digital business in banking · “kodak moment”. kodak was in many ways ahead of the curve when...

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Digital business in banking

REPORT

https://www.efma.com/joinefma

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Executive summaryA survey for Gartner run by Efma shows that banks are convinced of the need to embrace digital banking and to transform themselves. But our interactions with banks show clearly that what that ambition really means, how it will affect them and how to make it work in practice, are all far less certain.

Key findings

• 90% of banks surveyed expect that they will become an ‘open bank’ within 3 years, i.e.a bank that selectively shares data, transactions, algorithms or other capabilities with itsbusiness ecosystem partners.

• Banks are ambitious – the IT spend on digital transformation is substantial and a largemajority embraces actively such initiatives as innovation, fintech and hackathons.

• Banks struggle with cultural change and – despite their grand ambitions for the near-future – the current focus is on low risk (but also low benefit), internal, employee-only,digital platforms.

Recommendations

Bank CIOs with responsibility for the digital bank should:

• Help your peers to understand the importance of digital banking and digital platforms byexplaining what they are and the new business models they enable (from adapt to disrupt).

• Avoid the “build-it-and-they-will-come” fallacy by purposefully building a businessecosystem and requiring global operations to adopt the digital platform.

• Change culture by adopting the traits of a ‘digital leader mindset’.

Peter Redshaw Managing Vice President (Banking Research), Gartner


PART ONE

Go back three years or more and Gartner was trying to convince banks of the need to change themselves. Banks were advised to move from analogue to digital, to transform themselves, to “Disrupt themselves before others did it to them”. New challengers, more draconian regulations, lower margins, more expensive capital and a host of other factors meant they could not continue as they were. The status quo was not sustainable. Then, to make matters worse, along came platform businesses that could do things like collaborating, orchestrating, creating value, and matching buyers and sellers at scale. The writing was on the wall for the old days. So the demand from the banks has changed from “Tell us why we need to change?” to “Tell us how we can change”. The need to change is a given – now it is all about how best to achieve it.

This survey reinforces that view, i.e., that banks are convinced of the need to embrace digital banking and to transform themselves:

• First, it shows that 90% of banks surveyed expect that they will become an ‘open bank’ within 3 years,i.e. a bank that shares data, transactions, algorithms or other capabilities with its business ecosystem1

partners. 50% of them expect to be there within the next 12 months! (see figure 1)• Second, it shows that banks are ambitious – 34% of them estimate that they are spending more than

20% of their IT budget on ‘digital banking’ or ‘bank transformation’ initiatives. (see figure 2) This issubstantial when most banks spend on average 66% of IT budget just on ‘run the bank’ operations2.

• Third, the large majority of banks embrace actively such initiatives as innovation (68% have a formalinnovation center), fintech (89% work with fintech firms) and hackathons (71% do this).

Analysis

Figure 1: Plans to become an ‘open bank’

Source: Gartner and Efma (Sep 2017)

We already do this

Yes, plan to in the next 12 months

Yes, plan to in 1 to 3 years

No plans in the next 3 years

21%

30%

39%

10%

1 A business ecosystem is a dynamic network of entities (people, business and things) interacting with each other to create and exchange sustainable value for participants (see Gartner; “Eight Dimensions of Business Ecosystems Enable the Digital Age”).

2 See Gartner: “IT Key Metrics Data 2017: Key Industry Measures: Banking and Financial Services Analysis: Current Year”

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But there is another side to this coin. CIOs face a lot of internal resistance to this change from both the technology and business camps. Cultural change is cited as the number one barrier to change by 29% of banks (see figure 3). So there is a lot of inertia to overcome. And from our interactions at Gartner with numerous banks, it is clear that they struggle with three more aspects:

• What ‘digital banking’ and ‘digital platforms’ really are (they seem to mean different things todifferent people)

• How it will affect them (e.g. the impact on their value proposition)• How to make it work in production (how to make it secure and robust, get customer traction and monetize it)

Figure 3: Barriers to becoming an ‘open bank’

Figure 2: Percentage of 2017 IT budget on ‘digital business’ or ‘banking transformation’



Culture Security Monetisation Regulations Reputation risk

Other Rigid vendor solutions

29%26%

21%

10%7% 7%

0%

None Less than 3% 3% to less than 5% 5% to less than 10% 10% to less than 20%

20% to less than 50% 50% or more Don’t know

4% 5% 8% 7% 23% 23% 11% 20%


Part of that cultural barrier is the ingrained lack of urgency at banks that is sometimes characterized as a “Kodak moment”. Kodak was in many ways ahead of the curve when the digital photography revolution disrupted its industry: it had the technology and they had the foresight to see what was coming. But it was so hard to let go of the old “razors-and-blades”3 style of business model, while it was still making money, that Kodak never moved fast enough or far enough before it was too late. The same sort of complacency is present at many banks. They see the need for change and want to do it – but while they are still making good money (and many are – about half of the world’s top 50 banks by market capitalization have a Return on Equity above 12% – see figure 4) they feel they can always put off the pain of revolution until tomorrow (or, more likely, next year).

3 See https://en.wikipedia.org/wiki/Razor_and_blades_model for an explanation. For Kodak, the equivalent was ‘camera-and-film’ plus ‘camera-and-prints’.

Figure 4: Cost/Income ratio (CIR) vs Return on equity [world’s top 50 banks by market cap]

Source: Gartner (Oct 2017) – size of bubble represents market capitalization

0.20

4%

8%

12%

16%

20%

24%

0.30 0.40 0.50

CIR (2016)

Return on equity (FY2016)

0.60 0.70 0.80

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A global non-profit organisation, established in 1971 by banks and insurance companies, Efma facilitates networking between decision-makers. It provides quality insights to help banks and insurance companies make the right decisions to foster innovation and drive their transformation. Over 3,300 brands in 130 countries are Efma members.

Headquarters in Paris. Offices in London, Brussels, Barcelona, Stockholm, Bratislava, Dubai, Mumbai and Singapore.

www.efma.com

Gartner, Inc. (NYSE: IT) is the world’s leading research and advisory company. We help business leaders across all major functions in every industry and enterprise size with the objective insights they need to make the right decisions.

Our comprehensive suite of services delivers strategic advice and proven best practices to help clients succeed in their mission-critical priorities. Gartner is headquartered in Stamford, Connecticut, USA, and has more than 13,000 associates serving clients in 11,000 enterprises in 100 countries.

For more information, please visit gartner.com.

About us

www.efma.com


Digital business in banking

November 2017

www.efma.com


https://www.efma.com/joinefma

digital business in banking · “kodak moment”. kodak was in many ways ahead of the curve when...

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