Eat or be eaten: this is the Post-Covid Champion in Banking!

By Diederick van Thiel

Looking at the 2020 strategic banking game to detect the winners!

The battle on the banking customer has become intense. Therefore, I researched the underlying competences that drive current and future success in banking. Since September 11th, 2020, I have written a series of 5 blogs that illuminate banks’ differentiation in cost/income strategy, customer experience strategy, innovative risk strategy and customer centric innovation strategy. To put it another way, to win in the current bizarre market and position well for the digital uncertain future, banks have to champion efficiency and effective digital customer engagement.

In my blogs, being read by more than 20.000 senior leaders & professionals, I unravel the performances of three competitive segments: commercial banks, Fintechs and Big Techs. Commercial banks are highly inefficient but nevertheless have profitable business models and large customer bases. Instead, Fintechs are highly efficient but often loss giving. They differentiate with high engaging customer experiences that offer interesting potential growth opportunities. Not to mention Big Tech, who are most efficient, profitable and engaging. However, consumer protection risks due to their big data play might limit their growth potential. Interestingly enough, also within these market segments we find fundamental differences in performance and growth potential. Looking at the strategic banking game to understand the competitors’ strategies better is what made us able to select the 2020 winner.

2020: What a bizarre market to compete in!

But before coming to the disclosure of the bank champion 2020, some remarks must be made to come to a decent understanding of the selection. In the light of the unprecedented pandemic, the G20 has come with leading principles to advance global pandemic preparedness, to jointly develop and distribute vaccines, to relief the debt burden of developing countries and to maintain income support in advance economies. However, principles alone are far from sufficient nowadays as bold, robust action is required to lead the world out of this crisis. The same complexity goes for competitors in the financial arena. They need strategically understand where to invest for future growth as well have the bravery to act on it now. Consequently, next to performance, action-oriented company culture that drives efficiency is a crucial element in the selection of the 2020 winner. Where Big Tech shows the most revenue, they most often are also most effective. Banks need to be circumspect as the impact of the financial crisis will only be seen in 2021 when government support programs will come to a hold, companies might go bankrupt and non-performing loans will accelerate.

Digital customer obsession

In the context of the strategic battle between commercial banks, FinTechs and Big Techs another strategic difference can be found in customer obsessed digital competences. Digital champions will most probably win the hearts and minds of millennials and generation Z in the upcoming years. Consequently, winners are fundamentally customer obsessed. That is, they internalized digital value creation in everything. From their mission and DNA to the smallest actions.  Moreover, they really master digitalization in their organizational models and are able to scale artificial intelligence and robotization across the company. On top of that, they are very ambitious in this respect and want to be world’s most customer centric company (Amazon), breath mobile interaction (Vodafone) or onboard new customers according to the 2 minutes application-1 second decisioning -0 manual labour in processes principles (Alibaba).  Additionally, they drive boundary-bursting customer obsessed innovation from the very top of their companies. Comparatively, commercial banks are predominantly competitor- and product oriented and often lack an ambitious customer obsessed mission. Although they employ younger generations as well, their leaders are still most of the time old fashioned bankers that think and act in terms of information asymmetry and portfolio risk management rather than in terms of continuous customer value improvement.

Data and technology driven profitability

Artificial intelligence, blockchain and big data form the ingredients for profitability in the next decade. As FinTechs and Big Techs fully embrace this, commercial banks often have difficulty scaling this to substantial profit drivers. C-level leaders in Fintech and Big Tech master scaling the business opportunities across their operating model in customer touchpoints, processes and risk decisioning.

And the winner is…

Apple! Apple scales in the banking market with Apple Pay. A payment and digital wallet platform that provides Apple access to consumer payment data globally. It digitizes credit and debit card chip- or pin-transactions. Apple scales globally fast through an eco-system approach with credit card companies, banks and others. Looking at our 2020 champion benchmark, Apple also is the most efficient company in the benchmark with an overall cost/income ratio of 60% (including financial losses) on a revenue of $ 33 billion in the first half of the year, where the largest commercial banks like BNP Paribas and Credit Agricole are above 80% (including net credit losses) on a revenue of respectively € 23 billion and € 16.9 billion. Most of the larger FinTechs are still loss giving on a revenue base of a few hundred million. Moreover, Apple is customer obsessed which results in a NPS score of 47, although it doesn’t beat yet the Fintech “Lending club” with a NPS of 78. Amazon, which for a long time I considered the outsider, scores 25 on NPS and the commercial banks somewhere below 40. The Net promotor score is an important metric for customer engagement, but also for driving digital process innovation. Last, but definitely not least, Apple integrates its mission in a high action-oriented company culture. Apple’s mission is ‘to make the best products on earth, and to leave to world better than we found it’. Apple therefore now is quietly expanding its artificial intelligence eco-system with acquisition of companies that champion this. The overarching objective is to grow the iPhone sales by strengthening its services eco-system. Apple’s virtual assistant Siri is the leading entity in this and might, driven by all insights from Apple Pay and the other services, evolve in world’s leading financial assistant in a few years. I want to congratulate Apple by being elected as the 2020 Champion in banking!

This article has also been published on Finextra (30 November 2020).

Win or lose? Winning banks break through the Big Tech Nash equilibrium

By Diederick van Thiel

In today’s ever-changing business landscape, where companies need to try and stay ahead of their competition, innovation should be one of the most important focus areas. According to strategy consultant BCG, innovation indeed is a top-three management priority for almost two-thirds of companies. This is however the lowest level since the financial crisis in 2009 and 2010—perhaps reflecting the uncertain economic outlook amid geopolitical tensions and the outbreak of COVID-19.

In a world where every industry is becoming a technology industry tech driven companies are the innovation leaders. Silicon Valley investor Marc Andreessen phrased it like this “Software is eating the world”, and now AI is eating software. And indeed, according to BCG, world’s most innovative companies are technology and software savvy companies like Alphabet, Amazon, Apple, HP, IBM, Microsoft, Samsung and Toyota. They have been leading the global innovation play for almost 15 years now which is reflected in their impressive financial performances. So, if the strategies of these innovation leaders have been successful for fifteen years now and there is no incentive for them to change their strategies, what could bank leaders learn for their own strategies to break through the Nash equilibrium? The Nash equilibrium is a concept within statistical game theory where the optimal outcome of a game is where there is no incentive to deviate from their initial strategy.

Innovation lessons from big tech

First of all, great innovators have a mission that drives innovation from the top. Amazon CEO Jeff Bezos has spent nearly half of his life inventing and revolutionizing e-commerce. Alphabet founders Larry Page and Sergey Brin had the mission to organize the world’s information and make it universally accessible and useful and they did. Apple’s mission to revolutionize customer experience by bringing the best user experience to its customers through its innovative hardware, software, and services brought the company to all kind of new market disruptions. But also, innovation leaders from Asia thrive on their mission. Samsung devotes all human resources and technology to create superior products and services, thereby contributing to a better global society. There are multiple stories known that the recently passed away owner Lee Kun Hee throwed away thousands of products during site visits at Samsung factories as they did not comply to his high set quality standards. And Toyota strives to lead the global automotive industry, especially through design and innovation that address current trends and customer preferences. Not mentioned in the BCG list of innovation leaders, but in my opinion other companies to follow are Alibaba and unicorn fintech banks like Monzo and N26. Alibaba’s overarching mission is to make it easy to do business anywhere and at any time, Monzo makes money work for everyone and N26 is building world’s first digital bank, centered around you!

What we learn from the mission of world’s innovation leaders is that they are customer obsessed rather than competitor focused. They all think longer term and want to contribute something big to the world. Easiest buying of products, easiest access to information, most convenient access to internet and software, superior products and technology, best fit cars for customer preferences, most convenient money matters. And they all do it in a scalable way through technology and software.

World’s most innovative banks have also been adopting these lessons. BNP Paribas embraced a partnership with Silicon Valley accelerator Plug & Play to bring innovation across the company. The program has been led by Jacques d’ Estais, the banks chief operation officer and head of international finance and was run from innovation hub Station F in Paris. A fantastic program that in my opinion in its set up can be a guiding example for financial innovation. Recent research also shows that innovation leaders differentiate from others by their use of artificial intelligence, external innovation channels such as incubators and academic institutions and properly digitized processes. They listen to their customers through data, use artificial intelligence to find new solutions and services and disrupt markets by doing that. They survived the so-called AI-paradox which is the ease of achieving powerful results with AI-pilots and the difficulty of replicating those at scale. But it also helped them to succeed in making innovation successes replicable and transform the opportunities into large sources of revenue. In the recent years these cultures of listening to the customers through data transformed them into boundary bursting innovators. Amazon and Alibaba entered the consumer and business finance and software markets, Apple revolutionized traditional markets like music and gaming with their software and Samsung and Toyota are in all kind of different markets. Also, innovative banks like Barclays and BBVA acknowledge this innovative power of data and AI and appointed a Chief Data Officer on their board of directors. However, most banks lack a well-developed competence of creating sustainable high impact value with data and AI.

Drive, size & skill

The ambitious mission, innovation leadership from the top, obsession for customers and data driven customer led-boundary bursting innovation are lessons to be learned from these innovators. However, their passionate innovation culture also stands out and binds all the above tight together. Innovation cultures with a drive to move first, experiment constantly and fail fast binds all of these assets together. It creates an outside oriented culture of finding and realizing high potential scalable ideas. It helps them to invest big and easily build eco-systems and platforms that revolutionize markets and improve their solutions and services to their customers. An example from the banking market comes from ING. The Dutch market leader changed its company culture a few years ago. The bank fully embraced the (Spotify) agile way of working across the retail bank. The bank benefited by growing its results and digital market leadership in the Netherlands.

Strategy change to break through the Nash equilibrium

BCG research again shows that 56% of financial institutions globally are committed innovators. This is a 11% higher percentage than the benchmark across sectors. A lot of them embrace partnerships and try to build eco-systems. However, the lessons from global innovation leaders teach us that sustainable market leadership cannot be captured by just connecting to the outside world through an accelerator or other program or changing the company culture. It rather is a strategic combination of art and science that can only be captured by linking obsession for customers with an inspiring and ambitious mission, innovation leadership from the top, data driven customer led-boundary bursting innovation and an innovative company culture. Financial institutions have to adapt their innovation strategies fast now as disruptive innovations from smart tech players come to the financial markets. It’s a battle on volume in segments with sustainable customer value that urgently requires business model innovations from financial institutions. The only way to win is to fundamentally change the innovation strategy and break through the Nash equilibrium big tech is causing.

This article has also been published on Finextra (9 November 2020).

The post COVID war has started: the leading group of digital banks against Big tech and Fintech

By Diederick van Thiel

Digital sales, a dangerous unseized opportunity for banks

For banks, digital sales are a crucial new benchmark—and a logical next step in the race to digitization. For every time that customers visit a branch, customers access their banking apps between 50 and 80 times. And this number doesn’t take into account visits to banks’ websites, this makes the ratio of digital to physical interactions even more lopsided. Yet despite this mammoth behavioral shift, most banks’ proportion of digital sales hasn’t increased so much. It remains an opportunity that banks haven’t seized. In their upcoming phase of hiring, technology buying, and strategy formulation, banks need to create a foundation for digital sales. The ones that do so will gain a lasting advantage. The ones that don’t will die.

Digital champions: Big Tech & Fintech educate customers fast to buy digitally

Digital mature companies offer a wide range of relevant functionalities for customers with a compelling user experience. Their digital strategies share one single item: creating world’s best customer engagement. Two examples of Big Tech companies illustrate how severe competition for the traditional banks has become. Amazon for example defined their strategy around being the most customer centric company on earth. Jeff Bezos believes that a few successes compensate for billions of dollars of failures. This drives the company’s rhythm and makes it experiment continuously, improving customer engagement, finding new customer market combinations and developing new business models. From payments to lending to insurance to checking accounts, Amazon is attacking financial services from every angle without applying to become a conventional bank. It’s clear that the company remains very focused on building financial services products that support its core strategic goal: increasing participation in the Amazon ecosystem. As a result, the company has built and launched tools that aim to:

  1. Increase the number of merchants on Amazon and enable each merchant to sell more 
  2. Increase the number of customers on Amazon and enable each customer to spend more
  3. Reduce any buying/selling friction

In parallel, Amazon has made several fintech investments, mostly focused on international markets (India and Mexico, among others), where partners can help serve Amazon’s core strategic goal. In aggregate, these product development and investment decisions reveal that Amazon isn’t building a traditional bank that serves everyone. Instead, Amazon has taken the core components of a modern banking experience and tweaked them to suit Amazon customers (both merchants and consumers). Another interesting example can be found in Ant Group. Ant Group recently made news with its plans to go public simultaneously in Hong Kong and Shanghai. As an affiliate of Alibaba and the owner of Alipay, the firm rebranded from Ant Financial to Ant Group early 2020, aiming to further evolve its business model and accelerate its global expansion. Ant Group, growing from Alipay, an online payment system for eCommerce, has successfully expanded to wealth management (Ant Fortune) and online banking (MYbank). To enable these successes, Ant Group has developed a unique portfolio of tech-driven capabilities for the financial services industry, including database, cloud-native, middleware components and blockchain platforms. In fact, according to Ant Group CEO Simon Hu, the firm made more than 50% of its revenue in 2019 by selling technology products and services to financial institutions. The firm expects this ratio to continue to expand in the future. Ant Group created the 3-1-0 online lending model (three minutes to apply, one second to approve, and zero human intervention), which has served 29 million small and medium-size enterprises (SMEs) in China, a number that has nearly tripled since 2018. This data-driven, no collateral-based lending model kept the nonperforming loans (NPL) rate under 2%, even during the COVID-19 lockdown period.

And FinTechs also change the game faster than ever before and adapt to the new post COVID-19 normal. Fintech companies are expected to benefit over the long term from the customers’ shift to online banking due to COVID-19. N26’s home country Germany is among countries whose citizens were considered especially wedded to cash prior to the pandemic. N26 is among the financial institutions that have benefited from flexibility in meeting customer expectations, which was only possible because it is what the industry refers to as “digitally mature” institution. N26 already raised nearly $800 million in venture capital, Bloomberg reported, including a $ 100 million round in May 2020. And last but not least, N26’s CX is amazing. Another great example is US based SoFi. SoFi launched in 2011 as a student loan financing company for millennials, but quickly expanded to personal and mortgage loans, refinances and wealth management services. The company has raised $2.3 billion in funding and is valued at around $4.8 billion. In response to the pandemic, it is the first US company that launched a small business lending program to fund over $50 million in loans under the US Payroll protection program.

Leading group of banks: the battle on customer profitability

The immature or intermediate digital mature banks are losing the profitable customers in this market driven by digital customer engagement. Not many banks are doing a good job at all. In our research we found that very few banks are delivering personalized marketing to their customers’ mobile devices. Many banks provide product information over their digital channels, but the presentation often doesn’t take advantage of the medium’s interactivity or, in the case of mobile, is not responsive to the small screen. It’s almost never easy to buy a bank product digitally; most such attempts result in the shopper’s having to re-enter personal data, being redirected to a separate bank website, or visiting a branch. And heaven helps the shopper who wants support while making a purchase: the options, whether phone, chat, or video, are usually rudimentary—if they are available at all. Some of them however dare to take the leap and try to fundamentally transform. ING for example grows its customer base as a digital attacker with ING Direct. In their home market The Netherlands they completely shifted the traditional value chain banking operating model into an agile one with tribes and chapters. BBVA also embraced a digital champion operating model several years ago and created a business that is flexible and responsive to change at all levels. Working with digital is not unusual and is a fully embedded part of daily working life across the organization. And also, the Belgium bank KBC has fully embedded the digital maturity strategy and launched a personal digital assistant as arrowhead in their customer engagement strategy this year. Recent Roland Berger research shows that the digital mature banks are also Europe’s top performing banks. Banks like KBC, ING, BBVA and Barclays lead the game on profitability showing cost income ratio’s around 56%. Their boards embraced a company strategy that focusses on digital customer engagement. In relation to digital sales these banks indeed also grew faster than their peers. It will be this leading group of banks that dare to take the leap in rigorous digital transformation strategies that might have a change against the customer engagement power of Big Tech and unicorn Fintech companies. They will grow beyond their core in relevant eco-systems, create financial supermarkets, find ways to monetize their data and find ways to become champions in extending value across the customer journey. They will have a chance to take a significant piece of the 14,9% CAGR of the digital banking market until 2025. The rest of the banks grow too slow and will be eaten or pushed away into an infrastructure supplier role. The leading group of digital banks is at war with Big Tech and Fintech in the battle on customer engagement! Let the customer decide who will win.

This article has also been published on Finextra (27 October 2020).

Survival of the fittest: Digital advice, the strategic cost – income play

By Diederick van Thiel

COVID-19 flushes away traditional banking

Last week at premier financial services event SIBOS a series of C-level banking executives shared their immersive visions on the post COVID growth of banks. “How will the pace of technological change push digitalization forward and how will the rise in consumer demand for new digital services encourage banks and Fintechs to work together more to innovate and disrupt the market with fresh ideas” was one of the leading themes. The FT Adviser just as many other news sites increasingly pay attention to digital advice in a post-COVID world. But, let’s be honest, most banks actually suck when it comes to seamless customer experience because most of their processes are still not digital at all!

With a deep global financial crisis coming up an exploding number of people will need financial advice. Young generations want this advice to be digital. But also, the enormous number of people needing advice in developing countries can only be reached digitally. On top of that the threat of the virus will urge us all to do this digital whenever possible. And, last but not least, digitizing advice and services is a key element in strategic cost/income breakthroughs.

Digital human centered advice

Modern banks plan for a viable business in the next decade, rather than just making profit in the next quarter. They should give highest priority to digital human centered advice and get rid of the manual processes in their customer servicing! Human centered advice is highly personalized advice that blurs the boundaries of online and offline with intelligent automated processes. The combination of the need for financial advice, the drive towards digital services and strategic cost/income moves will unprecedently give exploding rise to digital advice concepts as ‘the virtual affluent banker”, “the virtual wealth advisor”, “the virtual mortgage advisor” and “the virtual insurance advisor’. But also, in other verticals we see the rise of digital advisors. Think for example of shopping advisors for e-commerce, virtual brokers and virtual doctors for medical advice. Covid-19 will be the first wave that makes virtual advice explode!

Based on my operational and scientific experience in digital advice for 15 years now, I want to share my vision on this topic. I will shortly tip on my, sometimes painful, learnings in the evolution of digital advice and will translate them into a sustainable vision for banks (and other companies who operate in fast moving services environments).

Digital advice learnings

End of 2009, when I used to be responsible for daily banking at ING Retail, we were the first Dutch bank that launched a personal financial management tool under the name of “Tim”. At ING we were kings in customer acquisition so in a few months we registered over 1 million users for the tool. However, a few months later we needed smart intensive campaigning to drive customer activation. The first important digital advice lesson I learned is that excellent self-service or advice tools need to be human centered designed with customer activation as central element.

After I had left ING, I started as a Fintech entrepreneur in 2010. With my first company eyeOpen, we successfully brought world’s first digital mortgage advisor to the UK and The Netherlands in 2013. In the eyeOpen value proposition we digitized the advice process for 100% for financially skilled customers. For less skilled customers we offered virtual access to advisors in our call center. My second important lesson based on this experience is the extreme power of the combination of seamless customer experience and data. I learned that even in a highly regulated mortgage advice market a strategic data play could shorten the advice process with 90 questions. That is what I would call a real customer experience breakthrough! But also, by doing this we succeeded in bringing the operational costs of mortgage advice down from € 2,000.- per advice to € 49.- per advice. Low costs, high value! I further researched this phenomenon in my PhD research on “Human Centered Virtual Advice” and developed the so called Digital Customer Experience model for digital advice. The ability of the digital advisor to match with the personal situation was and still is a core attribute of an excellent digital advisor. This, linked with reliable, transparent and helpful processes, really makes a difference.

Based on these lessons, I launched two other companies five years ago: AdviceGames which ran a gamification platform for customer activation and engagement, and AdviceRobo which ran an innovative credit decisioning platform. Later we integrated AdviceGames and AdviceRobo into an innovative digital customer acquisition engine for banks that want to get rid of the spaghetti of onboarding applications. We also help our customers design modern digital advice solutions and often use the engine as part of the solution. More important, my lessons learned are transformed in the human centered advice software: when well executed, “seamless customer experience”, “advanced analytics” and “data” are key success factors in modern digital advice solutions.

Digital advice vision & strategy development

These lessons were learned the hard way: by doing! Based on them (and many others) we see virtual advisors flourish that design their solutions with the customer at their heart. This means that a modern advisor must think mobile first (or even mobile only). Modern virtual advisors are designed as an eco-system. Aite research shows that key functionalities for these kinds of mobile advisors are “real-time (portfolio) info”, “educational content’, ‘aggregated account info” and ‘chat/ co-browsing and videoconferencing’. On top of that virtual and augmented reality as upcoming new killer technologies for virtual advisors emerge from an increasing number of academic researches across verticals. Going back to my own research, these technologies have the ability to better match with the personal situation. Their vividness and interactivity also tremendously increase the customers telepresence and therefore their perception of usefulness and enjoyment. In short, they are amazing activating technologies that will drive customer interaction, purchases and recommendations and therefore a bank’s knowledge on their customers in digital advice environments. Companies that want to support their customers with virtual advisors have to make strategic make-or-buy decisions. What functionalities and competences are core to them? And which ones can they better outsource? Our research and experience show that well-designed and realized virtual advisors deliver up to 40% higher customer satisfaction and up to 50% lower operational costs. Most banking costs are in the traditional human labor driven processes. And in those processes, the dominant factors in costs are the advice- and customer support related ones. Modern banks therefore close their branches and switch to digital advice and support solutions fast. Human centered digital advice is the killer app for post-COVID customer engagement and cost/income ratios!

This article has also been published on Finextra (13 October 2020).

Last boarding call: Post-COVID Risk Decisioning starts now!

By Diederick van Thiel

A hard hit for the world economy

The damage of the COVID-19 lock down for businesses and economies is becoming more visible every day. Forecasting institutions and scenario planners are estimating significant contractions in global GDP. In the Eurozone, GDP contracted by -3,6% in the first quarter of 2020 and by -12,1% in the second! The United Kingdom even showed a 20,4% decrease in GDP due to the long lock down, while the USA reported a 9,5% decrease in the second quarter! As a consequence, unemployment rates rise fast. The severity of the outbreak and the response varies by country, factors which will affect the size of the contractions. The future scenarios are uncertain. Some say the economy is expected to recover slowly, with subdued consumer spending and business investment; the ECB foresees a Eurozone GDP contraction of –8,7% in 2020 overall, while a decrease of 3,8% is expected in the USA.

Risk, risk & risk suddenly appears everywhere and hits the banks’ business models

In the mid-year reports of the Western banks we see all of them at least double their costs of risk. That’s prudent, but bad news for the bank’s effectiveness. Especially as the net interest income from banking over the same period decreased with all leading western banks. Strategy consultants like Mc Kinsey and BCG dive into this area of post-COVID risk management. Digital strategy company Ecology Innovations, in combination with Cambridge University used data from the financial crisis to develop a set of metrics and scenarios to improve the effectiveness of banks’ business models in these times of high uncertainty.  One important metric for the business model effectiveness is the currently exploding risk to income. The mid-term results of western banks show a dazzling ratio development of risk to income. More aggressive banks like HSBC, Barclays and for example ING traditionally show risk to income ratios between 4% and 9%. Now however they report a risk to income between 26% and 32%! BNP Paribas and Credit Agricole, who are usually less aggressive with risk to income ratios of around 20%, see this ratio double in the first half year of 2020. The exploding risk to income shows a double whammy hit for banks’ business models. On the one hand side it shows a decreasing net income and on the other hand side it shows an exploding cost of risk. As a digital banking non-executive director this keeps me, and many C-level colleagues, awake at night. The numbers show that our business models need urgent revisioning. In a poll that I did last week this picture was confirmed. NOW is the moment!

COVID-19 urges banks to invest in their business model effectiveness NOW!

As also stated in my first blog in this series on banks effectiveness two weeks ago, this is the year in which banking C-level executives have to invest in their effectiveness. The year in which they first have to fix their core: re-evaluate their business models and re-asses their enterprise risk frameworks.  And to do so, they fundamentally have to better understand their customers and digitize their value chains.

Steps towards more effective post-COVID business models for banks

But, because things are easily said, I come up with some steps to drive successful business model transformations.

First of all, bank leaders have to understand how to better differentiate between customers in the same segment. It’s about going deeper into borrower’s financials, business model and psychometric profile to estimate resilience to COVID-19 effects. This brings in new and more granular requirements for the bank’s KYC for new and existing customers.

Secondly, the conventional sources of data typically used in credit-risk assessments became obsolete overnight. Financial resilience will be determined less by pre-COVID-19 profitability than by indebtedness, liquidity and a high level of financial self-determination —attributes that will establish a borrower’s ability to weather the crisis. Suddenly, the six- or 12-months-old data on which lenders relied in the past are no longer useful in evaluating the resilience of individual borrowers. Creative approaches to acquire and utilize high-frequency data are at the order of the day. At innovative risk decisioning provider AdviceRobo, we have insights in the performance of many groups of dynamic behavioral data. Open banking data, psychometric data, biometric data and mobile phone data show great predictive power for risk. We encourage banks to integrate these kind of new data groups in their KYC for smarter risk decisioning.  Innovative high frequency data are in our opinion the solution for building deeper customer profiles for customer acquisition and smarter risk mitigation and collection strategies. Advanced modelling and analytics can seriously help find the way to more granular customer profiling and risk decisioning. Different for banks today is that many of their affected borrowers never imagined that they would be unable to pay their debts. The level of financial self-determination is a high predictive psychometric feature for the recovery of the debt. Traditional data and models do not detect this and still banks need to collect their debts. On top of that, traditional collections methods (calls, email, letters) are becoming less effective as customer preferences decisively shift toward digital interaction with their banks. Meanwhile, bank workout departments have shrunk to a fraction of the capacity that will be needed.

Effective post-COVID business modelling and risk management for winning banks

Effective banks therefore use this financial crisis to fundamentally transform their business models and enterprise risk frameworks with new and high frequent data and advanced modelling. It provides them deeper insight in customer value and better shapes their acquisition & retention strategies. But most of all, it will give them deeper insight in where credit, operational and market risks will come from as it will bring breakthroughs in their models type – and type 2- errors. It will also lead the way in smart data-driven digitization and robotization of their credit value chains driving personalized treatment solutions like dialogue programs and virtual banking assistants.

Beyond this horizon are approaches using more real-time business data in decision making and advanced analytics to review credit-underwriting processes and fuel digital dialogue programs and virtual banking assistants to prevent defaults or to collect them smarter. At Finovate 2019, I demoed JACQ as an example outlook to this new world of integrated high frequency data. I studied advanced models driving these kind of applications during my research on artificial intelligent credit risk prediction.

Today’s winners focus on digitization for fundamentally lowering their costs and collecting deep, granular data on their customers’ behavior and personality. Although still making significant losses, digital banks like Revolut, Monzo and N26 already have this kind of effective operations and advanced data methods in place. Revolut claims to have over 8 million digital customers. N26 5 million and Monzo 3 million. Effective traditional banks have a huge opportunity as they traditionally have much larger customer bases. On the other hand, they are stuck with the traditional business models and risk frameworks. Winners put digitization as the top priority in their strategies. Barclays is UK’s largest digital bank with over 10 million digital customers (50%) and a 68% growth in mobile customers. ING claims to have 13 million (34%) digital customers, including their ING Direct operations. Santander has 37 million digital customers (30%) and 3,6 million mobile customers. BNP Paribas claims to have over 8 million digital customers (24%), including their digital Hello bank.

The transition to new business models and enterprise risk frameworks will help banks cope with the present crisis but also serve as a rehearsal for the change that, in our view, credit-risk management will have to make. The best banks will keep and expand these practices after the crisis, to manage credit risk more effectively while better serving clients and helping them return to growth more quickly. But most important: don’t waste time! Post COVID-risk decisioning is about better detecting and treating! It starts NOW!

This article has also been published on Finextra (25 September 2020).

Eat or be eaten. Which banks will be the post-COVID-19 pandemic winner?

By Diederick van Thiel, CEO of AdviceRobo / e-cology innovations

“The first six months of 2020 have been some of the most challenging in living memory. Due to the Covid-19 pandemic, much of the global economy slowed significantly and some sectors drew to a near total halt,” Chief Executive Quinn of HSBC says. First half year financial results of European banks support this claim. All banks are being hit terribly by the COVID-19 crisis, share prices collapsed and banks now are great acquisition targets in a potential market phase of consolidation. So, I questioned myself, what does it take for bank’s executives to win in this extremely challenging situation?

To find the answers, let’s first have a look at how the big ones performed in the first half of 2020. HSBC, Europe’s largest bank by assets reported a 65% fall in pre-tax profits to $ 4,3 billion. BNP Paribas, Europe’s second bank reported a 7,4% fall in pre-tax profits to € 3,1 billion. Credit Agricole, Europe’s third largest bank in assets showed the same trend. A fall in pre-tax income of 23,3% to € 3,9 billion. Banco Santander, Europe’s fourth bank in terms of assets, on an underlying basis, slid attributable profit to the parent by about 53 percent to € 1.9 billion. Barclays reported a 66% plunge in profits for the first six months of the year, hurt by declining business in its UK group. If you look at the other European banks, we see the same trend. One could say that the profitability of the European banks currently is really extremely hit.
The reasons for these dramatic results are, according to the banks, in the instable macro-economic situation. Let’s phrase it as a collective “pandemic banking pain” for which they all increased their bad loan provisions tremendously. But with the increased provisions, the strategy to win in the current markets has not yet been found!

Efficient Banking

Costs perhaps? The European Central bank already hints for a longer time on bank consolidation. Efficient banks should take over less efficient ones. And, if results are poor, banker’s natural response is to cut costs harder. From my experience in the C-level banking suite cost containment always is a good thing as long as it improves efficiency and does not destroy the business! Banks can benefit from the pandemic pain by increasing their efficiency. By selling less profitable business lines and speeding up their digital transformations to improve their cost-income ratio’s and customer experiences.

Effective Banking

But there is more! In my recent academic research across European banks, which is currently being reviewed for publication by the Journal of Banking and Finance, I found that the COVID-19 pandemic has revealed serious flaws in the business models on which banks rely. Banks are losing their effectiveness as they are experiencing ever more model failures, and further issues can be expected with time. Model failures have been caused by pre-COVID-19 model assumptions, their reliance on historical data without access to high frequency data and their low agility to integrate new data. To put it simple, bank’s business models are old fashioned, real blockers of their efficiency transformation and fundamental threats for their effectiveness. Banks must therefore urgently review their model strategies on their effectiveness. This is heavy stuff for bankers who are, in their core, managers of risk and used to these old ways-of-working. And now, the fast-changing customer behavior, high speed of cloud and artificial intelligence development, combined with the highly instable macro-economic situation shows that the still traditional core of the bank brings in fundamental material financial risks and need to be transformed fast.

Time is running out

So, despite of the stable or even rising underlying income of the banks, despite the positive news for bankers in last weekends’ Dutch financial times however that credit applications in the Eurozone are at the same level of pre COVID-19 again, banks executive boards urgently have some serious strategic work to do. Time is running out!
This is the year in which they have to invest in their effectiveness. In which they have to re-evaluate their business models, re-asses their enterprise risk frameworks, speed up structural implementation of human centered innovations with new interactive technologies and data to find their way out in this instable macro-economic environment. Together with Cambridge University researchers I developed a digital maturity scan to support strategy and roadmap development for winning effective banks. Strategic drivers which we found essential to assess are:

  1. the maturity of interactive customer experience performances;
  2. the maturity of innovative and dynamic risk decisioning and data-driven decision making;
  3. the extend in which C-level fundamentally supports agile digital & strategic business model innovation for high impact;
  4. the cloud-based maturity of the supporting IT architecture;
  5. the quality of modern skills and competences in the bank to transform the bank into a future effective winner.

Love-banks winners with the most glorious future

Next to my fundamental academic research in these areas that make future winners and losers in banking, I will post blogs on these individual topics of banks effectiveness in the upcoming 12-weeks. Blogs which content comes from my research that will be published in my book on “Human Centered AI Growth Strategies in Banking” to be published in H1 2021. One thing is clear: bank executives have to act now to fundamentally increase their effectiveness! It’s eat or to be eaten in the extreme pressures from the market. In times of crisis the essence lies in the claim that natural selection is a creative force. Those who adapt fastest and smartest will be the winners! At the end of the 12-week blog series I will announce the 2020 European effective bank winners and losers. Banks that have effective strategies and execution and that can become love-banks in the future. Love-banks winners with the most glorious future.

This article has also been published on Finextra (11 September 2020)

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