Digital shift likely to impact bank financial results

I'm starting to hear of some very significant digital and multi-channel budgets being put in place by many of the leading retail banking brands in 2012. It's about time!

While I won't name names or budgets, I've heard of mid-sized banks dedicating more than $50m to Internet, mobile and social-media this year, and large banks in the range of many hundreds of millions. It's obvious from some of the outcomes in 2012 that major brands like Citibank, BBVA, CommBank, and Amex, for example, are putting some major spend into various initiatives on the digital engagement side. Key to these activities is some groundwork around platform development, staying competitive on the customer interface side, exploring the mobile wallet and new forms of loyalty around payments, and of course, big social media plans.

As earnings reports have been coming in this quarter, it's no surprise that 2011 was a tough year for the big banks. Of course, I've also heard of major brands in the space whose budgets are woefully thin and spell major problems for them on a competitive front this year, some of these banks are already hurting. How can I argue that budgets for digital are too thin in the current environment? Well, when a major global brand in the space spends less on social media globally than the cost of deploying one branch in central London or New York, and they are yet to have any type of coherent social media strategy (no real Twitter presence as an example), that is a budget out of kilter with the reality of customer behavior and acquisition/retention mechanics.

The Intertia Problem

While I'm sure I'll hear the justification that the economy and particularly the ongoing Euro crisis is the primary cause, there must be a recognition that banks are simply carrying a lot of redundant capacity, based on the old paradigms of the way banks should operate, and are under-invested in the new platforms and skills that will help them grow their business out of the current economic malaise. This appears to be forcing banks to try new fee structures to cover the costs of legacy business operations, rather than adapting the organization and thus cost structures. I could call out legacy branch infrastructure again, but I won't beat a dead horse, as they say - the economics of that are becoming glaringly obvious to most. So let's take two other simple examples where the organizational behavior is skewed by inertia:

Account Opening and Administration
With average account acquisition costs being in the range of $250-350, you would think that someone would have connected the dots between the need for a signature card (and related physical handling) at account opening, with the cost of acquisition. The easiest way to reduce acquisition costs is get rid of the paper. Which brings us to annual costs for checking accounts too. With an average checking account costing around $350 a year, sending paper statements, printing checkbooks that are never used, charging big fees for wire transfers so that you prop-up your dying legacy check business, all smacks of a business driven by inertia.

What's my account balance?
This is the number one requested piece of information from the bank today, and while we provide internet banking access to this piece of information, the dominant method of a customer getting this is still through an ATM or through the call centre. A far simpler mechanism would be sending the account balance via text message when a major transaction occurs, at set intervals (say weekly) or as defined by the customer. The cost of sending a text of your balance to a customer 10 times a month, is less than the cost of one call to the call centre for the same information, and less than two ATM balance enquiries (based on current channel cost estimates). The deployment of mobile wallets will massive reduce these ongoing costs as well.

Investment prioritization

In terms of size of budget, here is my rough take on where the investment prioritization is occurring across the board:

1. Mobile
   Clearly, whether it is deploying new mobile apps, iPad apps, playing with mobile wallets, or geo-location features and offers, Mobile is the big play in 2012 and everyone wants a part of the action.
2. Social Media
   From deploying monitoring stations, building service paths organization-wide to cope with social media requests and incidents, building new loyalty programs powered by social platforms, or trying to tap-in to friends, likes and advocacy, social media is a big play this year.
3. Acquisition/JVs/New Appointments
   Acquisitions are a tough one because it is only the larger organizations who are looking at this, but there's an effort to acquire key skills, technology and business practices emerging though acquisition, and significant dedicated funds for exploring new lines of business. With CapitalOne's acquisition of INGDirect, and other moves, we're going to start to see this being a sizeable component of global plays in the space as the bigger players try to acquire core capability. We've seen banks like Comm Bank in Australia start to make strategic investments in core skills at the top, such as the appointment of Andy Lark, along with major changes in their budgets internally around digital. While Andy is billed as the Chief Marketing Officer, he bares little resemblance to the marketing officers of most banks traditionally.
4. Core Systems replacement to cope with channel mix
   I think this one is obvious
5. PFM, Big Data and Analytics
   I've put all these in one bucket, which isn't really fair, but for many organizations the start to collating their big data into useful information only occursthrough the move to PFM (Personal Financial Management) tools behind the login. The need to connect people to their money, to target cross-sell and up-sell messages and otherwise monetize account activity and data, is a big priority.
6. Engagement Marketing and Collaboration
   Increasingly we're seeing dedicated efforts at partnerships, API layers, new marketing initiatives across broader platforms and other such mechanisms. We're starting to see a new slew of 'business development' and 'partnership' resources emerge as banks look beyond their own walls for growth opportunities. Expect this to grow significantly over the next 3 years as we see more JV, incubation and acquisition budgets emerge as well.

The downside to the shift

Clearly these changes are all good for staying relevant to consumers, changing business practices to adapt to new behaviors, and better aligning costs with operations as they shift. However, the downside is that as you move away from legacy operations there's a lot of dead wood.

"AUSTRALIA is on the cusp of a white-collar recession with insiders warning that thousands of jobs are at risk in the finance sector, after it emerged yesterday that ANZ planned to cut 700 jobs."
Bank on White-Collar Crisis, the Age, January 14th, 2012

While many banks used the global financial crisis to 'downsize', the reality is that there are going to continue to be significant job cuts in the sector as a result of re-tasking the organization for the new reality. In fact, my estimates are that we'll lose many more jobs to the 'shift' than we did in the global financial crisis. Sure, there will be new hires as well, but the reality is as we downsize branch staff, manual operations and traditional marketers, we simply don't need the volume of skills to replace them on the digital front. Even in-branch we'll be using technology to avoid queues, speed up transactions, and hence reduce branch staff footprints.

It's inevitable in the shift to digital within finance, that some humans will be replaced by technology efficiency gains. As we really start to see digital making progress, those legacy skills sets will become glaringly obvious on the balance sheet. Unfortunately, it's either lose legacy operations staff or lose customers and profitability.