WORKING DRAFTLast Modified 11/1/2011 11:02:27 AM W. Europe Standard TimePrinted

Digital life: The ultimate Customer Experience and play field for Banks…and Non-Financial Institutions

Radboud Vlaar

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Contents

Key Implications for Financial Institutions

The starting point

The digital consumer

Summary

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Innovations in banking in the last five decades have been limited, and mainly centered around “faster” and “cheaper”…

Age of the mainframe

Proliferation of cards

Deployment of ATMs and telebanking

Boom of the Internet

1950’s/1960’s1960’s/1970’s

1980’s/1990’s2000’s

SOURCE: Team analysis

From: Paper-based processing of transactions To: Managing and balancing transactions on digital platforms

From: An industry limited to only banking playersTo: A new payment structure with the entry of card companies

From: Planning bank visit each weekTo: Convenient, spontaneous 24/7 visits to the ATM and telebanking for all banking services

From: Visit to bank or ATM to perform transactionsTo: Taking care of banking needs from the living room couch

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…with customers adopting to tech enabled innovation faster than ever before …

0.8

2.0

2.0

3.0

4.0

7.0

22.0

38.0

Internet (1974)

Radio (1902)

TV (1928)

Twitter (2006)

iPod (2001)

Facebook (2004)

Groupon (2008)

iPad (2010)

Years until 50 mln units/usersYears

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…Non – Banks demonstrate innovations create opportunities…

Apple worth more than top 30 BanksApple worth more than top 30 Banks ……non Banks lead banking innovationnon Banks lead banking innovation

350379

Apple Top 30 Banks

80

20

2,782

Banks

72

20

80

Non Banks

Market cap, September Financial Service Apps

McKinsey & Company

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…whereas in Banking it added cost rather than reduced!

Cost to serve has gone up…Cost to serve has gone up… ……despite promising business casesdespite promising business cases

Costs by banking channelUSD

0.08

0.17

0.85

1.26

3.75

4.00Branch

-98%

Mobile

Online

ATM

IVR

Call centre

McKinsey & Company

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Contents

Key Implications for Financial Institutions

The starting point

The digital consumer

Summary

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Global consumer trends that shape the digital future!

Anywhere, anytime information and networking enabled by device adoption, new applications and cloud computing

1

Multichannel usage along all customer touchpoints7

Increasing price transparency, e.g., through online or mobile search engines

3

Very “heterogeneous” classification of value of hardware and content and the willingness to pay (e.g., ringtones for €1.99, quality journalism “for free”)

4

Personalization and participation, consumers demanding engagement and customization

6

Source: McKinsey

Generation Y putting new demands on companies and determining the winners

2

Bi-polar behavior, the vanishing “middle”5

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Anywhere, anytime information and networking: consumer access digital content everywhere

1

Smartphone

PC/ tablet

Connected TVs

• 400 million shipment per year• Tablets expected to surpass PC shipment by

2015, with 250M

• Penetration in the US is expected to reach 80% by 2015.

• 45% of TV shipments in Germany is connected TV

• Mainstream in North America and Europe, reaching 40% penetration in US and ~43% in UK

• <100EUR smartphone launched in Europe last summer

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Increasing price transparency: Example – mobile price comparison and purchasing in real time via serialio.com and amazon.com

Sources: Internet research; McKinsey

3

▪ Mobile payment services can be integrated into existing Web sites

▪ One-time authorization of customers; thereafter, single sign-in and one-click shopping

▪ Uses data stored at Amazon

▪ User can read in product data with a barcode scanner in smartphones, e.g., by means of special applications or software

▪ Output: Comparisons of product data at price comparison sites and real-time read-out of online prices at retailers

Purchasing in real time

Mobile price comparison

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After I visitthe store

While I am shopping at the store

Before I go to the store

When do consumers use mobile device to check prices?

How use of mobile device in-store impacts customer behavior?

Would not affect purchase or future decisions

14%

Would buy item, but impact future decisions 48%

Would delay purchase/buy elsewhere(for a lower price)

69%

14%

48%

69%

SOURCE: Multichannel pricing survey, Sept. - Oct. 2010 Question 7.1, 7.7, 7.9

Increasing price transparency: price comparison tools are already shaping consumer choices today

3

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▪ Quality journalism, i.e., research, editing, page make-up, updates, etc., “for free”

▪ Consumers refuse to pay

Heterogeneous willingness to pay: Example – quality journalism ‘for free’ vs. willingness to pay for simple ringtones

Sources: Internet research; McKinsey

4

▪ Prices of up to €4 per ringtone

▪ Ringtones and ringbacks as downloads for mobile phones

▪ Sound file content identical to normal mp3

vs.

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39.6

12.0

18.6

18.8

4.5

22.1

48.2

12.3

19.6 9.9

2.8

8.0

Bi-polar consumer tastes: High end and low value growing fast

Net sales growth (compound annual growth rate, or CAGR) 1998-2005; %

* 1998-2003 data were used, because 2005 data could not be identified for Miele

** 1998-2004 CAGR for Cisco

Sources: Global Vantage; Bloomberg

Globalindustry average

Premium/ higher-end opportunities

No-frills/ lower-end opportunities

Automotive Apparel

Computerhardware

Acer

White goods*

Miele

Gorenje

Retail

Tiffany& Co.

Wal-Mart

Cisco**Gucci

H&M

Porsche

Hyundai

5

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Multi-channel usage: Customers’ multichannel behavior regarding information and purchases is evident in many industries

7

1519

2323

35

43

59

FoodMobile phones

Health and wellness products

Cars Financial products

TravelElec- tronics

Customers who changed their minds about the brand they preferred for their next purchase after getting information online

Source: EIAA Mediascope Europe

EXAMPLE EUROPE

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Contents

Key Implications for Financial Institutions

The starting point

The digital consumer

Summary

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Implications for Financial Institutions

• Value proposition for clients− Product offering

− Bread and depth− Pricing− Speed

− Marketing and Branding− Distribution model

• Operating model− Process excellence− Operations− IT− Risk management

• Risk of disintermediation• 24/7 banking• Mobile always on• Social Media• Price polarization: Excellence

vs. cheap banking• Convergence between

Banking, Insurance and Wealth Management

• Industrialisation• Full digitalisation of E2E• Cloud• Big data

Key elements Key trends

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Disintermediation – New concepts such as bank simple and "Mint" could begin a process of marginalizing banks

Retail banking offering

Aggregators2Payments

Savings, investments, mortgages

Consumer finance

Banks

WORST CASE SCENARIO1

1 Many of these companies have not yet earned profits; rough potential likelihood ~10%2 Most aggregators earn revenues through some form of referrals/ fees/ revenue sharing with banks, while Geezeo, Meniga are white label

Personal Finance mgmt products

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Top 200 iPhone financial applicationsAs of Aug, 2011 (subject to fast change)

SOURCE: Press search; Apple AppStore; team analysis

AppStore data shows big demand for non-bank financial applications that threaten to put more distance between banks and customers

54

100

46

100% =

Bank

Non-Bank

Paid

200

0

Free

200

Sample non-bank entrants Description of activity

▪ Square allows anyone to accept card payments using their smart phones

▪ TxtLoan provides a quick way to get a £100 loan for a week via your mobile phone

▪ Moneyzoom provides an easy-to-use personal financial management tool

▪ Lending Club is a peer-to-peer lending platform for credit worthy borrowers & affluent lenders

HTML 5, a new standard for presenting rich online content independent of device, will require apps to do more than

just stream content, but will not kill the app store

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Innovators like BankSimple and MovenBank are already trying to re-imagine the whole banking value chain

Source: Press search; company website; team analysis

BankSimple Concept

Consumer obtains a bank account, checking, and debit card from Bank Simple

No ATM or other

charges

Other banks?

BankSimple intermediates banking relationships, managing the relationship and using banks’ back-office processing

Interest spread and card fees

Movenbank Concept

?

Consumer uses Mobile contactless (NFC) for core banking and P2P functions

No cards or paper in account

“3rd gen User

Interface”

“Gamification for viral and social risk

model”

Apply points-based gamification to retain customers and use trust-based risk rating system for loans

Banking designed for the mobile channel

Both companies are in the early Beta phases, and will undoubtedly change

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24/7 banking: A fact, now heading towards banking in one click, requires some legal and regulatory changes!

1 Footnote

SOURCE: Source

80’s – 90’s 24/7 payments80’s – 90’s 24/7 payments

90’s – 00’s: 24/7 transactions90’s – 00’s: 24/7 transactions

00’s – 10’s: 24/7 banking and sales00’s – 10’s: 24/7 banking and sales

Key sales processes Path

On boarding▪ Branch▪ Remote

▪ 8 min/8 min▪ 5 min/1 day

Best practice time To complete/deliver

Savings▪ Branch▪ Remote

▪ 5 min/5 min▪ 5 min/5 min

Mortgage▪ Branch▪ Remote

▪ 15 min/5 days▪ 10 min/5 days

Quick lending▪ Branch▪ Remote

▪ 10 min/2-3 hours▪ 2 min/20 min

Investments▪ Branch▪ Remote

▪ 5 min/15 min▪ 10 min/10 min10’s – : 24/7 banking in

one click10’s – : 24/7 banking in one click

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Social Media: Way to build you brand…

Situation: Every year, Chase donates more than $100 million to non-profit organizations in local communities, nationally and abroad, and employees dedicate countless hours of their own time to helping those in need, The grassroots nature of Facebook would allow Chase to hear directly which local charities matter most to the community.

Solution: Chase Community Giving is a program in which Facebook users vote for their favorite local charities to get a piece of Chase's charitable dollars. Facebook users are able to vote for local charities with yearly operating expenses of $1 million to $10 million through the Chase Community Giving page.

Result: Chase Community Giving now has over 2.5 million Facebook fans who have selected over 300 winning charities; $150 million in donations were given in 2010 alone. JP Morgan Chase announced they commit to an additional $25 million to charities in 2011.

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…and better service and understand your clients

Situation: Wells Fargo wanted to move from listening to engaging online to humanize customer service.

Solution: Wells Fargo created a Co-Tweet shared platform for customer engagement. By displaying hashtags and proper legal disclosures and denoting real employees with pictures and signatures (e.g. ^JC), created a personalized and friendly service experience. The team intervened on banking issues and negative feedback through their customer monitoring system and provided support across all product lines with key specialists where needed.

Result: Personalized alternative to customer service e-mails and phone numbers, drove higher satisfaction levels according to Wells Fargo’s Net Promoter Score, and increased Twitter following from 90 to 6,911. Also created an integration between social media and CRM by tracking and weighting consumers’ tweets. Wells Fargo is considered a social media pioneer in financial services.

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We see 3 big sources of opportunities which require Financial Institutions to change the name of the game and address typical challenges

Less leakage1

New sources of revenues

2

New clients3

What we have and how it helps

• What: Become the apple of Banking• Impact: Superior customer experience can result in less leakage

▪ 30% cost reduction ▪ 50% higher conversion▪ 50% higher customer satisfaction

• How: Eliminate all leakage from a client perspective

• What: Launch new value added use cases at a premium• Impact: Superior customer experience and ~5% extra revenues• How: Develop value added use cases such as

▪ Pro-active info at moments of truth (fraud, card lost)▪ Higher speed (Instant credit, delayed payment, etc.)▪ Extra services (e.g. instant travel insurance, etc.)

• What: Master the digital marketing and customer experience• Impact: Gain 3-5% market share in 2-3 years • How: Attract new clients on the web

▪ Search engine optimisation▪ Social Media brand awareness▪ Event marketing

McKinsey & Company

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Post-sale supportProduct purchasingReceive adviseInformation seeking

340,000

350,000

100%

200,0001,000,000

Online non-captiveOnline non-captive

Outbound call centerOutbound call center

BranchBranch

Online captiveOnline captive

Customer seeks information pre-contact

Customer submit request for product

Bank communi-cates offer to customer

Bank responds to customer contact

Customer launches initial contact

Bank handles request

Customer accepts and bank processes request

Follow up from bank

CRM

Inbound call centerInbound call center

SOURCE: Team analysis

250,000

200,000

100,000

100,000

350,000

Customer visits branch

Outbound rep calls customer to offer product

Customer browses website

Checks non-captive sources for alternatives

Customer applies online

Offers through email/online bank

Offers made to customers contacting CS

Outbound outreach to customer

Appropriate products offered at visit to branch

Customer mails signed papers

Bank informs customer of offer

Customer visits branch to sign papers

Payout of loanInternal processing in bank

Meeting inbranch

Request completed online

Request completed in branch

Immediate follow up after fulfillment of request

1. Customer satisfaction

2. Cross-sale and up-sale

Request completed over phone

Bank contacts customer re application

Customer calls bank

200,000

80%

50,000

300,000 150,000

150,000

50%

50,000

50,000

75,000

50%

75,000

40,000

75,000

Leakage

10,000

10% 180,000 30,000

30,000

30%

150,000150,000100,000

20,000

20%

50,000

20%250,000

Less Leakage: Can be done without big investments and as experience shows there is plenty of opportunity! CLIENT EXAMPLE

McKinsey & Company

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New sources of Revenues: immediate access to credit at POS

Provides small short-term instant loans of £50 to £200 through online-only application, paid into bank account in under 15 minutes

SOURCE: https://www.wonga.com/

Key features

▪ On chosen date a single payment collected from the borrower debit card

▪ Typical 2689% APR but a Wonga loan is only for between one day and a month

▪ Missed payment fee of £7.50

▪ Failed collection fee of £17.50

Value proposition

▪ Borrowers with good credit ratings receive loan money within 15 mins

▪ Encourages quick repayment, rewarding good borrowers with good rates and increased flexibility on subsequent applications

▪ Alternative Lender of the Year 2010 by Credit Today Awards▪ Fastest Growing Business in Europe 2010 by Media Momentum

Awards

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New revenues – “Bollettini Postali” (Post Payments) Case Study Premium price possible because of higher value

COST PER TRANSACTION: 1,1€

•PERCEIVED VALUE: none vs•Time spending 40-50 min. (travel and queue)

COST PER TRANSACTION: 2,5 €

• PERCEIVED COST: 1,4 € more expensive than ATM• PERCEIVED VALUE: payable from home or through own smartphone vs•Time saving 40-50 min. (immediate payment)

POST OFFICE ON LINE BANKING(only customer)

ATM(customer & not)

COST PER TRANSACTION: 2 €

•PERCEIVED COST: 0,90 € more expensive than Post•PERCEIVED VALUE: available 24/7 on ATM, vs•Time saving 20-30 min. (no queue, closer to home)

Price tiering based on value for customers

10 months of “Bollettini Postali” payments on UC direct channels

10 months of “Bollettini Postali” payments on UC direct channels

ATM130.000 (20%)

ONLINE BANKING660.000 (80%)

PAGO FACILE

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Contents

Key Implications for Financial Institutions

The starting point

The digital consumer

Summary

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Summary

• Digitalisation of Banking is a fact!

• So far, Banks did not capture the opportunity and the innovation is being lead by non-banks leaving significant money on the table

• Financial Institutions will need to change gears:−Step up the pace of innovation to regain control−Fight the diffused perception of Digital = discount. −Use the momentum to innovate the operating model leveraging cloud, etc.

• Big Data, Cloud, Social Media and Mobile will enable achieving these goals faster, since these areas still are Greenfield territories