers the ability to do things far more quickly and cheaply.
“Any industry where the middle man makes significant amounts of money will be called into question between now and 2020,” says Bales. That is particularly true in banking. “The legacy transactional banking and distribution infrastructure, supported by outdated metrics, budgeting processes and organization charts has over time built up into an unsustainable operating model,” Brett King, CEO and founder of digital-only neobank Moven, said in a recent blog posting. “While regulatory imperative has significantly increased operational costs, we’ve ended up simply adding complexity and inefficiency on top of the old system, rather than rebuilding the underlying bank and its processes.”
While banks are aware that they have to adapt and have a bigger IT spend than any other industry sector, they don’t exactly move at Internet speed.“Most start-ups can do in three days what banks can’t do in six months,” says Bales. “Banks will spend tens of millions of dollars building a project on the assumption that ‘if we build it people will come.’ Start-ups remove the assumptions from the solutions and get a higher rate of adoption and also a reduced rate of failure.”
As banks begin to acknowledge that they can’t do it all alone they are turning to start-ups for help. Life.SREDA, a venture fund owned by a group of eight Russian commercial banks, has just invested in Moven; other banks are acquiring stakes or partnering with start-ups that are pioneering new approaches to payments and foreign exchange.
Start-ups are not just disrupting banking — they are also impacting the future of money. Alternative currencies such as the Ven and Bitcoin are already going mainstream and in this area too there are opportunities for banks to partner with start-ups. “The genie is out of the bottle. People have figured out to how to do this. It is a weird and exciting but scary time — everyone has to come to a realization that this exists now — so the question is how do we all deal with it?,” asks Patrick Murck, Bitcoin Foundation’s general counsel.” There is a culture clash here — there is no doubt about that. At times I feel like there is a new counter-culture with the technology sector moving to radical openness, transparency and sharing. It is a challenge for banks because all of this is totally counter to their thinking. Today it is about individual responsibility and individual control, that is where everything is heading right now.”
The time is ripe for banks and Bitcoin to seek common ground, says Murck, a scheduled speaker at Sibos. “The big opportunity is to work where traditional finance and banks can’t — there is a large unbanked and underbanked population in the in world and they can benefit from a system that doesn’t have barriers to creating a bank account and participating in the global financial system,” says Murck. What’s more, there is an opportunity for banks to run high-performance Bitcoin/dollar exchanges for merchants to cash out. The message to banks is “don’t be afraid, Bitcoin is not scary and is very interesting and there will be plenty of opportunity,” he says. “You have expertise in certain things and there are plenty of innovators that would love to work with you. We can help each other out.”
Preparing For A Very Different Future
As start-ups offer new technologies and new models for collaboration “there is finally a recognition that the business model has to change thanks to the technology, and banks are realizing that the last century model, where a bank manages the complete end-to-end delivery to the customer, is no longer relevant or appropriate in 2013 and beyond,” says Skinner.
Indeed, resilience and adaptability are key for any organization or business to sustainably succeed in the information economy of the 21st century, says Sean Park, a founder of The Anthemis Group, which has invested in Simple, Moven and Fidor Bank. “This creates a new paradigm for banks, one where the bold and forward-looking incumbents unbundle their value chain and take a hard, honest look at where in the ‘business stack’ they have a real competitive advantage, be it infrastructure, distribution, research or product innovation and build on that, instead of clinging to the monolithic, vertically-integrated models, optimized for a 20th century industrial economy. The ‘mainframe’ era of banking is past.”
In the coming years, the most successful incumbents and new entrants will be those that let go of their mutual wariness and create networks of collaboration and commercial partnerships that harness and play to each other’s expertise and strengths, says Park. “The disruptors are unencumbered by legacy infrastructures, are agile and most importantly, in phase with their customers…their entire business models are often fundamentally different and natively adapted to the new, emerging technological, economic and cultural environment of the information age. But there are still many facets of the banking industry where the incumbents … can maintain and even grow further great, sustainable businesses so long as they recognize where their true competitive advantages lie in this new landscape and act deliberately to transform their businesses to play to these strengths and let go of historical assumptions as to what it means to be a bank.”