Often thought as merely a way to reduce costs, the digital realm is now being considered as able to create its own profit. As consumers turn to digital more frequently than ever, banks have had to rethink their strategies. Patrick Brusnahan reports on Timetric’s research into this trend
Retail banks often viewed digitisation as a cost-saving manoeuvre, as well as a way to build its brand image and engage customers. However, as customers often prefer digital channel, the paradigm has shifted. In addition to convenience and customer loyalty, banks are ‘looking to find innovative ways of generating revenues from digital banking services’, according to the report; Monetising the Digital Channel in Retail Banking.
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The report stated: “There are three fundamental pillars driving direct revenue generation through digital channels and technologies. The first pillar is focused on monetising mobile as a channel where banks are enabling traditional financial services through apps.
“Secondly, banks have started focusing on playing a larger role in the emerging digital wallet and e-commerce market, which is fuelling the next phase of product innovation to drive revenues. This is happening across markets and notably banks in emerging economies are investing in initiatives to drive innovation. The third pillar is focused on leveraging new digital channels and technologies as sales channels.”
Mobile migration
There is an increased focus on launching full scale banking services through mobile apps. Mobile- and online-only banks have started emerging across developed and growth markets. While the movement’s success remains to be seen, customers clearly prefer increased convenience and personalisation through mobile apps.
As more services and transactions shift to mobile, it will be a crucial driver for retail banks. Pace of innovation through mobile apps has been increasing and efforts are being made towards digitisation of traditional financial services.
Timetric expects the ‘primary focus’ to be on transactional services such as Remote Deposit Capture (RDC) and mortgage lending. While RDC has seen a greater level of adoption in the US market, it is still insignificant in other markets. After transactional services, personalised advisory services through mobile apps could be the next key area for retail banks.
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By GlobalDataIn addition, mobile wallets have a part to play. Banks gaining a share of the mobile wallet market is critical as it opens up revenue streams not traditionally in banking models. Notably, banks in growth markets are aggressively driving innovation in this space. Some consolidation is also expected as big banks try to acquire key technologies and platforms from disruptive start-ups.
Due to the fast changing nature of digital banking services, banks have needed to react quickly to change. This has needed some structural change. An innovative nature has had to be implemented in banks. In addition, one of the most utilised strategies by retail banks across the world has been acquiring start-ups to gain direct access to the talent pool with the capability to drive innovation.
Revenue from basic services
Digital services are helping banks convert increased consumer convenience into direct sales. One of the key pillars of digital strategy of retail banks currently rests on successfully developing and implementing financial services through mobile apps and generating revenue through this path.
There are certain cases where banks charge retail customers for using mobile banking applications. This strategy is generally aimed at the mass market, where low value revenue can be generated through high volume. While this trend can be seen across many markets, it is primarily happening in developed countries where banking app adoption is high.
However, an emerging consensus is that customers are willing to pay for what they deem as value-added services. For instance, for time bound clearance, banks have implemented a tiered fee structure depending on the urgency of the service.
The report stated: “Going forward, we expect multiple dimensions to get added to differential or tiered pricing. These would be based on type of product and importance of the consumer from a revenue and profitability point of view.”
Another option is offering full scale financial services on mobile applications. By making the entire range of solutions available on apps, banks have built awareness about their various services which, in turn, has resulted in increased sales. As a result, the strong set of services has enabled banks to charge higher fees for premium services.
Two examples are highlighted by the report:
- Jibun Bank: Japan-based Jibun Bank has adopted the concept of mobile only banking. Jibun is a joint venture between mobile network operator KDDI and Bank of Tokyo-Mitsubishi UFJ. The Jibun Bank App, introduced in 2010, has consistently enhanced its features every year. These include fund transfers, locating ATMs, and even opening new accounts. Foreign exchange accounts, introduced in 2014, resulted in a hike for ‘au WALLET’ charged by 25% for customers performing transactions through the bank.
- CaixaBank: Caixa processes nearly 120 million mobile transactions each month. Almost one third of these are for funds transfers. Currently, Caixa operates about 70 mobile apps which have reportedly been downloaded over 10 million times. It became Spain’s first bank to launch an application for the Apple Watch. In addition, CaixaBank launched a first-of-its-kind biometrics-based financial services app, LineaAbierta BASIC. The app has been a huge success among its retail customers, as 3.4 million of its 4 million mobile customers have used the app. According to CaixaBank, it registered a 10% increase in digital sales in 2014 and this was primarily attributed to LineaAbierta.
Remote Deposit Capture
Remote Deposit Capture (RDC) allows customers to deposit an image of a cheque, rather than the physical version, for processing in the bank. This has two benefits. Firstly, it decreases the costs associated with cheque processing. Secondly, it opens up another revenue generation stream for the banks in the form of service charges. Given the level of convenience in RDC, it’s easier for banks to monetise these services in comparison to others.
While it has been successfully implemented in the US since 2004, it remains a fairly new concept in the rest of the world. Canada started allowing banks to accept RDC in 2014, the Canadian Payments Association (CPA) introduced the ‘Image Rule Project’ toward the end of 2013 that allows Canadian financial institutions to clear cheques electronically.
In developed economies, banks are taking an alternative route to boost revenues. For example, in case of mobile cheque deposits, a bank may charge a percentage of the deposit if it is to be enchased immediately. It might charge a relatively low fee if the money is to be paid within two days as the bank can verify the details during the intervening period.
RDC has been popular among retail banking customers in the US. Due to the increased usage of smartphone and digital banking channels, the service charges levied has boosted revenues for American banks. The US Bank charges 50 cents per RDC while Regions Bank charges 50 cents plus a percentage of the cheque value.
European and Asian countries are yet to roll out RDC services widely due to regulatory hurdles. In Singapore, Citibank introduced the cheque capture facility on a small scale through ATMs. UAE-based NBD Bank introduced the Multichannel Transformation programme in 2015 to offer digital banking services. Under the initiative, mobile cheque deposit facility through mobile apps was introduced.
Lending apps
Lending through digital mediums is one of the services important for boosting revenue. Unlike other services, loans require proper documentation and verification which remains the primary hurdle. However, there are some examples which showcase how monetising lending products can increase revenue.
- Standard Chartered partnered with Singaporean telco SingTel in 2014 and launched a mobile application that facilitated personal loans. The Dash mobile app provided the Dash Advance service which allowed a customer to apply for a personal loan, equivalent to four months of salary as on the bank statement, and get a notification within 60 seconds for the approval.
- In 2014, US-based online credit marketplace, Lending Club, and Union Bank entered into a tactical association among themselves under which Union Bank will have the power to procure personal loans on the Lending Club platform. This partnership is aimed at combining a balance sheet of Union Bank and the low operating cost of Lending Club.
- Hana Bank is the first bank in South Korean market to introduce a fully functional online mortgage application that performs the entire procedure of mortgage loan processing over a digital channel. Entitled ‘One Click Mortgage’, it triggered sales of over $2.4bn after ten months of its launch and contributed to 15.5% of total mortgage sales at Hana Bank.
The report stated: “Retail banks are experimenting on lending services through digital channels in terms of short terms loans. While most of the banks still use digital as a channel to generate sales leads, focus is now shifting onto creating lending products, which can be monetised through digital.
“Going forward, strategy around lending products is expected to focus on creating transparent products with clear pricing along with customisation according to individuals’ needs. Credit as a product segment is also being targeted by non-banking institutions and start-ups, which are coming up with innovative offerings to gain market share.”
Transforming new digital channels
In recent years, retail banks have started focusing on leveraging digital channels to drive sales, according to the report.
Consumer engagement through digital channels along with increased focus on convenience is becoming a crucial segment of growth strategies. Reaching out to customers through video and teleconferencing technology has become common across all markets.
Innovative solutions, such as wearables and personal Internet of Things (IoT) are among the new digital sectors entering financial services. Following the success launch of embedded online services such as biometric authentication, there is a systematic push around developing apps for wearables.
Big Data and cloud technology have both contributed towards innovation in retail banking with a focus on sales and lead generation. Social media has caught the attention of the banking industry and has led to the launch of various fund transfer platforms, and other services, through the medium.
Facebook and Twitter are extensively used for fund transfers and bill payments across the globe, primarily through NOCI’s Immediate Payment Service (IMPS). Some banks are even beginning to sell their products through social media.
Tapping into the vast amounts of data in social media has boosted direct sales and generated leads for other offerings. One example is WeChat in China. As it gained popularity, banks teamed up with it to provide customer services, financial assistance and launched loyalty programmes to attract new customers. In early 2015, Tencent became the first private bank in the country to introduce WeBank.
In addition, DenizBank in Turkey launched a social banking service within an application on Facebook that allows customers to apply for banking products, transfer funds, engage in social gifting, and communication with customer service personnel. Over 150,000 people now use the application.
Furthermore, the bank introduced a service on Twitter that awards loans to customers. The bank’s Twitter account is integrated with its existing SMS loan infrastructure and can undergo a customer’s loan approval process. During 2012 and 2013, DenizBank reportedly approved loans worth TRY2.7bn ($912m) utilising this method.
