September 8, 2014

The “do or die” challenge for European banks

It’s hardly news that digital banking continues to grow in strategic importance.  But now a recent McKinsey article, The Rise of the Digital Bank, has raised the stakes – saying that “getting digital banking right is a do-or-die challenge” for European banks.

Why such strong words?

Well according to analysis by the author, Tunde Olanrewaju, a principal in McKinsey’s London office, customer adoption to digital channels is expected to proceed at a breathtakingly fast pace in the next few years — putting as much as 30% of revenues in play for Europe’s banks.

And here’s the challenge: most banks today have, according to the consultant, “relatively shallow digital offerings focused on enabling basic customer transactions.” Considering that the vast majority of these banks currently invest less than 0.5% of total spending on digital, there is a strong possibility some may not adopt quickly enough.

The article does an excellent job covering a variety of digital “improvement levers” that deliver strong value-to- bank benefits.  We wish the piece had given more perspective on the equally important need for digital offerings to provide strong value-to-customer benefits. We strongly believe that the future winners in digital will focus on both customer and bank value drivers.

A case in point is McKinsey’s somewhat perfunctory reference to the need for a digital banking to include “improved customer targeting via digital marketing and micro-segmentation.”  Sure, that’s true, but the bigger news on this front is that digital marketing is poised to move far beyond simply finding better ways of segmenting and targeting a broad customer base.

Very shortly we expect those techniques are going to seem very last century to bank marketers — thanks to new digital applications and advances in predictive analytics that make it possible for a bank to take what it already “knows” impersonally about an individual customer (from transaction data and other sources) and transform that information into insights that are predictively helpful, personally relevant and financially useful to the customer.

What we’re describing of course is a new category of digital that we call personalized guidance – and it provides both value to customer and value to bank benefits – enabling a bank to cost-effectively leverage its wide-ranging products, services, channels and data to help each individual customer better manage their day-to-day financial life.  Can it improve customer uptake on new offers and drive higher share of wallet?  Can it improve loyalty and satisfaction?  Can it encourage self-service and lower costs?  Yes, yes, and yes.

And here is some really good news for Europe’s banks who are challenged to quickly improve their digital game: They already have both the data and base digital platforms to make these kinds of personalized, one-to-one experiences possible, and the decision support technology is now available to make them practical within a model of lightweight technology intervention covered in this McKinsey piece.