Dharmesh Mistry highlights three ways to increase revenues and three ways to cut costs by exploiting digital banking technology
Increasing profit is simple: it will go up if you can cut costs and increase revenues. Automation can work in your favour on both sides of that equation. It kicked off the agricultural revolution and really got going with the industrial revolution. Now it's digital change that is revolutionising profitability. Here are my top three ways that banks can use digital to cut costs and increase revenues.
1. Timely and relevant personalised mail
Personalised marketing campaigns to date have meant sending Mr Jones a letter starting with Dear Mr Jones. What followed was generic and untargeted. Today, banks can do so much better. They have the data that reveal exactly how much and on what Mr Jones is spending and they should use this to sell products.
For example, Mr Jones' bank can look at his spending, see that he's just paid an unusually large bill that might leave him short of funds later in the month. With this knowledge it can send an offer for a new credit card, short-term loan or overdraft facility. The pitch is relevant, timely and clean and more likely to be taken up. Indeed, EY research showed that 60 per cent of customers said they would expand their relationship with their bank if they were recommended products that they really needed.
2. The marriage broker
Banks are in the fortunate position to be able to hook up their business clients with their retail clients, promoting the former to the latter and getting a cut of any sale. By looking at spending patterns, banks can see what customers are interested in and make the introduction. It's been done by credit cards for a few years and Lloyds and Barclays Bank have recently started, too.
It's simple and effective. For example, a business client could be a golf shop. The bank offers the golf shop the ability to analyse an anonymised customer database. With this data the shop owner identifies 40,000 of the bank's customers that are within shopping distance of the golf shop and who buy golf equipment. It can target them, sending out promotions. It can construct a push portal a bit like Groupon, and each time a retail customer responds, it gets a bit of the action.
3. Be like Amazon's marketplace
But banks will need to go further and become a marketplace, selling competitors' products too. Amazon does this brilliantly, offering its own products as well as other companies' versions, which might even be cheaper. It's about selling more products and taking a cut.
Banks will have to do this to survive. The disrupters are already taking market share and by making them a revenue stream they will no longer be a threat – it turns competitors into partners.
Success will depend on being timely and relevant, having high levels of customer service and delivering exactly what the customer wants. The process and delivery must also be transparent.
This is the future for general banking, and already we are seeing it in wealth management. YourWealth, for example, offers masses of tools and content for its customers and aggregates rivals' offerings on its site.
There will come a point when banks that aren't doing this will get left behind. The next generation of customers will be switchers with no bank loyalty. They will change accounts according to offer, need, price and service.
1. Go direct
The more a bank goes directly to the customer, the fewer buildings and people it needs, reducing a huge cost burden. The mobile revolution is already having a massive impact, with banks closing thousands of branches and having far fewer people per square foot.
HSBC is cutting 50,000 jobs as it shifts services online and into self-service channels, expecting to save $5bn a year by 2017. JP Morgan is closing 300 branches by the end of 2016 as a direct result of the increasing popularity of its mobile banking app. It revealed that seven years ago 90% of consumer deposits were made via a branch teller. Last year, that had dropped to 42%, with 48% made via an ATM and 10% via the mobile service. The result is a 50% cut in cost per deposit and that's from just a mobile app.
The next step is automated, full-service kiosks, which are already appearing in branches, and it won't be long before we see them in service and railway stations, airports and shopping centres – the bank is coming to the customer.
Taking this mobile service a little further, Idea Bank in Poland is sending a car to the customer to collect cheques or cash for deposit, which it then takes back to the bank. One day that car service will be driverless.
We'll have robots in branches soon too. Santander had an innovative trial back in 2010, but this year the Japanese Bank of Tokyo-Mitsubishi put a small humanoid robot into an Osaka branch. Called Nao, the robot can explain in four languages how to open an account. When it is not banking, the robot dances to entertain customers.
Banks still largely have bespoke core IT systems, of which they have to own two, one for disaster recovery. These are expensive, finite and reaching the very limits of their abilities. Switching to the cloud offers limitless resource to run far more powerful software, opening the door to new ways to sell. It's cheaper, too, so banks can get a more efficient platform and cut their cost base.
The disrupters are already in the cloud, traditional banks must follow.
3. Data mining
Leveraging data will help banks to sell better, but it will also help them to cut fraud. Fraud is hugely expensive, costing banks billions every year. Indeed, in 2010, the UK financial services sector alone recorded £3.6bn in fraudulent losses.
We're not saying that fraud can be eliminated, but by analysing patterns banks can dramatically reduce these losses and they can almost entirely end swindles and scams by introducing a program that looks for patterns and raises an alarm. For example, a common credit card scam is to apply for multiple credit cards, rack up the spending, and disappear. If banks marry the data on applications to household addresses, they can set an early warning system.
The technology is already available, most of it is bolt-on and modular and the benefits are clear. Digital brings consistency, it brings opportunity, and it brings down costs.