PWC the New Digital Tipping Point

8/3/2019 PWC the New Digital Tipping Point

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The new digitaltipping point

www.pwc.com/financialservices

Traditional banking is facing its steepestchallenge in over a generation. We believethat a new tipping point has been reached,with digital at its fulcrum.


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PwC The new digital tipping point 1

02 Introduction: Driving customer valuethrough digital

04 Customer relationship primacy is the newsource of value in banking

05 Digital is crucial in addressing changingcustomer behaviour

10 Customers value new digital offerings

12 New digital entrants are disrupting thebanking ecosystem

14 The battle for customer relationshipprimacy among banks has begun

16 Contacts

Contents


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We are in an unprecedented period of increasing regulationand continuing cost pressures for banks. This is beingcompounded by the persistent trend in margin compressionand alarming market uncertainty.

The emergence of new technologies into banking has had apermanent impact, as once traditional banking revenue pools

are now being sucked up by new competitors, especially inthe payments space. All of this is happening at a time whencustomer expectations for banking services (both offline andonline) are being reset by the experiences being provided byretailers and online providers, elsewhere.

Finally, to this long list add the general lack of trust customershave in financial services owing to the credit crunch andthe general perception that the major banks all contributed tothe global market collapse. We can quickly conclude that

traditional banking is facing its steepest challenge in over a

generation. We believe that a new tipping point has beenreached, with digital at its fulcrum.

Introduction: Driving customer value

through digital

2 PwC The new digital tipping point


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Towards a customer-centric valuemodel in bankingBefore the financial crisis, banks relied

heavily on financial leverage to createshareholder value. Today, the economicclimate, increased regulatoryintervention and competitivechallenges are forcing banks todeleverage and look for other sourcesof value. In the new reality since thecrisis hit, a new value model is required,based upon securing customerrelationship primacy (the position ofbeing the preferred and main bank fora customer), through efforts to regaintrust and build customer engagement.

Preference for digital is nowglobally pervasive amongbanking customersDigital will play an instrumental role inachieving this strategy. The preferencefor digital is now pervasive across allcustomer segments, globally, andespecially so for Generation Y (thedefinition varies widely, but broadly, itrefers to those people born in the 1980sand 1990s). In fact, for this group, now

at the threshold of deciding primarybanking relationships, the quality of thedigital offering is an important factor intheir decision process. Banks have areal imperative to act now to attractthese customers and thereby lock infuture value. Banks digital strategies

will need to move beyond costreduction objectives to do this.

Digital has evolved from basiconline banking to a broad, richset of capabilities...

The full extent of what digital can offercustomers goes beyond the basic mobileand internet banking services that arenow widely provided, although there isstill value to be obtained for manybanks from simply delivering thesebasic services well. Digital banking willevolve into a richer set of offerings,providing new value for banks and theircustomers through a new digitalfeature set, based on innovations in:user experience; mobile devices and

networks; social media andcollaboration; customer analytics; andchannel integration. By embracingdigital, banks can deepen their existingcustomer relationships as well as accessnew sources of revenue.

...now disrupting and catalysingchange in the banking ecosystemDigital has also opened up banking to a

number of innovators big and small seeking to capture value across thebanking value chain. In markets wherebanking is widely accessible, we believethat while these new entrants willsecure a place as part of the bankingecosystem, there is little evidence tosuggest that they will be successful intaking over the entire customerrelationship from banks. Despitechallenges to this position, banksremain the most trusted providers ofbanking services by customers. Ingrowing markets where the under-banked population is sizeable, thethreat of being out-competed by newentrants could potentially be greater.

Provides a platform forinnovationMobile is coming of age and is movingbeyond simple banking functionality toembrace mobile payments and otherinnovative offerings such as marketingservices, sophisticated authentication

mechanisms, location-basedpersonalisation, etc. These innovativeservices serve to create a superiorcustomer experience, one that thecustomer is willing to pay for.

Strategic partnerships will pavethe way to success for banksWe believe that banks should acquire orpartner with innovators that are actingas catalysts for change. The alternativefor those banks that accept the need tochange is to develop these capabilities

alone an expensive and risky effort.

Traditionally, banks have preferred abuild approach for most changes.However, we believe that in thisscenario, a buy or partner strategy

would be more optimal as this changerequires a new way of thinking andbuilding that is difficult for competitorsto copy.

We believe that the real battle will takeplace between banks, as they seek to

secure primacy of the customerrelationship as the basis of futureshareholder value. Many banks,however, may react late or continue topersist with old ways and methods andas a result, lose market share in thechanging banking landscape. PwC The new digital tipping point 3


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There are four main considerationsfor a bank to invest in a robust digitaloffering:

1) A number of factors are changingcustomers attitudes and behaviours.

2) Preference for digital is globallypervasive.

3) Generation Y, who are now at thepoint of choosing their primaryfinancial services provider, cite

digital as an important factor inthis decision.

4) Digital itself, is evolving: the newset of disruptive features of thelatest round of digital innovation is

proof enough.


Today, a successful digital offering in banking implies the provision of high quality online andmobile banking access. We find that the new digital feature set can be used to meet theincreasing demands of the customer.

Digital is crucial in addressing changing

customer behaviour

Expectations are beingshaped by experiencesoutside of the banking

industry wherecontent, interactionsand features are richer,delivering a moreengaging andrewarding experiencefor the consumer.

...expect more ...trust their peers ...are informed ...have choices ...have a voice

The role of banks asthe financial experthas been replaced

by word of mouthpeer conversations,or independentinfluencers. The rapidemergence of socialmedia in parallel withthe rise of mobilityhas seen customersincreasingly turn totheir peers forinformation andadvice, rather than tofinancial experts inbanks.

Financial consumersare more savvy today,due to the easy access

to research, data andexpert views. Thishas also exposed thelack of differentiationbetween differentproviders bankingproducts. As morefinancial servicescustomers becomeself-directed, theyare coming to relyless upon traditionalsources of financialadvice.

Comparison andpurchase of alternativefinancial products and

services online is nowstraightforward andwidespread. It hasopened up a widerange of choices forconsumers, someoutside the boundariesof traditional bankingservices, such as peer-to-peer lending.

The rise of social mediaplatforms has alloweda single consumer voice

to be amplified to atremendous degree,and consumers havenot been shy aboutraising it. Stories ofbad customerexperiences rapidlyspread through thesemedia and often causeirreparable damage toassociated brands.

We believe that there are five key aspects of changing customer behaviour

Customers...


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While the preference for digital can be seen across allsegments and markets (see Figure 2), it is especiallyimportant for those customers who form part of Generation

Y, now at the point of choosing their main banking provider.

Consequently, banks need to target and acquire thesecustomers now to lock in the future value that will begenerated by this segment. Our research suggests that theextent to which a bank exploits the new digital feature set

will play a very important part in this customer groupsdecision-making process, much more so than traditionallyimportant criteria such as branch location, or even brand.


Figure 2: The global usage of internet and mobile

usage in banking

100

90

80

70

60

50

40

30

20

10

0

Canada

China

France

Hong

Kong

India

Mexico

Poland

UAE

UK

Total

n % who currently use mobiles to purchase financial products

n % who currently use the internet to purchase financial products

Source: PwC

In banking, the internet is now widely used by all segmentsaround the world to purchase financial services products.Mobile banking is still in its infancy, but is following asimilar usage curve with China, India and the UAE leadingthe trend in terms of adoption. For the emerging markets,mobile is more than just a new channel, as it provides basicbanking facilities to a previously under-banked market.

The growth of mobile has

significant implications for

banks. As mobile phones get

equipped with more and better

functionality, it will transform

the traditional interaction model

with the consumer. Well-

appointed branches and slick

websites will no longer be enough,

as customers expect services on

the move. Location-based offers,timely and relevant content, and

interactive applications will form

the basis of the mobile customers

engagement with their banks.


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Figure 3: Online and mobile are preferred channels, particularly for

Generation Y customers

n Mobile n Online

Combined proportion of respondents who are currently using or considering using online or mobile

banking services

Source: PwC Digital Tipping Point Survey 2011

Gen Y

Gen X

Baby

boomers

Matures

After work

0 50 100

87.8

91

92.3

90.6

85.4

66.8

59.5

45.8

39.9

26.3

Generation Y, or digital natives

as they are sometimes referred to,

naturally expect a rich digital

experience that is both mobile

and social, and seamlessly

integrates their banking needs

with their digital lives. This group

represents a highly important

customer segment for banks, as

they are starting to reach the peak

age of financial consumption and

will be an important source of

value for banks.

As Generation Y grows up

with digital, it will be more

important for banks to match

their digital expectations.

The propensity of Generation Y to use mobile channels was higher than anyother consumer segment. Sixty-seven percent of respondents in this segmentsaid that they were either currently using or considering using, the mobile

channel. This number progressively decreases for older customers.


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The new digitalfeature set has led to:

Improvements in user-experiencedesign through interactive,game-like interfaces that arestarting to merge the boundariesbetween the real and the virtual,and bringing data to life throughrich visualisations.

Advances in mobile devices andnetworks, providing new servicessuch as enhanced digital securityand the ability to access theinternet from anywhere (partiallylimited by high internationalroaming charges).

The rise ofsocial media andcollaboration tools, empoweringcustomers and employees, andmoving control of the brandmessage from businesses toconsumers.

Innovation in digital analyticsand predictive models, drivingdeeper insight into customersbehaviour and enabling highlytargeted and relevant treatmentstrategies to be executed throughdigital media.

New channel integrationtechnologies, enabling a moreseamless end-to-end experiencefor customers with their bank.


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The implication for banks is

that as business models are

transformed by the shift to

digital channels, it opens up new

opportunities for engaging and

interacting with customers to

build relationships and grow

revenues. For banks that manage

to engender a similar shift in theirown distribution models, similar

opportunities await.


The new digital feature set will increasingly be exploited to provide a much richerset of banking offerings for the customer. The impact of these digital innovationson banks goes beyond their technology, security and infrastructure capabilities:

it is opening up new business models and propositions, redefining the customerexperience, and enabling new potential from employees and business networks.

easyJet, a British low-cost airline,became the first in the UK to launchan e-commerce website in 1998,marketing itself as the websfavourite airline.

As easyJet redefined the market,the rest of the industry includingtraditional leaders like BA had tofollow suit or risk being left behind.By 2005, BA had stopped payingcommission to travel agents,previously its main channel tomarket, as ba.com took over thatmantle. Today, almost two-thirds ofBAs sales are made through ba.com.

As consumers gravitated towardsba.com, it provided the airline withboth the means and the opportunityto develop new propositions forcustomers in a virtuous circle ofinnovation. The launch of new digitalservices, e-ticketing, online check-inand mobile boarding cards were allbuilt on the success of the channel shift

to ba.com. This channel shift has notonly sparked the redesign of theend-to-end traveller experience, buthas inspired BA to design new digitalservices for which some customers willpay, such as priority seat booking morethan 24 hours in advance of departure(BA charge from 25 for economypassengers to choose seats if its morethan 24 hours before the flight; forexit row seats, this charge is 50).3

3 www.ba.com


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Figure 4: Appetite for innovative digital services

UK

UAE

Poland

Mexico

India

Hong Kong

France

China

Canada

I can be notified by

Twitter/Facebook

for a transaction

occurring

1 My bank will storeloyalty cards and

convert points to

cash

2 My bank can offerspending analysis

tools

3 My bank canoffer me relevant

third-party offers

4 My bank wouldstore key documents

in a virtual vault

5

0 50 100 0 50 100 0 50 100 0 50 100 0 50 100

Which of the following would you be willing to pay for, please rank your top 3?

Level of interest [Scored ranking results (rank 1=100, 2=50, 3=25); average 0-100]


66.3

67.1

69.0

73.7

85.1

70.5

75.7

75.9

64.6

67.7

61.8

62.8

65.3

67.2

64.1

74.6

62.6

56.1

61.2

66.7

61.3

58.7

58.3

55.4

56.1

58.5

54.0

49.0

53.4

46.4

43.6

52.6

48.7

44.2

56.9

57.0

56.1

47.4

57.2

45.2

50.7

63.9

46.5

54.9

As part of our survey, we tested thewillingness of customers to pay forsome innovative digital capabilitiessuch as a digital wallet for loyalty cards,

notifications through social media,spending analysis tools, third-partyoffers and storing documents in a

virtual vault (see Figure 4).

In all markets, social medianotifications (except China), anelectronic wallet for loyalty cardsand financial tools were rated amongthe top three from this list.

Our research indicated that acrossdifferent regions a base price can becharged for these digital capabilities,in the range of GBP210/month for

each capability. At a time when banksare finding it difficult to sustainrevenue and margin growth, the factthat customers appear prepared topay for the perceived value of usingdigital services that offer new valueto customers, is significant.

Not only does digital deepen levels of customer engagement,

it also opens up avenues for the monetisation of new services.In our research, PwC tested the level of interest in a number oftheoretical digital capabilities.

Customers value new digital offerings


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PwCThe new digital tipping point 11

Figure 5: Customer willing to pay

Point of marginal cheapness: 3 Point of marginal expensiveness: 5.40

Too Inexpensive Inexpensive Expensive Too expensive


PwC Van Westerndorp pricing analysis

0 2 4 6 8 10

Optimal price point:

4.20

Tolerance

UK willingness to paySample proposition My bank will store loyalty cards and convert points to cash

Research (see Figure 6) has shown thatacross markets in the world, customersdemonstrate a willingness to pay apremium for products or services fromcompanies who have offered them goodcustomer service in the past.

This translates to a higher willingnessto pay for perceived excellence ofbetween 5% and 10% more for

products and services, highlighting thevalue for customers and companieswhen they get this right.

Considering the likely uptake of digital,especially among younger, affluentcustomers, there is a real opportunityto enhance ROI by investing in digitalcapabilities that drive additional valueand better service for customers.

Figure 6: Consumers will pay more for good service

US

Canada

Mexico

France

Germany

Italy

UK

Spain

Netherlands

Australia

India

Japan

n Percentage of consumers who say that they have spent more on a product orservice because of a history of good customer service with that company

nAverage percentage more, a customer is willing to spend for perceivedexcellent service

Source: American Express Global Customer Service Barometer 2010

0 20 40 60 80

The percentage of respondents whosuggested that they would be

willing to pay for loyalty servicesprovided by a bank in the UK was65%. They suggested they would be

willing to pay an optimal price of4.20 per month for this service.This would translate into an annualfee income of approximately 50

per customer.


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Customers across all groups continue to put their trust in banks (see Figure 7)to manage their financial affairs, despite their continuing relative unpopularity.When asked about who they would trust with their current accounts, customersstill prefer banks to any other financial services provider. We do believe, however,that despite this, innovative challengers will continue to act as catalysts of changein banking. Banks should look for strategic acquisitions, or partnerships with thesefirms to secure their long-term positions in the battle against other banks forcustomer relationship primacy.

There are several new entrants competing for inclusion in thebanking value chain and we believe that a number of these willbe successful in securing their position as part of the bankingecosystem. Our research suggests, however, that these areunlikely to displace banks as the primary provider of financialservices, especially in markets where banking is widely accessible.

New digital entrants are disrupting

the banking ecosystem


Figure 7: UK trust in current account providers

Building societies andcooperatives

Existing banks

Payment networks

Retailers

Technology companies

Newer providers

Mobile companies

Percentage of respondents who chose trust absolutely, or trust somewhat when asked about the extent

to which they trusted these providers with their current account

0% 10% 20% 30% 40% 50% 60% 70%

Source: PwC survey

61%

55%

44%

38%

28%

22%

17%


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Figure 8: The emerging challenge to the banking ecosystem

Handset manufacturers

Banking incumbentsAccess holders and

networksDigital innovators

Attackers

Large retail banks

Remittance

Card issuers

Card networks

Defenders

Mobile operators

Technology firms

Personal finance

platforms

Source: Company websites, press releases and annual reports, PwC analysis

Defenders are marketincumbents that havetraditionally controlled their ownsegments in the banking valuechain. While almost all of themaspire to move into the digitalinnovator space, few are equippedto do so without external help(through acquisition or

partnerships).

Attackers are new entrants whoare trying to wrest share awayfrom the incumbents byintermediating themselves intothe value chain. These includeestablished players in technologyand mobile as well as smaller andmore nimble start-ups. We believethat while these players may beable to secure positions on thevalue chain, they will be unlikelyto displace banks as the primaryprovider of financial services

Existing role

Aspirational role

Incumbents in emerging markets thathave a large share of unbanked, orunder-banked consumers are likelyto experience a greater threat fromnew players. Here too, a strategicpartnership between a bank and aninnovator has the best chance of

creating the winning combination toacquire and retain new customers,assuming banks act. However, it mustbe acknowledged that a game-changinginnovation by a pure play provider (e.g.in growing or emerging areas such asmobile payments or digital wallets)may also prove successful, especially ifbanks fail to act.

We have analysed the banking ecosystemand identified that there are bothdefenders and attackers in the market.


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We believe the most importantelements in getting started are:

Develop a vision and strategy:Acknowledge that the new digitalfeature set is changing the wayconsumers interact with their banks.Understanding the different needs ofdifferent customer groups is essential,as a one-size approach will proveinsufficient to meet the range of needsof customers. Developing a vision anda digital strategy with the customer

at its heart is the first step towardssucceeding on this journey.

Be prepared to partner: Banking willnecessarily become increasinglyintertwined with customers digitallives. New business models and meansof interaction will be required in orderto be successful in this changingbusiness context. In most cases, it willprove more effective to worksuccessfully with innovators fromtechnology, telecommunications andother non-traditional banking providers,than to go at it alone. Identifyingpartners to acquire or help deliver the

vision becomes of critical importance.

Achieve first-mover advantage, orbecome a high-quality fast follower:Given the benefits that digital canbring both for existing customers as

well as Generation Y banks need toact now to avoid being displaced. Whilemany banks have traditionally copied

their competitors, this strategy maynot be suitable for this scenario as firstmovers will have tied up the mostinnovative partners and banks will findit expensive to replicate thesecapabilities in house.

Banks face the dilemma of having tochoose one of two available pathsopen to them: whether to stay withtraditional banking models that haveserved banks well until now, or embracechange and serve the customer ina way that the customer wants.

We believe that the perfect stormbanks are facing today will producesome clear winners. The victors willbe those that recognise the changingecosystem and set out a clear digital

vision for securing customerrelationship primacy. Others will seethe challenging environment of todayas a distraction at best and continuepersistently with old ways andmethods, eroding value in the processby disengaging the customers.

With the battle lines being redrawn amongst banks, thewinning bank should focus on taking steps to develop deeperrelationships with their customers. Focusing on gainingtrust, building engagement and creating value for theconsumer should be the guiding principles for doing this.

The battle for customer relationship primacy

among banks has begun



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Contacts


Scott BauerPartner (PwC UK)+44 (0) 20 780 [email protected]

Matt HobbsPartner (PwC UK)+44 (0) 20 721 [email protected]

Sean MahdiDirector (PwC UK)+44 (0) 20 721 [email protected]

Jan-Willem WeggemansDirector (PwC UK)+44 (0) 20 721 33946

[email protected]

Stephen WhitehousePartner (PwC UK)+44 (0) 20 780 [email protected]

AcknowledgmentsJack Cooper

Aishwarya JayakumarWoosung KimGorham Palmer

Anton Ruddenklau


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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the

information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or

completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do

not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information

contained in this publication or for any decision based on it.

About PwCWe are an extensively networked organisation thataims to bring the best of PwC to our clients each and

every time. We combine rigour with fun and relish themost complex challenges. We create a flow of peopleand ideas in order to do the right thing for our clients,our people and our communities.

Our team brings the appropriate talent to bear toaddress your particular business problem, augmentedby subject matter experts and alliance partners whoare leaders in their specialised areas of expertise.The ability to draw upon talent when and whereneeded ensures that our shared solution covers theoptimum breadth of topic areas, from customerexperience to technology to business and beyond.


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www.pwc.com/financialservices

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PWC the New Digital Tipping Point

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