Branching out into digital. Considerations for Irish retail banks

Branching out into digital. Considerations for Irish retail banks www.deloitte.com/ie/digitalbanking Leading business advisers

CONTENTS Executive summary New mobility The case for digital banking Trends in Irish retail banking The path to omni-channel growth Five point plan Conclusion About our digital banking team Recommended reading

EXECUTIVE SUMMARY Like the first years of broadband internet, mobile banking is undergoing a speedy transformation from a niche service for the technologically savvy to a mass market must have. Customers now expect to be able to start, execute and complete a transaction in any channel including mobile. The recent explosion in tablet devices creates yet another channel banks must address and is further evidence of society s demand for convenience, speed and multi-tasking. New customer strategies Fast-evolving technologies afford banks excellent opportunities to attract and retain customers and even to build new revenue streams but also allow unprecedented challenges from new market entrants. Consumers are demanding personalised offerings seamlessly delivered through all channels including mobile, social media, the PC and bricks and mortar. Turning customers around Banks need to make the shift from organising by channel, product and geography to mobilising themselves around customer segments and their needs across all media and channels. Deloitte recommends pursuing an omni-channel strategy, comprised of the following points: Adopt a digital mind set Define the branch of the future Adjust operating structure for a more customer centric model It s all about personalisation Harness the power of social media The banks that thrive will be those that offer an omni-channel strategy and engage with the customers on their terms.

NEW MOBILITY Digital banking in Ireland Recognising the rise in the popularity of smartphones and tablets, the main Irish banks Bank of Ireland, Allied Irish Bank (AIB), Ulster Bank and Danske (previously National Irish Bank) have all rolled out mobile services with varying functionality. Continued app development will be a critical enabler in engaging with customers, particularly when benchmarked against what clients of banks overseas have come to expect. The take-up certainly shows the demand is there: (please roll mouse over below) Mobile users That figure had risen to over 300,000 by year-end AIB press office figures The bank, which has closed its branch network, says almost a third of its customers here are active users of its ebanking services Danske press release November 21, 2012 Almost 30 per cent of them on a daily basis Bank of Ireland press release December 7, 2012

THE CASE FOR DIGITAL BANKING The mobile channel as a catalyst to improve bank performance CUSTOMER ADVANTAGES Convenience: banking on the move means 24/7 access, visibility and control. Reduced fraud risk: instant notice of deposits and withdrawals. Reduced costs: most transactions are significantly cheaper online when compared with the cost in time and transaction when going to a branch in person. BANK ADVANTAGES Engage new customers: 63% of the 740,000 smartphone users in Ireland were aged under 35. Source: Amas Winter 2011 Report!ssue 23 Cross selling opportunities: ability to profile existing customers and conduct targeted marketing activities. Lower costs per transaction: studies show the cost of processing a transaction on a mobile device can be as much as 10 times cheaper than via an ATM and as much as 50 times less than in a branch. Incentivise online behaviour: improve real-time access to full range of products and services.

TRENDS IN IRISH RETAIL BANKING (please roll mouse over below) The mobile influence factor to 41% by December 2012 0.4 million now own a tablet Source: IAB Mediascope Ireland, December 2012 outgrow smartphones by early 2013 Source: Adobe Digital Index, December 2012

TRENDS IN IRISH RETAIL BANKING Omni-channel no longer a buzzword The term omni-channel has emerged to describe this seamless, connected, simultaneous demand from consumers, with mobile playing a starring role. Catering to this omni-channel experience requires an overhaul of thinking and organisational structure to deliver a better customer experience. The good news is that you don t have to deliver everything on each channel, but you do have to understand your customers behaviour and their digital personae to disentangle this puzzle. Increased customer demand for a seamless, multi-channel experience across branch, online and mobile may be problematic for traditional banking business models, which are built and structured along distinctive channel and service lines. The ongoing reliance of banks on ageing and multiple product based legacy systems makes it more expensive to integrate new mobile applications. Changing requirements mean banks must recruit and train fresh talent to meet new demands. This will entail a deployment of different skill sets, moving from the current focus on administration to sales, advice and analytics. Although this constitutes a fundamental change in hiring priorities and pits them against other sectors with similar demands, banks must be prepared to make the transition quickly.

TRENDS IN IRISH RETAIL BANKING Customers want greater control over their finances Banks that adopt Personal Finance Management (PFM) strategies will reap handsome rewards. They will retain hard won customers, acquire new business and drive efficiencies. Personalisation should provide a detailed insight into financial behaviour, creating opportunities to tailor and recommend products to address individual needs. A theoretical willingness to adopt PFM strategies is not enough - banks must be proactive in making them happen, including staff buy-in and investment in new technologies. Any bank serious about catering to the needs of existing customers and winning new ones must embrace these new realities or risk being left behind by more nimble competitors.

TRENDS IN IRISH RETAIL BANKING Some customers still need personal service Deloitte s Technology, Media & Telecommunications Predictions 2013 report forecasts more than one billion smartphones will be shipped worldwide by the end of the year but the report also points out this does not spell the end for either PCs or more traditional handsets. Despite this explosion of different digital devices, a significant proportion of bank customers in Ireland are late adopters of new mobile technologies mainly but certainly not exclusively in the seniors age category. Banks must formulate a coherent strategy to accommodate this lucrative and growing customer segment while gradually persuading it of the benefits of mobile banking through appropriate communication and incentives. Banks ignore this cohort at their peril: abandoning it in favour of younger, more tech-savvy customers will likely result in a flight to those banks or other niche providers who will target this cash-rich demographic.

TRENDS IN IRISH RETAIL BANKING Eating their lunch In an increasingly fragmented marketplace, the homogenous offerings favoured by banks make them vulnerable to new competitors specialising in niche products. If banks want to continue eating lunch, they must learn from their peers in other sectors. Supermarket multiples such as Tesco Bank in the UK started to locate branches in its stores back in 2009, using loyalty card data to build up a potential customer base. The success of this concept in the UK increases the likelihood of it appearing in Ireland in the near future. Many large car manufacturers, such as Volkswagen, now offer discounted customer finance directly, cutting out the need to approach a bank for a car loan. They further sweeten the offering with extras such as free servicing or extended warranties. New disruptive models of telco operators partnering with social media providers have already developed peer-to-peer payments capabilities that allow money transfers from one person to another without the need for a bank, together with the concept of the digital wallet where money can be loaded and stored via a mobile device.

THE PATH TO OMNI-CHANNEL GROWTH Growth Optimised Performance Rationalised Efficient Stage 1 Traditional Branch Centric Model Stage 2 Digitally enabled branch Stage 3 Analytics informs multi-channel strategy Stage 4 Insight drives omni-channel growth Siloed channel structure Rationalised branch foot print Enhanced online banking Self service across all channels Straight through processing Online and mobile banking Consistent multi-channel customer experience Micro market optimisation of branches Advanced customer analytics and MI Tailored mobile banking applications Customer centric operating model Insight driven analytics Social media integration Seamless omni-channel customer experience

THE DELOITTE APPROACH: A FIVE POINT PLAN Any omni-channel strategy should comprise the following five points 1 Adopt a digital mindset 2 Define the branch of the future 3 Adjust operating structure for a more customer centric model 4 It s all about personalisation 5 Harness the power of social media

1 Adopt a digital mindset Redesign IT for an integrated online and offline experience Banks need to make the shift from organising by channel, product and geography to mobilising around customer segments and their needs across all media and channels. The customer experience needs to be seamless and one that lets customers decide how and when they interact with the bank. This requires the business or consumer serving departments to take charge of defining the scope and business objectives of new IT programmes. Bankers should intelligently rationalise their technology costs so that they can build the bank of the future while maintaining an efficient bank of the present. Begin by focusing on those systems and processes that have the most impact on target customer segments. 20 million new customers are expected to be entering the system over the next three to four years, looking to establish banking relationships. These customers use their mobile devices (smartphones and tablets) constantly to text, browse, and navigate their worlds. Source: Max Bercum, a principal at Deloitte Consulting LLP

Real life scenario: innovation driven from the mobile space An American retail bank and a leading US discount retailer offer consumers a better way to manage their finances Advances in mobile technology enabled an American retail bank to team up with a retailer in the US to offer a joint pre-paid debit card account to customers including: No transaction fees or charges (including no fee ATMs) Pre-loaded digital wallet for purchases Ability to transfer money instantly to friends via smartphone Ability to scan and lodge cheques via smartphone Sub-accounts for children, with parental controls Free theft and accident insurance protection for goods purchased Discounts and incentives offered

2 Define the branch of the future Design next generation branches around a memorable retail experience and revenue per square foot. Product showrooms Branches should become an engaging and interactive channel for delivering specialised services such as financial management and expertise, financial education and tax preparation. It will require a rebalancing of staff and branch processes to focus more on complex service issues and the necessary sales opportunities. Adopt a retail philosophy Banks should consider managing their branches on a sale per square foot basis and their locations should reflect realistic local market opportunities. More thought should be given into producing a distinctive store design to drive consumers into the branches more akin to the Apple Store. Examples include taking the concierge concept from hotels, where bank employees greet customers and direct them to the areas of greater opportunity for the bank. Offering service amenities like free Wi-Fi access, video conferencing lounges, coffee bar and value add services like networking opportunities and seminars on financial services all go towards making the customer experience more memorable.

2 Define the branch of the future (continued) Irish branches will continue to be strategically important: Ireland is still a long way from being a cashless society - a stubborn adherence remains to traditional payment methods such as cash and cheques. According to the Irish Payment Services Organisation (IPSO), cheque usage has fallen for the past six consecutive years but at 84.2 million in 2011, it remained a major payments instrument. European Central Bank figures show only three countries in the eurozone wrote more cheques than Ireland over the same period. Source: Central Bank of Ireland, Cheque Survey 2012 Loyalty - Branches remain, and are likely to remain the popular choice for the foreseeable future, with a large segment of the population, particularly senior citizens and those businesses with significant cash throughputs. Complex financial transactions - Branches remain the preferred channel among many consumers for advice involving significant financial decisions. In addition, where a requested transaction is non standard, it is currently difficult to conduct remotely. Branches offer the comfort of personal customer service and help build trust over time.

Real life scenario: beyond coffee and ipads An American retail bank: New flagship concepts More space, more specialised bankers, financial advisers and the latest gadgets. Video conferencing screens to give access to specialised bankers in different locations. Power bar for customers to plug in their laptops and do their banking. Employees with ipads patrolling the main area to support customers with routine transactions (i.e. changing smart pin). Real life scenario: the pop-up branch Popping along to KBC Closer to home, KBC Ireland opened its first pop-up branch in Dublin s Dundrum Shopping Centre in October 2012. It followed this up with a series of others across the country. It is aiming to extend its reach by providing instant personal information where people are doing their shopping while avoiding the overheads of opening a permanent branch. KBC has also transformed its flagship Dublin branch into a bright, futuristic, welcoming environment equipped with the latest banking technology devices.

3 Adjust operating structures for a more customer-centric model Making fundamental changes to the way that retail banks operate is an expensive business. Segmentation helps banks to prioritise their investments, focusing only on those operations that have an impact on target customer segments. Structure around customer segment divisions Organisational structures in retail banks are typically product led (e.g. mortgages, credit cards, current accounts) leading to a sales focus and a proliferation of product ranges. Operating models may become more customer centric if they work through customer segment based divisions (e.g. mass market, the mass affluent, affluent, and high-end) serviced by product lines. Realign staff culture to the business model Front-office systems should be developed so that the staff have sufficient skills to deliver improved service to high-end clients, improved relationship development skills, and enough data to know the requirements of the customers at the point of sale/advice.

Real life scenario: The online branch Banks could learn a few things from a US virtual bank branch that provides a highly personalised customer experience using social media including: Personalised profiles: such as financial personality (ranging from accountant to rockstar) and a credscore (a gauge of financial health). Moneypulse : an interactive graphical display of recent spending and projection for net cash position at month end. Get the Gossip : connections to the bank via Facebook or Twitter. Payment scanner ticket: attached to the back of a smartphone and using tap and pay technology, customers can easily transact.

4 It s all about personalisation How banks manage customer data is at the heart of an integrated channel strategy. Banks must leverage the extensive data they currently hold to better understand customers spending habits and develop new personalised offerings. Customers now expect banking services to be specific to them, their context. Generation Y in particular view anything less than this as odd. Taking a build and they will come approach no longer works. Today s consumers are savvy and demanding and will easily turn to the new entrants who are providing next generation banking services. Brand loyalty - personalisation will be the standard in how to engage and build brand loyalty. For example, banks could pinpoint shoppers physical locations using GPS to make relevant offers to their customers. Or as some new entrants are already doing, they could inform their customers exactly where they have been spending their money, thus making it easier for them to manage their personal finances. Data ownership and the ability to use data are two of the most valuable assets for a retail bank. The amount of data available from social media, mobile transactions, payments, and location based services can help banks make the right decisions when it comes developing products aligned to customer preferences or deciding where to deploy relatively costly branch resources. Banks need to reshape their data management capabilities from their data architecture to sophisticated uses of analytics for customer decisioning and risk management.

5 Harness the power of social media to connect with customers, take soundings on public sentiment and adapt accordingly The future role of social media in banking remains to be teased out, although it is already clear banking and social media capabilities will become increasingly intertwined. Social media offers many opportunities including transaction banking on Facebook, the disintermediation of incumbent payment systems by Twitter, growth in peer-to-peer lending via social networks, improving corporate reputation and more. Other activities could include: Conduct consumer research to understand emerging demands for bank integration with social media. Financial incentives to refer a friend. Employ crowd sourcing to generate product and service ideas and development. Integrate banking functionality into social networking platforms. Learning communities. Provide the infrastructure to facilitate payments through social networks, peer-to-peer payments. Participation and facilitation of social lending activity.

CONCLUSION New technology provides exciting opportunities for banking to reinvent itself by engaging with customers in new ways while simultaneously driving down the costs of doing business. With the proper vision and investment, it could also open up new revenue streams by exporting its technologies to other banks across the world on a white label basis. This will not only require investment in new technology, staffing and training: it will require a willingness to change the way a bank does business. While there is always an element of risk involved, there is more than enough international evidence to suggest a fair wind is blowing behind those who choose to embrace innovation. The blueprint is already there and banks across the world are using it to drive future success. Ad-hoc tinkering won t do: systems must be holistic and seamless for engagement to work. Mobile must become a core part of every bank s offering with functionality constantly being updated to meet evolving customer needs. A cohesive branch network is essential to not only reinforce brand presence but provides an opportunity for personal engagement. New technology can transform retail banking into the most dynamic and exciting sector in finance. Vision and execution will be pivotal to remaining relevant: the future is now, the possibilities endless.

ABOUT OUR DIGITAL BANKING TEAM David Dalton, Partner Head of Financial Services, Management Consulting T: +353 1 417 4801 / E: ddalton@deloitte.ie Donal Lehane, Partner Management Consulting, Financial Services, T: +353 1 417 2807 / E: dlehane@deloitte.ie Harry Goddard, Partner Partner T: +353 1 417 2589 / E: hgoddard@deloitte.ie Warren Marmion, Director Management Consulting, Financial Services T: +353 1 417 2550 / E: wmarmion@deloitte.ie David Reynolds, Director Management Consulting, Financial Services T: +353 1 417 5729 / E: davidreynolds@deloitte.ie David is the lead partner in Deloitte s Financial Services consulting practice. His experience includes customer and market strategy, channel strategy, business and operating model design and transformational change. Donal is a partner in Deloitte s consulting practice, specialising in the provision of consulting and advisory services to clients in the financial services sector. Donal has substantial experience of working with banking and insurance companies, both in Ireland and internationally. Harry is responsible for the Technology Integration practice, supporting clients in their technology initiatives. He has worked with a range of clients across the public and private sectors, where he has led a number of large technology transformation programmes. Warren Marmion is responsible for Deloitte s Financial Services Consulting industry strategy and solutions for banking. Warren is an accomplished leader of transformational change with extensive project management experience in IT, process and organisational change across the financial services sector. David is a Director within the Deloitte Consulting practice focusing on large scale business operating model transformations, strategy development and outsourcing. David s clients include AIB, Central Bank of Ireland and Citi. David Conway, Director Management Consulting, Deloitte Digital T: +353 1 417 3859 / E: daconway@deloitte.ie David Conway leads our Irish Deloitte Digital solution area and specialises in Enterprise Technology Strategy and Digital Channel Transformation. He has delivered a number of digital strategy, web, smartphone and tablet implementation projects for a large Public Sector and Financial Services sector clients.

RECOMMENDED VIEWING Visit our dedicated retail banking website for further recommended reading. www.deloitte.com/ie/digitalbankingreading Recommended viewing: CLICK TO PLAY

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