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The Phygital Banking Transformation Report

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My first report on how phygital will affect the next banking revolution.

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The Phygital Banking Transformation Report

  1. 1. PHYGITAL BANKING TRANSFORMATION - CREATING NEW BUSINESS MODELS WHERE DIGITAL MEETS PHYSICAL 1
  2. 2. PHYGITAL IN BUSINESS The truth is that both the digital and the physical world are indispensable parts of life and business. The real transformation taking place today isn’t the replacement of the one by the other, it’s the marriage of the two into combinations that create wholly new sources of value. There is a great reversal of roles that seems to have taken place: instead of the former digital adaptation and appropriation of material things (think of the folders and the trash can on your laptop screen as a very basic example), we see a new, physical manifestation of digital concepts and functions has beginning to emerge. Cross your middle and index fingers on both hands for instance, and you have just signaled a Twitter hashtag, specifying the general topic you speak about. What is that, if not a human gesture generated by lines of computer code? This is what Phygital is, and it is likely to reshape not only the way people live, but the way companies operate. Customer expectations have placed tremendous pressure on business leaders to change the way they set their strategies and run their organizations. New requirements to incorporate information and interactivity quickly drive up costs and complexity. Business leaders have long used information technology to improve productivity and efficiency, reach new markets and optimize supply chains. What’s new is that customer expectations have also changed. People everywhere are using social networks to find jobs and restaurants, lost friends and new partners – and, as citizens, to achieve common political goals. How can businesses best respond to this shift? How can they take advantage of the opportunity to innovate and grow? And how can they do all this cost efficiently? Companies with a cohesive strategy for integrating digital and physical elements can successfully transform their business models – and set new directions for entire industries. They do this by focusing on two areas. THE OPERATING MODEL & THE CUSTOMER VALUE PROPOSITION The operating model can be realigned so that customer preferences and requirements inform every activity in the buying and selling chain. Doing this requires integrating all business activities and optimizing how data related to those activities is optimized. Up to now, most organizations have focused on one of these areas at a time based on specific initiatives. Taking a more holistic and integrated approach, a third path combines the two focus areas, simultaneously transforming the customer value proposition and organizing operations for delivering that value. Determining the best path to transformation requires a thorough understanding and evaluation of several factors: •Where products and services are on the physical-to-digital continuum in the industry •Mobility and social networking adoption levels and expectations of customers 2
  3. 3. •Strategic moves by other industry players •The degree of integration at every stage of the transformation – between new digital processes and legacy, physical ones. 3
  4. 4. HOW BANKS SHOULD APPROACH PHYGITAL TRANSFORMATION THE RIGHT FRAMEWORK Successful phygital transformations do not happen bottom up. They must be driven from the top and inspire all organizational levels as they focus on the “how” more than the “what.” The most successful transformations focus as much on how to drive change as on the detailed content of the change. Organizations that have successfully implemented digital transformation strategies and have fully transformed their operations and business models, did not achieve that by building their companies from the scratch, but from reshaping the organization to take advantage of valuable existing strategic assets in new ways. Companies can do much more to gain value from investments they have already made, even as they envision radically new ways of working so it is crucial for them to build on their existing customer bases and reinvent their offerings by substantial added value. Retail banking has already become a digital business, spurred by the rapid spread of broadband access and affordable smart mobile devices. Globally, an average of more than half of consumers’ banking interactions took place through online or mobile channels, with an even greater share in digitally advanced markets like the Nordic countries and Australia, according to Bain & Company’s 2013 customer survey, executed through Research Now. Add the use of ATMs, which increasingly connect to the Internet, and the share of digital interactions exceeds 85% for the most advanced countries today and is heading to more than 95% in the near future. 4 BANKS NEED TO BE Intuitive: 54% of consumers are interested in banks locating discounts Intelligent: 53% of consumers want proactive bill pay services Individual: 52% of consumers want proactive product recommendation
  5. 5. UP UNTIL NOW BANKS USE DIGITAL TO IMPROVE SIMPLE TRANSACTIONS BUT NOT CUSTOMERS LIVES To date, most banks have focused their digital investments on simply improving simple transactions through online or mobile channels, thereby reducing brick-and-mortar branch costs. They haven’t devoted as much time to making customers’ banking lives more convenient, easy and engaging, by creating a differentiated customer experience featuring truly innovative, useful digital applications and a seamless integration of all channels. Customers often cite certain digital interactions as “wow” experiences that exceed their expectations—moments like remote deposit capture, remote bill pay or even well-delivered basic transactions through a mobile app. Winning in the digital realm, therefore, is critical for improving the overall customer experience. THE PHYGITAL BANKING CUSTOMER MANIFESTO These 2 visual guides put the phygital consumer on the epicenter of the phygital transformation strategies and they apply to all organisations no matter the industry they belong. Customer expectations have changed because customers have changed themselves. For the last decade, marketers were trying to decode and behaviorally analyse the digital consumer but right now we should talk about phygital consumers. Consumers who expect services that not only cover both their online and offline needs but also combine them in a way that the consumer experience improves in each interaction and touchpoint. 5
  6. 6. 6 • You look out for me and recognize me as a valued customer both online and offline. • I can easily find simple, clear product and service information both online and offline. • I can apply for a product or service through one channel and seamlessly finish the transaction on another. • I can buy the same products at the same price, regardless of how or where I go. • I can access all my accounts on any device. • I can do most of my day-to-day banking through digital channels. • I can make purchases, payments and transfers quickly through my smartphone. • My interactions are efficient, secure and fast—“one and done” with minimal paper. • I can easily share feedback, including on social media platforms, and my bank will resolve the issue quickly.
  7. 7. THE 3 PHYGITAL BANKING TRANSFORMATION FOCUS AREAS DISCOVER PHYGITAL CONSUMER SEGMENTS AND CREATE A DIFFERENTIATED CUSTOMER EXPERIENCE WHERE YOU CAN WIN Take a step back. Think for a while what kind of needs banks served up until now, how these needs have evolved during the years and whether these needs are being served not by traditional banking competitors but by new entrants in the financial industry. How could someone define the retail banking industry? Its about serving consumers needs that have to do with money or is it about maximizing their revenues? Someone could say that banks are mostly for facilitating peer to peer money exchange and as a result they should focus on the social network industries. Or what if the banking industry was a 100% focused consulting business that sells financial consulting sessions and has open access to our accounts to manage our money as they think its best? Banks should innovate like they are the hottest start-up incubator out there trying to find the next thing that will redefine the whole banking industry and not only their organizations. They should follow the banking operations of companies like Paypal, Uber, Ubisoft, Whatsapp, telcos and even Facebook that allows money exchange via messaging. Banks have long deployed technology to support and automate internal processes and to replicate functionalities online, mostly in the service of reducing costs. But now, they need to move a step forward being transformed into truly customer-centered banks fusing digital and physical assets to make customers’ banking lives easier, more convenient and more engaging. But some banks have innovated not only on creating added value to their existing customer segments but on identifying new consumer profile groups, especially of below 25 years old, which behave on a completely different way than traditional banking customers. 7 35% of market share that full-service banks in NA could lose to new digital competitors by 2020 Consumers perception of their banking relationship as transactional not advice- driven is growing at a rapid pace. 79% of consumers consider their banking relationship to be transactional -up nearly 10% since 2014. Banks should evolve and not being viewed like a utility.
  8. 8. These case study end-to-end experiences create platforms for adding value in new ways. Other banks are replicating the approach and applying it to customers’ needs such as buying a car or managing cash flow. In Malaysia, for example, RHB Banking Group, the nation’s fourth-largest financial services provider, has launched a technology-empowered branch network called Easy. This simple, agile and transparent delivery model, designed to attract the less affluent, is 15 percent cheaper to build and operate than traditional RHB branches. Moreover, branches built on the Easy model break even in one-quarter of the time of traditional branches, and generate operating profits equal to the initial investment more than twice as fast. 8 THE CASE STUDY OF CBA Commonwealth Bank of Australia (CBA), for example, took a core banking product, mortgages, and innovated Digical capabilities to help customers buy their homes. Partnering with multiple listing database Domain.com.au, CBA developed a mobile app to search any house in Domain’s database for visual and written details, which engage customers from the start of their home-buying experience. Customers can click through to get advice, then start the mortgage application online or book an appointment with a mortgage adviser in a nearby branch. After completing the application, a rapid “straight-through” decision process and e-alerts keep customers updated on their application status. The bank’s mobile payments capability allows customers to transfer funds to the vendor on the go and manage their mortgage balance through any channel, including mobile, online and ATM. This easy, convenient and engaging experience has helped CBA to reinforce its THE CASE STUDY OF WESTPAC Among the innovations by Westpac, another bank in Australia, is the way it built its position in superannuation, the compulsory pension scheme, with its “BT Super for Life.” Westpac allows customers to aggregate and manage all of their superannuation accounts in one place, whether that’s through the Web, a mobile device or in the branch. Once they enter their personal information, the platform behind the product does the rest, including finding the customers’ “Supers,” moving them to target- date funds and then letting customers see and manage these accounts alongside their bank accounts online or through a mobile device. The low cost of this innovation stems from cutting out the investment adviser and has allowed Westpac to price the product at 75 basis points, roughly 40% less than the market average. Delivering a simpler, low-cost platform has also helped Westpac to achieve fast growth in the superannuation market and improve cross- selling performance.
  9. 9. In many countries, particularly those where infrastructure challenges loom large, banking by mobile phone is making rapid headway. Just consider the success of Safaricom’s M-PESA mobile payment service in Kenya, which now boasts more than 17 million users—more than half the East African country’s adult population. Right now, telecom providers, with their vast distribution networks, dominate such services. But some innovative banks have opted to partner with them for a piece of the action. For example, ICICI Bank, a leading provider of mobile banking services in India, has forged a network of partnerships with telecoms including Chennai-based Aircel and the United Kingdom’s Vodafone Group to reach rural and unbanked customers. 9 THE CASE STUDY OF HELLO BANK Hello bank! is the 100% mobile digital bank successfully launched a few months ago by the BNP Paribas Group in France, Belgium and Germany. The addition of Italy will expand its European dimension, increasing its number of operations in the Group's "domestic markets", which are increasingly integrated and where the aim is to promote a new way not only of "doing" banking but of "being" a bank, in line with the innovations that digital technology is introducing into international banking services. Hello bank! is a new approach aimed at the digital generation, customers with "digital DNA", the early adopters with a passion for technological innovation, who prefer to use mobile devices, such as smartphones and tablets for many of their everyday activities: from news to weather, from sport to nutrition, from learning to reading, from choosing a film to booking a flight or hotel, and so on. Hello bank! customers want to interact with their bank using dedicated apps, and for more complex needs, such as advisory services, look for extended-hours access to their account manager by video call, online chat or phone.
  10. 10. THE IMPORTANCE OF OMNICHANNEL STRATEGIES Omni-channel customer experience took a hit last year. Performance fell across four key metrics: ability to build long-lasting customer relations, design and deliver branded customer experiences, use multiple channels strategically and leverage digital channels. Whether high-growth or lowgrowth company, B2B, B2C or B2B2C, marketers also report that the importance of offering an omni-channel experience declined as well. One set of numbers tells the story in sharp relief. CMOs report that their ability to use multiple channels strategically and in an integrated and consistent way fell seven points in 2014 from 2012 (from 53% to 46%), but the importance of mastering the multi-channel customer experience fell even more—by 14 points (from 71% to 57%). Omnichannel is now a brand differentiator, according to a recent Forrester study. Achieving the goal of “anything, anytime, anywhere” banking has major implications for the role of the branch. With teller-assisted transactions declining at an annual rate of 10% to 15% for many banks, migrating to lower-cost, automated formats is essential. Moreover, innovations in smart ATMs and video teller machines have made self- service easier and more engaging. Optimizing the footprint is one aspect of how the branch network will evolve for an omnichannel world. To start, many existing branches in the Americas and Europe will close. Recent studies show that 75% to 80% plan to reshape or close their networks, with some banks shrinking as much as 30% of their networks over time. This will be expensive for banks that have been slow to move. To raise the overall effectiveness of the network, leading banks are developing new branch formats that consist of lighter but sturdier alternatives to the traditional branch. As noted earlier, the most common new model consists of hub-and-spoke configurations of advisory offices, light-retail consumer shops and self-service kiosks arrayed around the full-service flagship store. All of the new formats incorporate digital technologies to enhance the customer experience and provide self-service capabilities that customers increasingly expect. Some spoke formats have removed bank tellers altogether. An advantage of the hub-and-spoke model is that it can be built in one local market (a city neighborhood or rural district) and then optimized while rolling out more broadly. Forward-thinking banks have been using sophisticated modeling techniques, geodemographic data and geomapping software to dramatically improve decisions about the network. First, they identify key local markets, building a picture of potential revenues and profits to determine where branches can be most profitable. Then they identify which factors have the greatest influence on branch performance— 10 Consumers’ perceptions about bank branches are changing: 81% of consumers would NOT switch banks if their local branch closed. Branches must be a relationship hub, not a transaction processor.
  11. 11. being close to a shopping center or train station, for instance. Finally, they apply behavioral science to lay out and design the store. In aggregate, the branch network will undergo substantial change. While many banks are cutting the number of branch tellers and assistant managers, between 50% and 75% are expanding specialist and relationship adviser roles. They’re also plowing money into technology to promote a more seamless experience across channels; depending on the technology, 40% to 60% are adding in- branch tablets, video teller machines, smart ATMs and the like. In a few places like Singapore, more versatile ATMs make customers’ lives easier by allowing them to buy airline tickets or pay parking fines. . Customers will increasingly expect transactions on their smartphones or tablets to flow directly to the branch and interactions with the bank to be easy and engaging, whether online or in person. 11 Millennials also have distinct preferences for how banking services should be delivered. Two-thirds (67%) of them said that the traditional and digital banking experience they receive at their current bank is only somewhat or not at all seamless, and nearly half (47%) said they would like their bank to provide tools and services to help them create and monitor their budget. THE CASE STUDY OF UMPQUA BANK Consider the story of Umpqua Bank’s flagship store in San Francisco, winner of a 2014 EFMA- Accenture Distribution & Marketing Innovation Award in the physical distribution category. Note that the use of the word “store” over “branch” is not an oversight. I’ve seen many banks use this word over the last decade, but it has often been used in the wrong connotation as a place to amass products instead of as a place to shop for the product they need. What is Umqua doing differently? To connect with and welcome customers and the broader community, Umqua designed this store, which opened in August 2013, to envelop customers like the best retail stores do—and then some. In addition to its strong design sensibility steeped in local and regional influences, the San Francisco store includes breakthrough features and services not typically found at a bank branch, such as: - External screens with community information. - Public access to tablets. - Comfortable chairs in inviting conversation nooks. - A “demo bar” to showcase key products and services in an interactive manner. Retail banks should use their local branches as a strategic advantage in keeping those non-bank competitors at bay by making better use of their stores as true places to meet their needs.
  12. 12. OVERHAUL THE TECHNOLOGY PLATFORM TO SIMPLIFY CUSTOMERS’ LIVES AND LAUNCH MORE OPERATIONALLY EFFICIENT BUSINESS MODELS To deliver a differentiated, seamless experience to customers, most banks will need to make substantial improvements to their IT infrastructure. CBA’s effort to build digital innovations around home buying and other experiences, for instance, was premised on its long-term commitment to investing in customer record migration and integration—infrastructure that allows a single view of the customer from any channel—and the reconstruction of its core IT platform for one-and- done processing. Joined-up IT capabilities are becoming a competitive advantage for many banks that invest in technology. Fragmented infrastructure remains a pervasive problem for the retail banks on our benchmarking panel. Standard services might be available online and through mobile, but for even slightly more complex transactions like sending funds abroad or prepaying a mortgage, customers still have to go to a branch. to endure a slow, clunky, multistage experience. The Phygital transformation entails a few essential characteristics of IT infrastructure: • Joined-up customer data that creates a holistic data file for each customer • A single view of the customer so frontline employees can see the entirety of a customer’s relationship • Technology that supports one-and-done processes and a real-time processing engine, rather than batch processing, to speed up outcomes for customers Building these kinds of capabilities usually involves a multiyear roadmap of changes to systems and infrastructure that’s expensive and hard to deliver. A few banks have chosen to replace their core and single-view systems all at once, but most are staging the transition. Others are exploring outsourcing and cloud-based capabilities to achieve their IT goals at a lower cost; roughly one-quarter of our benchmark banks have used the cloud, and 60% plan to expand their use of cloud computing in the future. 12 290% increase in customer conversion rate by a leading european bank that used web analytics to personalise online offers
  13. 13. PHYGITAL TRANSFORMATION BANKING TIPS • Know your customers. Micro-segmentation allows financial marketers to understand customers better as groups, sub-segments and individuals. It guides banks to direct resources, develop products and service customers through individual interaction models and as part of an omni- channel strategy. • Re-imagine the experience. With analytics, banks and credit unions can create consumer- centered journeys that go beyond conventional banking encounters. They can develop test- and-learn approaches, using data insight to inform continuous improvement efforts that reflect customer behaviors and feedback. • Change the distribution mix. Considering the changing role of the branch and the growing importance of digital, financial institutions need to rethink the distribution mix to make the most of consumers’ changing patterns of channel usage. • Deepen and sustain loyalty. Financial institutions can sustain customer loyalty by combining implicit loyalty — advice, matching donations or services like merchant-funded offers — with explicit loyalty (points based systems), using the right data for an insight- driven, holistic loyalty program. • Evolve into everyday banks. Banks and credit unions must bring multiple elements together— channels, customer experience, analytics, partnerships, digital platforms and innovation among them—to power a new Everyday Bank value proposition. 13
  14. 14. 14 Vasileios Tziokas is a marketing professional with outstanding academic & professional record in branding & strategy having worked with world-leading brands like the Vodafone Group, Mondelez, Telefonica and Coca-Cola. He has been featured in top publications like AdWeek, MediaPost and Venturebeat. He has previously worked for BBC Worlwide and TBWA/London. A guest speaker at Reload Greece, blogger at Huffington Post & founder of The Phygital, the first ever thematic site about the convergence of physical and digital in business, strategy and marketing. BIBLIOGRAPHY 1.Altimeter Group Digital Transformation Report 2.Accenture The Everyday Bank Report 3.Bain & Company: Leading A Digical Transformation Report 4.Capgemini Consulting: A Roadmap For Billion Dollar Organization

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