If the last epoch in retail banking was defined by a boom-to-bust expansion of consumer credit, the current one will be defined by digital. This will include rapid innovation in payments and the broader transformation in systems enabled by digital technologies.
Broeders and Somesh Khanna*
around the world are quickly adopting digital banking. Incumbents only have a
short period to adjust to this new reality or risk becoming obsolete.
If the last epoch in retail banking was defined by a
boom-to-bust expansion of consumer credit, the current one will be defined by
This will include rapid innovation in payments and the broader
transformation in systems enabled by digital technologies.
The urgency of
acting is acute. Banks have three to five years at most to become digitally
proficient. If they fail to take action, they risk entering a spiral of decline
similar to laggards in other industries.
and profits will migrate at scale toward banks that successfully use digital
technologies to automate processes, create new products, improve regulatory
compliance, transform the experiences of their customers, and disrupt key
components of the value chain.
Institutions that resist digital innovation will
be punished by customers, financial markets, and—sometimes—regulators.
our analysis suggests that digital laggards could see up to 35 percent of net
profit eroded, while winners may realize a profit upside of 40 percent or more.
Where banks stand
more innovative incumbent banks and financial institutions are moving rapidly
to embrace digital. Most have invested heavily in transaction migration.
have also significantly upgraded web and mobile technologies and created
innovation and testing centers.
In addition, banks increasingly realize that to
succeed with digital, they must adopt the habits and culture of digitally
native companies: for example, opening up the banks’ application programming
interfaces, pursuing agile development, or hosting hackathons to foster
intensive digital collaboration.
no letup in the pace of change. Within the next five years, digital sales have
the potential to account for 40 percent or more of new inflow revenue in the
most progressive geographies and customer segments.
By 2018, banks in
Scandinavia, the United Kingdom, and Western Europe are forecast to have half
or more of new inflow revenue in most products coming from digital sales.
in the United States are expected to trail them but are still forecast to see
significant new inflow revenue come from digital.
Among bank products, savings
and term deposits, as well as bank services to small and midsize enterprises,
are expected to see more than half of new inflow revenue coming from digital by
these forecasts may take longer to materialize than expected, we believe the
digital transformation is at an inflection point.
Banks have just a few years
to adapt. Appreciating the magnitude of the opportunity—and the gravity of the
threat—is vital, but it is just the first step in formulating a winning digital
Digital will touch every aspect of bank operations, from product
development to risk management and human-capital management.
strategies need to be based on a clear understanding of how digital creates
value, granular perspectives on consumer behavior and market dynamics, and
careful prioritization by top management among hundreds of potential digital
new entrants are moving into the broader financial-services sector in many
In China, Alibaba has captured some $100 billion in assets in the
second year since its launch of a wealth-management platform, while online
giant Tencent is building a financial ecosystem around a large-scale online
The realm of payments, already digitized, is seeing more innovation
from Apple Pay’s contactless-payment technology.1 In response, banks must also
use digital to innovate and prosper.
Capturing the value of digital
four fundamental ways in which digital capabilities can be used by banks to
First, digital technologies increase a bank’s connectivity—not
just with customers but also with employees and suppliers.
This extends from
online interactivity and payment solutions to mobile functionality and
opportunities to boost bank brands in social media.
Second, digital draws on
big data and advanced analytics to extend and refine decision making. Such
analytics are being deployed by the most innovative banks in many areas,
including sales, product design, pricing and underwriting, and the design of
truly amazing customer experiences.
A third way
that digital creates value is by enabling straight-through processing—that is,
automating and digitizing a number of repetitive, low-value, and low-risk
Process apps, for example, boost productivity and facilitate
regulatory compliance, while imaging and straight-through processing lead to
paperless, more efficient work flows.
Finally, digitization is a means of fostering
innovation across products and business models. Examples of this include social
marketing and crowdsourced support, as well as “digitally centered” business
the good news is that each of these ways of creating value through digital can
be applied to every bank function.
However, developing a digital agenda and
driving a digitally centered transformation is a complex task. It requires an
unusually high level of coordination of cross-bank initiatives spanning
prioritization, resource allocation, and collaboration in execution.
most banks are only in the early stages of developing the capabilities and
culture of digitally native organizations, which include several elements:
User-centered customer-journey design. Customer journeys should be
compelling and highly differentiated, combining personalization, speed, and
ease of use for all processes, including applying and getting approved for a
loan, opening and understanding how to make full use of an account, and
To make this leap in the delivery of customer journeys,
banks need to act quickly to acquire deep capabilities in user experience and
Personalization, leveraging data, and advanced
data still go unused. Yet there is significant value in applying advanced
analytics to create targeted offerings for cross-selling and up-selling.
is achieved by making data usable in real time, such as at the point of sale,
and combining the data with analytical tools to generate insights provided by
“next product to buy” models or risk assessments, for example.
Rapid experimentation and agile development. Banks need to learn to rapidly
acquire or imitate high-value initiatives, while showing tolerance of failures
Banks often struggle with this trialing and testing culture. In
addition, they need to move to “agile delivery,” with weekly sprints, from a
“waterfall” approach in which there are months between releases.
achieve this agile model at scale but still recognize that agile isn’t the
right answer for every development effort.
developing these capabilities is crucial, an equally critical part of the
digital transformation is the need to develop a different culture (see sidebar
“Habits for an effective digital transformation”).
That requires adopting a
mind-set similar to that found in successful digital enterprises when it comes
to everything from establishing a challenging and coherent digital vision to
acquiring new data capabilities and adopting a test-and-learn approach with
value chain—from operations and IT to marketing and sales to product
development and finance—the data and technology required to realize this vision
in the bank often already exists.
What’s missing is the organizational
orientation and mind-set to have small, cross-functional teams working together
through rapid testing and improvement programs.
Indeed, we have noted that many
of the new capabilities required cannot be found in banks but instead need to be
imported from other industries.
aware of the need for change is the first challenge that bank CEOs face.
next challenge is to take leadership in the development and execution of a
holistic change program that simultaneously addresses the culture, systems, and
Invariably, a number of issues will arise to test CEOs
(see sidebar “Confronting digital dilemmas”).The scope
of these changes demonstrates that digitization is a tough, complicated
Capturing the opportunities it provides will require investment,
painstaking planning, and coordinated decision making spanning the whole bank.
Digitization is rewriting the rules of how banks compete. Incumbents that fail
to grasp this risk damaging franchises built over generations.
But if CEOs
manage to address the multiple strategic challenges posed by digital advances,
they can position their institutions to compete effectively and capture an
emerging, long-term growth trajectory.
Broeders is a director in McKinsey’s Amsterdam office, and Somesh Khanna is a
director in the New York office.