Belgian banks are working nowadays in an economic climate where low interest rates and low growth numbers are having a big impact on the traditional income of the banks. And following the Covid-19 crisis, this climate will still be there for quite some time. On top of that, regulations are forcing banks to invest a lot of money to be in line with these regulations (and there is no return for them). And banks are confronted more and more with fintechs and ‘neobanks’ who have to be seen as real competitors. For all these reasons, banks are looking into alternative sources of income.
As the cost / income ratio is one of the key indicators for a bank, they have to look also into the cost side. Major cost drivers for a bank are the cost of the IT infrastructure and staff, less important are buildings, taxes and marketing costs. One of the important evolutions that we see is the complete rethinking of the distribution channels.
An important element having an impact at both the cost and the income side is the client offering. Banks have to evolve continuously due to changes in the customer’s expectations. As the relation between banks and their clients is constantly under pressure, banks have to find other ways to bind their existing clients on the long term, and try to attract new customers.
· Digitalisation is an important evolution that banks already did quite well, but it has to go further. Client expectations are constantly evolving: they want a personal approach and advice based on their specific situation and needs. This has to be done in both a digital way but also with human interaction. On top of that, clients expect that they can do this at the moment that suits them the best.
· Some banks, e.g. KBC, are also creating an ‘all-in-one app’ (also known as ecosystems). In their mobile app, they are not only offering bank services. Via the app it is also possible to buy tickets of external partners like e.g. De Lijn, NMBS,… A very important point is that these services are also available for prospects which can help to attract new clients (see e.g. Goal Alert in the KBC app).
· Banks are also trying to sell their products via other channels, outside the banking industry.
Other alternative sources of income are e.g. bringing the clients from savings towards investments on the long term. Instead of being a cost (banks pay for the amounts on a savings account), they generate income via investments and this in a one-off (transaction fees) and recurrent way (management fees).
Digitalisation is important. However, the physical client contact is equally important, if not more important. Basic banking services (e.g. money transfers, consultation of securities accounts,…) can be done by most of the clients in a digital way. However, in some circumstances (e.g. subscription of more complex products like e.g. a loan, management of complaints,…), a personal, human contact with the branch employee remains very important. The optimal mix of digital and physical client contacts is key in this. Client contact will happen more and more outside the classic branches in the street during the normal working hours. Instead, the contact will take place by videocall or phone via a secured line and on the time that the client suits the best.
Banks have a lot of interesting data about their clients. A good analysis and usage of these data can bring extra income for a bank: proposing new products to client via the app can bring extra value. Banks are also trying to sell these data to other interested parties. Therefore, data management and artificial intelligence will become more and more important.
You can state that the cost of IT and the staff are the main cost components of a bank. However, these are also the most important drivers of a bank. To be able to react timely and efficiently on the above mentioned evolutions, the bank processes, the organizational structure and the people have to be ready. Therefore banks have to continue to invest in digitalization: robotics will help to automate easy, repetitive tasks, and artificial intelligence will be used to automate more complex processes (e.g. claims processes). By doing this, clients will be helped faster and in a more efficient way.
From an organizational point of view, banks will look differently: less decision levels, simplicity in product offering processes and client communication. And via the use of Scaled Agile, the throughput time for projects will decrease drastically.
For employees, there will also be some changes. Some jobs will disappear due to outsourcing or because they are replaced by robots. But on the other side new jobs will be created. Employees will have to work in a completely different way. A culture where growth, continuous improvement and learning, flexibility, knowledge,… will be key.
Banks are facing challenging times. They have to look to alternative sources of income, do their utmost best to adapt their systems and products to the new client needs and expectations. To be able to do this, they have to invest in the digitalization of their product and service offering, change their organizational structures and look for employees that are willing to continuously improve themselves and keep up to date with the most recent evolutions in the market.
Written by Maarten Lemmens, Business Consultant & Senior Manager @Bridgers