Digitisation in the Banking Sector: Finding the right route and dodging the pitfalls

With banks under increasing pressure from customer expectations, profitability goals, the convergence of industries (payments, telecom and retail), and innovative FinTech competitors, there is now a crucial need to adapt or restructure their businesses. As a result, digitisation has become one of the top concerns for banks, even more so than regulation.

Which is the best route?

There are three distinct routes that banks can take to successfully implement digitisation:

  1. Acquiring a digital organisation or start-up: utilising an up-and-running solution allows banks to quickly be brought up to speed from a digital aspect.
  2. Partnering with a digital partner to produce and implement a white-label offering.
  3. Organically building an internal offering: this allows a proprietary platform to be built and owned by the business. However, this will incur a higher cost and requires a greater time investment as well as internal expertise.

If poorly implemented, all three routes may result in a ‘scaffolding’ effect, which inhibits a bank’s flexibility. This directly contrasts the structure banks need in order to meet the demands of today’s world.

Regardless of the route chosen, an organisation must commit to implementing a clear transformational end-to-end roadmap when digitising its operations. This roadmap should allow for the consolidation of all e-banking channels, shifting from a multi-channel approach to an omni-channel approach, thereby creating a single digital platform while simultaneously positioning the financial institution to better meet the needs of its customer base. With the proliferation of media channels, banks must understand the new digital tools available to them, and be in a position to implement appropriate digital strategies to satisfy a market whose appetite for convenient technology is not likely to diminish.

Commonly encountered roadblocks

It is equally essential for banks to align their corporate culture with digitisation efforts. Firstly, if a given organisation is still operating with a legacy infrastructure and silos that slow the internal pace of bank operations, then the implementation and effectiveness of digitisation will be severely hampered. Secondly, a bank’s corporate culture needs to be customer-centred rather than product- or channel-centred.

The importance of commitment and investment is commonly underestimated in the digitisation process, creating challenges for banks’ digital transformation as they seek a happy medium between the necessary long-term investments and short-term profit demands. Senior management’s level of commitment will consequently have a direct impact on the extent of buy-in across the organisation. It is therefore imperative that digitisation is not seen purely as a CTO or marketing project but as a business-wide initiative.

Who will be successful?

Banks’ operational readiness is another key factor in ensuring the successful implementation of a digitisation strategy. Along with establishing business readiness, there are several additional elements that are crucial when digitising bank operations: taking a flexible approach, activating real-time analytics, and, as mentioned in our previous article on Target Operating Models starting the digitisation process with the middle- and back-office.

Beyond the internal execution of digitisation, however, banks must also consider how they will communicate the digital transformation of their operations to clients. In a world where digital processes are becoming more commonplace, institutions need to ensure that they are differentiating themselves through their marketing and taking full advantage of the new opportunity to connect with consumers more directly. It is now more complex than ever to stand out from the crowd and capture a target market’s attention. As such, it is key that marketing and selling techniques progress beyond the basics and adapt to the changing dynamics of today’s digital market.

In short, the implementation of digitisation and the shift to providing clients with a true digital experience entail more than simply changing processes or the types of channels used; financial institutions also need to change their corporate culture, showing full commitment to digitisation and focusing on client needs above all else. This is the only way to smoothly navigate any of the routes to digitisation and avoid the hurdles along the way.

For more information on how to harness the benefits of digitisation at your organisation, contact us at a-connect.

Freelance consulting 2.0

A lot of great things have been written recently highlighting the key trends and challenges impacting the Future of Work (more about it here and here). Today, we would like to focus on how technological innovation is rapidly fuelling and supporting freelance consulting and, more importantly, what’s in it for the independent professionals, also known as iPros.

In our opinion, there has never been a better time to be an independent professional. In early 2002, when we started a-connect, terms such as super temps, iPros and freelance consultants were unknown, or at least far from the mainstream. LinkedIn didn’t yet exist, e-lance (today known as UpWork) was still a software start-up and smartphones were still mostly concept designs. Today’s world is very different.

The Uber of professional services

First of all, on-line market places for consulting services are spreading around the globe, connecting iPros with clients. Former consultants and tech-entrepreneurs have acknowledged that there is an opportunity for the taking, in which industry knowledge, together with Big Data and artificial intelligence, could be the recipe to become the next Uber of professional services.

While this offers new options and avenues to iPros around the globe, it also means that they need to take care of their digital persona and on-line branding. The vast majority of on-line market-places rely on algorithms to assess iPros way beyond the traditional resume. The information provided on social networks, their connections and the recommendations given and received may also be taken into account.

New service platforms emerging

In addition to on-line market places, there are also significant investments into making the life of an iPro easier, more productive and cost effective. iPros now have access to processing firepower, data analytics solutions and even artificial intelligence driven platforms which, 5 years ago, were reserved for a few big firms. In addition, there are plenty of mobile apps available now at low cost, covering everything from project management to time sheet reporting, invoicing to collection and even pinpointing which is the best local coffee shop from which to work remotely.

Technology as the enabler – humans at the center

And while technology creates more opportunities and improves the life of an iPro, which is great news in itself, we believe that the technological innovation centered on freelance consulting has a more profound meaning. It shows that iPros have scaled in such a way that they have now become a very relevant and significant professional group. What motivated the creation of a-connect and what has been our mantra for the last 13 years is becoming mainstream. The belief that being independent means “on your own” no longer holds. Last but not least, it strengthens a-connect’s belief that, despite the many new opportunities technology creates, human resourcefulness is still a major driver of competitive advantage and that iPros are a key asset for organizations to better confront the future. Technology is here to help, but iPros are the future of work.

We hope you have enjoyed the reading and please join the conversation by sharing your ideas, insights or questions you might have about it.

Opportunities and Challenges in Digital Health 2017: The New Frontier in Healthcare

Digital Health is one of the hottest terms of this decade. This should come as no surprise when you combine the increasing power and affordability of computing and communication technology on one hand, and the rising expectations of and pressures on health systems on the other. The healthcare industry has consistently underinvested in the appropriate use of information technology and it lags behind comparable knowledge-intensive industries by about 15 years. Digital Health could well be the next big growth area for many companies.

Global technology giants have signaled a strong interest in the health sector, with companies like IBM and Google in particular making bets measured in the billions. But consider this for a moment: is this just hype created by the tech companies to stimulate their client industries, particularly life sciences and healthcare, to buy their branded picks and shovels for the 21st century gold rush of big data mining? Like many disruptive technological changes of recent times, I feel we might be overestimating the short-term benefits and underestimating the long-term ones.

What exactly is Digital Health?

It is difficult to find a concise definition of Digital Health. Its scope is very wide. I think the Wikipedia definition comes closest to embracing its complexity. I’d like to bravely/foolishly simplify it. Digital Health refers to the information and processes, and technologies and systems, that enable a person to make informed choices about their own health, take action to improve it, and monitor their progress to realize what works for them and what doesn’t. By contributing their own biological and behavioral data to the health system, people can give permission to carefully selected organizations and people in the system to anticipate and respond to their health and care needs, help good things happen and, where possible, prevent bad things from happening.

Why is it important now? 

We are seeing the last of the ‘accidentally well’ people, the pre-war generation that didn’t have to do anything in particular to stay healthy. Today, there are many more people whose ill health can be attributed to rapid changes in lifestyle in our modern society. We have easier access to energy (food) and less opportunity to expend it. Staying healthy now requires some effort that is not directly related to that involved in working or acquiring our food. We need to make conscious choices about food, work, play and rest in order to stay healthy.

The burden of lifestyle-related illness consumes around 70% of healthcare budgets in western economies, and the absolute value of these budgets is set to rise rapidly because of the ageing population in many of these countries. With healthcare budgets at breaking point already, clearly there is a need for a different way. The promise of Digital Health to enable better self-care and prevent or postpone the development of serious disease seems to offer a way out of a difficult situation.

What are the exciting developments?

IBM and Memorial Sloan Kettering (MSK) have collaborated to create IBM Watson for Oncology. IBM Watson is an artificial intelligence (AI) appliance that is available to large and small companies as a service. Just as IBM trained Watson to win the game show Jeopardy by feeding it all the prior questions and answers so it could learn how to answer future questions, MSK trained Watson using all the data they had available on cancer diagnoses and treatments provided to their patients, and the outcomes experienced. As a result of over two years of training Watson, oncologists around the world now have access to the best oncology brain in the world in the palm of their hand. The service continues to improve with all the data and outcomes it is still gathering.

The creation of AI infrastructures like Watson is spawning a new ecosystem of startups in Digital Health. Consider Talkspace, which provides psychological therapy through instant messaging. Although right now most of the therapy is being provided by a network of human therapists, all the interactions and outcomes are being ingested by Watson. The goal is to create an AI chat bot that will consistently provide high-quality psychological therapy. Babylon Health is attempting something similar in general practice (primary care or family medicine). These are ambitious goals. If they are successful, these ventures will dramatically change how healthcare is delivered in their markets.

There are scores of new ideas and businesses that are emerging every day, and Twitter is a useful tool for keeping up with new developments. Following people like @EricTopol (eminent cardiologist and author of The Creative Destruction of Medicine), @ManeeshJuneja, @Paul_Sonnier, @vgul, and others like them, will help you scan the Digital Health horizon.

What are the challenges?

There isn’t a clear regulatory framework for Digital Health. In the UK, the Care Quality Commission (CQC) and the Medicines and Healthcare Products Regulatory Agency (MHRA) are working hard alongside industry to bring the regulatory framework closer to the emergent technology frontier. There is a clear recognition of the potential of Digital Health to transform public (and private) health and care services. The regulator is keen to see that services are improved and people aren’t exposed to any new harm as a consequence of these innovations. The General Data Protection Regulation (GDPR) is also being updated with clearer guidance for all digital technologies, and particularly for healthcare, where personal and sensitive data is frequently processed.

One of the key challenges in most markets is finding a suitable business model for these great new innovations. Healthcare has a peculiar problem. In other industries, we see that technological innovation increases choices and tends to drive performance up and prices down. In healthcare, innovations increase choice and demand, but generally tend to increase prices. Consequently, healthcare budgets have been rising faster than inflation around the world. Secondly, most healthcare payment or reimbursement tends to be based on activity rather than outcomes (results). So there is usually no incentive to focus on prevention, and it is frequently not in the interest of most people and organizations in the healthcare business anyway. This is a toxic problem for healthcare for which strategic solutions need to be found.

What questions should we be asking our clients?

There is no doubt that healthcare needs to change in order to remain sustainable. An industry cannot remain viable if its customers cannot afford its services. Unless we see dramatic change in the next 10 years, there could be quite shocking economic and social consequences for the entire healthcare ecosystem (which includes life science and medical technology), and for society as a whole. If your clients are in any of these sectors, they are likely to be alive to these seemingly intractable issues. However, it may be worth your while to probe. Has your client considered how their businesses might get disrupted by digital technology? Where do they see the disruption coming from? What are they doing to mitigate the potential damage, quell it, or embrace it? Finally, how are they engaging with customers, regulators and innovators to ensure that their business will have a meaningful role to play in the emergent digital future?

Comments and questions are welcome via Twitter: @4LoyLobo and #ac-digihealth.

The Power of Disruption

Here are the simple facts:

  • Even though retail remains the most innovative part of banking, banks have slowly seen their share in payments erode from 80% in 2009 to 46% in 2016.
  • While the banks’ focus has remained on generating revenue from card interest and payment processing, the fragmentation of the value chain has prompted a decrease in margins for both payment processing and merchant acquiring – with even big banks like Barclays unable to buck the trend.
  • Consumer behavior has changed, with key players like Amazon, Netflix and Apple Pay increasing the expectation for instant gratification (‘I saw something that I could buy instantly’) and personalized suggestions (often with a high degree of accuracy).
  • Payments have become the epicenter of FinTech innovation, accounting for 40% of new FinTech companies/disruptors. (Source: McKinsey FinTech Database, 2015)

So, we have to ask the question: have banks simply given up on their dominance over payments? And, more importantly: can banks stop themselves from losing further ground?

I’ll venture a guess and say that, yes, banks have simply given up – though some of them, particularly global banks, may argue that their ability to service retail and corporate clients continues to ensure that they’re uniquely positioned to deliver to a broader client base. I’ll also say that, no, they won’t stop losing further ground – not with their existing mindset and their current approach to running their payments businesses.

Here’s why:

  • Banks have had to face tighter regulation, over the past 8 years, which made it easier for FinTech challengers to enter the market under more favorable conditions.
  • Regulators want to see increased competition. In many European countries, banks own the payment scheme as well as the payment processor. It’s just a matter of time before banks will need to concede control because regulatory intervention will trigger governance reform of payment systems and direct participation by non-members into payment schemes.
  • The widespread adoption of digital tools by customers, plus the banks’ inability to provide compelling digital platforms, even for e-banking, have eroded customer trust and created brand detachment regarding the digital experience that banks can offer.
  • Payment companies are essentially technology companies – banks are still grappling with their legacy infrastructure and have not been successful at identifying and implementing new technologies. In addition, many merchants and payment providers have moved to a cloud-based infrastructure, while banks are typically slow at implementing cloud technology.
  • The digitization of the payment industry has made it possible to add value using customer and merchant data. However, while banks hold enormous amounts of valuable data, they have been unable to meaningfully extract value from it for three key reasons: lack of adequate technology; lack of data science capability at scale; and lack of organizational support, including the decision-making impetus required to generate value from big data.


Meeting the FinTech challenge

So where does this leave the banks? I see four potential ways for banks to take action. These are not necessarily exclusive, however, and banks may benefit from combining some of these approaches in various markets:

  • Banks can come together to create a joint, industry-wide, market-wide infrastructure, rather than try to invest in their own legacy payments platforms. Sharing the capital expenditure will allow them to reduce the costs and share the risk, enabling them to focus on delivering front-end payment capabilities to customers and merchants.
  • Banks can become individual utility providers. To do so, they will need to leverage their strongest competencies – that is, risk management and their balance sheet – especially as these are capabilities that challengers are unlikely to invest in. Banks can then step back from fighting for customers and instead lend their expertise to players who are more able to innovate, can deliver faster, and will provide a better customer experience.
  • Banks can define their value chain in a way that allows them to extract value from partnerships with FinTech providers while maintaining some of their core capabilities in-house. In fact, many banks are already involved in collaboration with FinTechs (through accelerators, innovation labs, and VC arms), but this effort has not led to systematic, consistent change in the industry, or to the kind of high-value partnerships that also benefit customers and merchants. Therefore – although I am a great believer in well-constructed partnerships – I would not advocate that banks acquire FinTech companies, as I have seen too many cases of innovation being killed post-acquisition, with neither party able to extract value in the end.
  • Banks can invest in building their own data science capability; indeed, this is the best way for them to extract value from ‘owning’ the customer and merchant relationships and to genuinely exceed their clients’ expectations. Banks don’t necessarily need to build their data science capability in-house, either – it could instead be achieved through a strategic partnership or joint venture. Regardless of the model, banks need to equip their C-suite with the knowledge required to understand data science, artificial intelligence, and related technologies. This understanding will help the management team figure out the importance of these capabilities within the organization. It will also force banks to reconfigure their organizational and delivery models in a way that allows them to compete effectively with their more agile, more innovative competitors. This final option is the most sustainable way for banks with payment capability to compete effectively and buck the trend that sees them losing share to a wide range of challenges.

At a-connect, we understand the intricacies of this evolving competitive landscape – and how important it is for senior management to be well-equipped for the changes ahead. Our specialist team of independent professionals can help you meet the challenges posed in the payments sector, and to develop effective and sustainable approaches to doing business. Contact us today to find out more.

Digital Wealth Management

The basic conditions for the management of private assets have changed drastically in recent years. This is due to a number of factors, including:

  • Products: The increasing importance of passively managed and therefore low-margin funds, which should reach a market share of around 30% by 2020 (EY Global ETF Research 2017)
  • Profitability: The decrease in profitability since 2009, from 37 to 23 basis points of assets under management (BCG Global Wealth Report 2017)
  • Regulatory: The increase in transparency requirements – e.g. regarding costs in the EU through Mifid II
  • Digitization: The rapid growth of assets managed by FinTechs and robo-advisers – e.g. to over $150 billion in the US (TechFluence, 2017)

When these dimensions are compared internationally, there are significant differences. The US, for example, is much more advanced than Germany especially regarding the adoption of digital solutions However, in Germany, the importance of robo-advisers will also massively increase in the next few years and, according to Oliver Wyman, the assets managed by them will increase to $42 billion by 2021.

The following article outlines developments in Germany. However, the key messages regarding the disruption scenario and future business models can also be transferred to other countries.

What are the implications of the above developments on wealth management – especially if robo-advisers expand their focus from smaller assets to the larger asset volumes of private banking clients? In addition to the high level of convenience that robo-advisers offer, they can provide clients with significantly lower costs than traditional banks. In Germany, while the total cost of traditional private banking (including the costs of depots, trading, portfolio management and products) is around 2% of the value of assets under management per year, the cost of robo-advisers is 0.5–1%.

The significantly higher cost of private banking, which is having a massive impact on returns – especially in the current low-interest-rate environment in Europe – is justified by traditional private banking providers by two aspects:

  1. The active management of clients’ portfolios and the claimed generation of an excess return
  2. The scope and quality of the personal advice they offer

On the one hand, one must question the value of active management in the context of private wealth management given the empiric evidence and lack of scale. On the other hand, personal and high-quality advice cannot justify the significant price differences seen between traditional private banking and robo-advisers. Rather, the significant cost differences result from the complexity of the products and, above all, a lack of standardization and digitization of support and back-office processes. The continuation of trends seen in recent years leads to a disruption scenario in private wealth management.

The resulting disruption scenario is not only promoted by technological change and market developments, but, above all, is accelerated by changes in customer requirements – in particular, by the “generation of heirs”. This generation has a significantly higher online affinity with user behavior and price transparency. Due to the large volumes of money that are inherited across generations – according to estimates for Germany, €2.1 trillion will be inherited between 2015 and 2024 – this change will have a significant impact on the industry.

The resulting changes do not affect banks alone. These also affect all those involved in the value chain, especially asset managers and stock exchanges. We assume that the relevant investors in Germany have liquid assets of €1 trillion. As already described, the total costs of traditional asset management generally amount to at least 2% of the investment volume or, correspondingly, €20 billion per year. In the future, with the improvement of efficiencies, it will be possible to offer private wealth management with a differentiated level of personal advice- profitably for 1% – i.e. there is a potential for disruption of €10 billion per year. In the disruption scenario, two €10 billion-questions will have to be answered: 1) how fast will the efficiency potential of €10 billion per year be lifted; and 2) who earns the remaining €10 billion?

However, the future will not belong solely to robo-advisers. Rather, these developments pave the way for digital wealth management as a profitable business model for existing players. This means the rise of private wealth management for investors with liquid assets of €10 thousand to €1 million, which uses a rule-based investment approach relying on  ETFs to increase efficiency potential and combines this in a hybrid model with comprehensive online and offline advice. The combination of scaled investment processes with personal advice, which efficiently combines online and offline formats, will be the decisive success factor here.

Despite these opportunities for banks and financial services providers, who are adapting quickly to the new conditions, the upcoming disruption will initially lead to massive changes in the market. Two aspects will have to be addressed for the successful rise of digital wealth management. On the one hand, the exploitation of the efficiency potential through the extensive standardization of portfolio management, the digitization of processes and the seamless integration of online and offline customer interaction is important. The second aspect, which is critical to customer loyalty and business model profitability, is a new form of customer focus that breaks away from liquid assets and focuses on the investor and their family’s advisory needs.

Examples of concrete project approaches for banks with traditional retail businesses include:

  • Cost-efficient mapping of smaller asset volumes, which are typically not profitable, by using robo-advisers, possibly as a white label solution
  • Changing from an active to a standardized passive investment approach to increase efficiency
  • Expanding customer advice on all asset components – i.e. liquid and illiquid assets – based on digitized support processes

The key to the success of a digital wealth management strategy and the implementation of these measures will be a comprehensive transformation process that accompanies the introduction and use of new technologies and prepares employees for new roles and tasks within customer interaction. The development and direction of this transformation will be the core task of senior management in preparation for the new world of digital wealth management.