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Why digital, ecosystem-enabled banking transformation is the way forward

Banks need to act to improve revenues and profitability, enhance customer experience and secure a bold strategic positioning in the market.

In brief

  • Banks need to transform their operating model to respond to new market entrants, customer needs and profitability challenges.
  • Successful banking transformation programs combine customer, digital tech and data analysis to deliver new operating models that add value for customers.
  • Adopting an ecosystem approach can enable banks to capture additional market value.

Traditional European banks face compelling arguments for transforming their businesses, founded on market pressures and digital opportunities. Both the need and the potential exist to reimagine banking to create a brighter future.

Achieving change depends on multiple factors. It’s vital that banks become truly digital, embracing technology to improve customer experience. They can use data analytics to understand their customers fully and design personalized, real-time products accessible through multiple channels. Customer service operations themselves are evolving, with the potential to transform from reactive cost center to proactive value generator.

Across the wider organization, banking operations are ripe for radical and holistic change. Legacy system issues need no longer hold back new operating models, which can now take advantage of developments in cloud services and open banking. European banks can also explore new ways to capture market value by developing an ecosystem offering – bundling services beyond banking to serve customers better.


Chapter 1

Market drivers for banking transformation

Traditional banking models are no longer viable in this competitive, customer-led environment.

Traditional European banks are still struggling to solve long-standing challenges related to costs and return on equity – despite numerous cost-reduction programs. Meanwhile, banks’ revenues and operating margins are under pressure due to sluggish interest rates, a slowdown in lending and competition from new market entrants.

EY’s global banking outlook for 2021 estimates that non-financial services firms already generate more than $200b of global financial services revenues. FinTechs and BigTechs are making inroads into the banking space and capturing market share – applying their technological agility and digital capability to propose more valuable customer experiences at a cheaper price. Businesses from other sectors such as consumer goods and automotive are also now providing different types of financial products and services, encroaching into territory previously dominated by the banks.

From a demand perspective, European customers are increasingly open to buying banking products and services from companies outside financial services, such as retail, telecommunications, technology and social media, power and utilities, among others. Customer behaviors are also changing, with increased interaction on digital channels. More customers are taking up internet banking, using applications and relying on digital channels even for more complex transactions, such as taking out a loan. COVID-19 has only served to accelerate the digital shift, with social distancing measures and lockdowns pushing consumers to interact more in the digital space. In addition, customers increasingly expect their consumer banks to offer services beyond traditional banking, such as providing financial advice. Commercial customers, including SMEs, are also demanding more value-adding services and richer experiences from their bank – knowledge, networks and additional services to help them grow, as well as finance and more traditional banking support.

Banks across Europe have a clear need to act in order to improve revenues and profitability, serve customers better and secure a bold strategic positioning in the market. “Banks have a once-in-a-generation opportunity to transform their business. Creating the necessary investment capacity and securing the ability to execute at pace are going to be critical to future success,” says Nigel Moden, EY EMEIA Financial Services Banking and Capital Markets Leader.

Banks need to consider new ways of operating – models based on banking as a service or as a platform within wider ecosystems, perhaps a “plug and play” approach to develop products that can be promoted in the wider market.

Our global banking outlook research has found that people most associate transformation in their organization with exploiting new technologies – reflecting that developments in technology are often the drivers of change – providing opportunities or triggering the need to respond to what others are doing – as well as often being part of the solution. However, truly effective banking transformation also requires other factors alongside technology, such the development of new capabilities in the workforce and a clear vision for the customer relationship.

Although immediate market pressures and shocks such as the COVID-19 pandemic can create a sense of increased urgency to transform, this does not necessarily mean that European banks need to adopt a “big bang” approach. EY research into how transformation is perceived by organizations across all sectors suggests this could be detrimental.

Transformation should happen on a continuous basis. Adopting a culture where transformation is seen as incremental and continuous has a more positive association – a mode of ongoing fine-tuning and adjusting in light of market, customer and technological developments.


Chapter 2

Being truly digital to please customers and boost revenues

Banking transformation requires embracing digital to improve customer experience.

Being truly digital means reframing banking. It is about providing value to and deriving value from customers – both retail and commercial – in a way that builds customer loyalty. It therefore represents far more than simply doing the same things as before more efficiently and quickly.

Digital solutions should aim to create customer journeys that are as easy and frictionless as possible. For example, EY’s Nexus for banking cloud service platform can absorb data using open banking from a range of sources, use machine learning to generate real-time, tailored insights and then integrate data into banks’ channels – again in real time. By using the best digital solutions, banks can deliver the right insight, to the right customer, in the right channels – and so succeed in offering a not only a truly digital customer experience, but a better customer experience.

Case study: A bank delivers strategic customer transformation

We have supported a major European consumer bank in delivering its strategic customer contact transformation program aimed at maximizing the operational availability, effectiveness and efficiency of front-line colleagues providing customer services. The program contained many elements: improving front and back office digital adoption, improving and automating processes, developing a more flexible and optimized workforce model, and ensuring effective coaching and learning for agents.


Chapter 3

Using data analytics to understand customers fully

Banks now have the potential to realize unfulfilled data analytics ambitions.

The European banking sector has traditionally struggled to use data to generate commercial returns. However, developments in cloud services and open banking have made it easier to pull trusted data from across a bank for analysis. The ability to see one client’s credit or lending history across diverse databases and systems would be extremely valuable. Banks that share data more effectively across their organizations and analyze it more thoroughly can expect to generate better insights and have happier customers. If banks transform to offer personalized and real-time products or services based on individual data, this could fundamentally change their relationships with customers.

They can also anticipate increased ability to charge customers fees for value-added services. The “know your customer” concept is essential here for identifying such opportunities. It is also vital for enabling European banks to respond to pressure from governments and regulators to serve their vulnerable customers better.

These ideas apply equally to retail and to corporate, commercial and small and medium-sized enterprise (CCSB) banking. Using data-driven lifecycle maps, banks can measure current profitability and model future performance for individual client businesses – enabling them to offer solutions tailored to specific business needs at the right time.


Chapter 4

Transforming the customer service experience

Banks can transform customer services from reactive cost center to proactive value generator.

Customers increasingly expect a high-quality experience from the organizations they use: 90% believe customer service is somewhat or very important when choosing or remaining loyal to a brand.

Customers compare their financial services providers with the experience that they receive in other areas of their life, and now expect 24x7 access to support. They also expect to be able to interact with their banks using internet, social media, mobile and voice options, as well as in more traditional physical ways, including visiting a branch – with the experience being seamless across all channels. According to EY research, 25% of customers use more than four channels when engaging with organizations.

For many years, European banks have given customers the ability to self-serve through digital channels. COVID-19 has accelerated this evolution, increasing demand and usage of digital solutions. While the use of internet banking and mobile apps has risen significantly in the last year, we have also seen that there are still many customers who want, or need, to use face-to-face and human channels.

Banks across Europe are responding. We are seeing a trend towards reviewing and redesigning the customer service operating model to embed the omni-channel customer needs. This includes rethinking the requirements of contact centers, branches, relationship managers and digital platforms, with implications for technology and workforce skills.

Expectations for the benefits of transforming customer service are themselves evolving. Once seen as a cost to the business, customer service activity is increasingly and strategically positioned as a value generator. Rather than only responding to product and customer experience teams, customer service is now being actively included in the design of products and services. This shift recognizes that customer service front line agents interact with banking customers more than anyone else in the organization. Their insights can therefore help to identify product and service innovations that will be most valued by customers – and generate most value for banks in return.


Chapter 5

Shaping operations that reflect today’s technology

Operating models that have evolved over many years now need radical and holistic change.

Most European banks have made progress in changing their operations, typically focusing on using technology to replace repetitive jobs and free up human resources for more creative and higher value roles. However, most banks would acknowledge that their current operating model is sub-optimal – a result of implementing successive new regulations and short-term cost-cutting initiatives. Changes have also often been made to address pressing but narrow issues, such as minimizing execution risk.

Real value will come from banks stepping back and taking a holistic view in order to align their operating and business models. It is important to rethink business and operating models with a focus on process and customer needs, before then applying the full suite of technologies, including AI, robotic process automation, chatbots and machine learning.

Many banks have now started the process of re-scoping their operating models – looking at shifting from a functional to an output view. This could ultimately result in a move away from traditional linear structures, with teams and operations instead being aligned with specific services, such as the credit process.


Chapter 6

Overcoming core technology challenges

Banks need no longer be held back from achieving business ambitions by legacy system problems.

The problems associated with legacy systems have traditionally limited banks’ ability to thrive. Resilience failures have resulted from the patchwork of systems often bolted together after acquisitions. Banks’ ability to innovate has been hampered by lack of core system agility. In addition, the complexity and execution risk of trying to move off core systems has led to a defensive IT mindset.

Such problems can now be overcome. Cloud services allow banks to re-platform certain operations on new standalone systems, with integrated digital and analytics components. Bank leaders can start with a clean sheet – designing customer-friendly systems using open banking to enable full functionality.

Different strategies can be followed when moving off legacy systems. Some European banks prefer a gradual migration, whereas others are looking at building new digital platforms that enable them to “switch off” legacy systems. Decisions also need to be made about the right technology infrastructure, e.g., whether to use a traditional vendor or FinTech, or to set up a joint venture. The right answer needs to reflect each bank’s own needs and priorities.


Chapter 7

Adopting an ecosystem approach

Banks can capture market value by adopting an ecosystem approach to solving customers’ needs.

An ecosystem approach involves bundling services beyond banking to offer customers a friction-free and far-reaching service. These service bundles could focus on different aspects of individuals’ lives, such as housing, retail, mobility, retail and wellbeing, as well as financial health.

In an ecosystem offering, a multitude of actors provide their products and services, and are integrated on a single digital platform destined for the customer. Adopting an ecosystem play allows banks to address a bigger share of total wallet by expanding the points of access to their financial products. They can also strengthen their strategic positioning by providing non-financial services that customers would be willing to buy.

In a housing-focused ecosystem, for example, a customer could use a single platform to fulfil their journey from searching for a new property to its ultimate sale. Interim actions supported by the digital platform could include financing the property purchase, obtaining insurance, completing renovation works, moving in and property management. Services provided could include a mix of banking services, such as mortgage pre-approval, mortgage loans, house insurance, credit cards, investment advice and renovation loans, as well as numerous non-banking services, including estate agency, legal advice, architecture and design services, utilities, contractors, moving services and furniture retail.

Many different customer needs can be addressed through ecosystems. For example, we have supported a client in developing a platform to create and support an ecosystem of players focused on business customers in the agriculture and food sector. The platform allows bank customers to access numerous services for the development of their business and take part in a supportive network.

Services may be offered through a differentiated services model, reflecting different customer preferences and differing service provision costs. Some services might be provided for free, others through paid subscription packages and some made available on-demand on a pay-per-use basis, or along the lines of current banking services.

Three core approaches are open to European banks when launching an ecosystem offering. As a builder, the bank owns the platform as well as all the products on the platform – an approach that requires heavy investment in order to provide all the products and services across an end-to-end customer journey for a specific need. Alternatively, a bank could strategically position itself as an integrator, owning the ecosystem platform and orchestrating a mix of in-house and third-party products – an approach requiring strong partnership capabilities and organizational agility. Thirdly, a bank could opt to be a provider, offering its products and services to digital platforms owned by third parties – requiring less investment but still based upon digitized banking products and a compelling go-to-market proposition.


Margin pressures, competition from new entrants and changing customer preferences are forcing traditional banks to transform their businesses. In doing so, banks need to embrace digital platforms to serve customers better, make full use of data analytics for better real-time customer insights, modernize operating models and free themselves from the restrictions of old core IT systems. Adopting an ecosystem approach will give banks an additional way to increase the value they both offer and gain from customers. Real banking transformation can then be pursued in an ongoing basis, driven by clear organizational goals.

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