Financial Services Company of the Future SAP Financial services forum Mike Baxter September 10th 2014

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 2

Financial Services Company of the Future

How industry leaders are developing these

capabilities?

How digitization impacts consumer expectations &

behaviours?

What capabilities will financial

services companies need?

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 3

Digitization is transforming customer experience

MEDIA

TRANSPORTATION BOOKS

TELECOMS

AIRLINES

RETAIL

Uber in over 100 cities worldwide after 5 years

60% of retail sales are searched online; online sales are 9%

10+ major US newspapers out of business in last 5 years

eBooks represent ~30% of new book revenues in the US

Around 60% of travel reservations are made online

Skype accounts for 33% of all international telecoms minutes

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Globally, banking is becoming a digital business

Trajectory 2020

2020E average

95%

2013 average

81%

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P&C and life insurance becoming digital

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 6

This is good news for financial services

SM

EXAMPLE

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Throughout value chain, customer behaviour is impacted

Awareness

“The break up” campaign

Share

Social media presence

Service/ Transaction

“Virtual wallet” offering

Advice

Virtual assistant

Information

Property Guide App

Purchase

Cyber bank branch

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New players are attacking the financial services value chain

• Innovators

• Disruptors

• Aggregators

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Financial Services Company of the Future

How industry leaders are

developing these capabilities?

How digitization impacts consumer

expectations & behaviours?

What capabilities will financial

services companies need?

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 10

Retail Bank of the Future needs to develop 5 main capabilities

Fund investments through efficiency gains and reprioritization

Create digitally enabled customer experiences

Organize as an innovative enterprise

Deliver omni-channel sales and service

Position technology at the heart of strategy and execution

I

II

III

IV

V

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I What we mean by customer experiences…

Fund my impulse purchase

Move my home

Buy a home

Buy a car

Protect my family

Protect my home and belongings

Protect my car

Manage my money and cash flow

Move my money and pay for things

Send money to others

Provision for my retirement

Provision for college

Save up for something

Make my money work for me

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Digitally Enabled Experience: Buying a Home

While passing use mobile property guide app to

research home

Call bank to understand limits & receive pre-approval using app to find contact details

Check loan balance while withdrawing cash

Buy home, using mobile or online banking to pay deposit

I

Visit branch to sign documents confirming loan

approval

Use web banking (NetBank) to transfer remaining balance to

vendor

Apply online to meet with a loan specialist

Use video chat to discuss option, terms & set up

application/ pre-approval process

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EXAMPLE GERMANY

Big implications for the branch

2012 2020

~30% fewer branches

~35% fewer staff per branch

Status Quo Flagship store Satellite branch Transaction kiosk

II

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Technology needs to be at the heart of strategy & execution – example card activation

Hardware

Middleware

Welcome engagement Card activation Card receipt Application

decision Card application

‘Once and done’ through any channel

Instant application decision

Tracking of card pack delivery

Multi-channel options

Physical and digital engagement

Core systems

Front end systems

•  Real-time core banking

III

•  Self-service terminals

•  Digital signature capture

•  Instant decision making

•  Real-time account opening decisions

•  Instant card and check book printing

•  Card personification •  Card delivery tracking

•  Video conferencing

•  Self-service terminals

•  Desktop thin clients •  SEO

•  Mobile application

•  Workflow engine •  Decision engine •  Data services (ETL, file transfer)

•  Common services

•  SOA

•  Customer data (CRM integration)

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Lean processes

Migrate avoidable vol.

Migrate cash

Streamline footprint

Migrate residual

Efficiency gains and reprioritization: step-change 30-40% capacity requires focusing on a broad set levers and activities

Capacity prize: ~10% ~5-10% ~12% ~5-10% ~5%

Approach: Eliminate and

streamline processes

Stop forcing customers into the

branch

Migrate cash transactions from

teller to self-service

Change opening hours; close

selected branches

Use price and other incentives to

target residual volumes

IV

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State of the art: innovation models

BUILD PARTNER BUY

•  Innovation developed inside a protected space within a BU

Skunk-works/ internal startup

Internal incubator

Committed funding to strat. partnerships

Center-led

Spin-in

Open platform innovation

3

Acquisitions Tech lab/ research center

7 9 Grass roots innovation

2

Internal VC

•  Innovation comes from research lab or center outside of BUs

•  Innovation is tempo-rarily developed inside a protected space outside of BUs

•  Partnership to co-develop and/ or co-market a joint product

•  Innovation comes from and is developed inside a BU

•  The company poses problems to the out-side world in search for the best answer and/ or seeks solutions that already exist

•  Innovation battle-fields or specific projects are set as priority by the center and are executed in the business units

•  Innovation backed by an open application funding process

•  Committee selects projects

1 5

4 8 6

•  The company invests in and acquires ideas that were conceived and developed outside the organisation

•  Ideas that would be difficult to nurture/ advance inside the company are spun off and then acquired once enough risk is removed

10

Internal External

V

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Financial Services Company of the Future

How industry leaders are

developing these capabilities?

How digitization impacts consumer

expectations & behaviours?

What capabilities will financial services companies need?

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 18

Bain digitization index: Significant variance across banks within and across markets

High Medium

Source: Bain Retail Bank of the Future Benchmarking 2013. The Digitization Index is made up of 22 objective metrics and variables spanning the 5 Retail Bank of the Future Imperatives. The Maximum potential score is 100 ; the mean score is 49

APAC

31 points 42 points

EMEA Americas

33 points

Digitization Index Score (Max 100) High Medium High Medium

Degree of digitization

Average = 52 Average = 51

Average = 43

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Customer-experience as the ‘unit of change’

Achieving omnichannel delivery in key customer episodes

Funding by aggressively decommissioning the legacy, and digitizing the bank

Partnering with the world of innovation to move at pace

Out-investing on the critical front/back technology enablers

What we think the best are doing

I

II

III

IV

V

Bain-SAP Digital Lending Benchmark, 2014, designed to identify gaps and opportunities vs. Best Demonstrated Practices globally

Consistent cross channel execution

Relevant, simple and easy to buy products/offers

Better decisions from customer, risk and marketing data

Smart view of the customer

Customer migration to anywhere, anytime self-service

Efficient, digitized processes

Rapid innovation and business reinvention

1

2

3

4

7

6

5

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 20

Simple Loans: Preliminary insight into Digital Lending

KEY PERFORMANCE INDICATORS CORE SUB-CAPABILITIES

High variability in products distribution and applications processing

Source: Digital Lending microsurvey (N=11)

Low to medium maturity across sub-capabilities surveyed

Top quartile Bottom quartile

48%

73%

0%

20%

40%

60%

80%

100%

Applications Processed Straight Through,

Paperless

Sales Products That Can Be Sold On Any Channel

Median

2.2 2.5

3.1

2.0 2.4

0.0

1.0

2.0

3.0

4.0

5.0

Transparent lending process

Real-time tailored offers

Straight through

origination

Straight through servicing

Seamless, channel agnostic

purchases

Average coverage of the sub-capability (1-low, 5-high)