Digital customer demands, new technology-savvy competitors and regulatory changes combine to put the finance industry under considerable pressure
Munich, March 1, 2016
- Roland Berger study: Banks and insurers have a great deal of digitization potential but many lack a comprehensive digital strategy
- Huge savings potential if business processes are digitized end to end
- New competitors and new customer behaviors call for a fundamental change of mindset
- Market share of finance brokers and online platforms continues to rise
- Unfair competition: New digital competitors are in many cases not subject to the regulatory requirements governing the finance industry
Banks and insurers have some of the greatest digitization potential of all, given that they have been collecting, processing and connecting data on clients and transactions since the year dot. Yet many financial service providers are having trouble consistently and thoroughly digitizing their business processes from end to end. Customers are still confronted with paper application forms, manual processes and procedures and correspondingly lengthy waiting times, and their needs are not addressed at an early stage.
And the consequence? New, technology-driven providers (online platforms, FinTechs) are cornering certain segments of the market with customer-friendly digital services, while the established financial service providers are falling behind the competition or even being forced out of the market. Finance brokers' share of the market for mortgage lending has more than doubled since 2010, rising from 17 to 35 percent. This is one of the findings of a new study, "Plan D – Digital all the way: How financial service providers can protect their livelihood with end-to-end digitization", in which experts from Roland Berger analyze the industry and present the steps the established financial service providers need to take now in order to successfully achieve digital transformation.
Digital competitors have substantial competitive edge
"Today's customers are accustomed to searching on the internet and buying online," said Wolfgang Hach, Partner at Roland Berger. "And they are transferring this experience to the finance industry: what they expect from financial service providers are digital products and services available quickly and easily whenever they want them."
This customer need is being met by new competitors who are cornering the market and fundamentally transforming existing value chains with their digital business models. They are often technology driven and not subject to the strict regulatory requirements that apply to banks and insurers. This is a competitive advantage that will only gain in significance as market entry barriers at EU level are broken down by things like the qualified electronic signature from the middle of 2016. "Quite apart from that, many traditional financial institutions are struggling with obsolete IT infrastructures, complex products and diverse processes," added Sebastian Steger, digitization expert at Roland Berger.
Insular solutions are not enough to improve efficiency and customer loyalty
Time is therefore of the essence for the traditional providers. In their efforts to meet the needs of online-savvy clients, many financial service providers have already come up with digital offerings. But most of them are insular solutions – for instance a new website with a modern layout and additional online services or an app. "That is not enough to see improvements in efficiency and customer loyalty. Digital transformation is about much more than isolated optimizations," said Steger. Completely automating simple products and processes could save 40 to 50 percent of the capacity spent handling these aspects today – savings could even be higher in some cases.
Established financial service providers therefore find themselves in a critical transitional phase and are called upon to make bold decisions fast. "A relaunch is certainly possible – because these companies still have a large customer base, the trust of their clients and the expertise of their workforce to build upon," said Wolfgang Hach on a bullish note. However, end-to-end digital transformation will create more upheaval than any other transformation of the past decades. What will emerge in the end, especially in the retail banking sector, is largely digital processes and a business model that is much more flexible, more open, more customer friendly and more efficient than it is today.
Seven steps for successful end-to-end digitization
If they want to achieve this, financial service providers will need to bring about end-to-end digital transformation, with flexible client interfaces all the way from the front office to the back office and business processes that are open for online interactions with clients and external partners. With this in mind, the Roland Berger experts came up with a "Plan D" involving seven steps:
Identify digitization potential: Simple, standardized products are especially suited as a starting point for digitization. These lighthouse projects can then be used to calculate possible savings potential and create the basis for further digitization measures.
Define targets: The targets are identified on the basis of typical buying behavior (when and how do customers gather information; when and how do they first make contact; when do they conclude the transaction). The aim here is to link all of the process steps together in such as way as to eliminate disruption and enable largely digital and automated processing.
Involve relevant corporate units: Important units like Sales or Product Development need to be involved in order to initiate the necessary technical modernization steps. The company will then be able to systematically link IT investments with its strategic ambitions.
Develop a sustainable digitization strategy: Besides digitizing products and processes, companies should do the same to their control, risk and reporting instruments. They also need to review their strategy regularly and make adaptations flexibly.
Create manageable work packages: Implementation needs to be tackled step by step. Doing so will help companies avoid overwhelming their organization and enable them to better prepare their workforce for the digital transformation.
Modularize product offerings: If digitization potential is to be realized extensively, it is vital to base the product portfolio on standardized modules. This approach allows products and services to be individualized and offered to clients more flexibly – in the retail and wholesale business alike.
Establish 24/7 service capability: Product offerings and transaction possibilities need to be available day and night. This calls for all parties involved in the digital information and transaction flow to be integrated closely so as to facilitate fast feedback or automated decisions.
"Digitization presents huge challenges for the finance industry. Only if financial service providers tackle the digital transformation quickly and drive it consistently as an end-to-end solution will they be able to survive the intense competition they face with new, digital providers," said Wolfgang Hach in summary.