Banca Salvadanaio Morningfuture
Imagining Trend 5 March Mar 2018 0830 5 March 2018

Banks look set to become increasingly digital

Banks are investing more than never before to radically innovate their business model - a necessary strategy to avoid being put on the scrapheap by fintech, and in particular by the threat posed by Apple, Google, Facebook and Amazon.

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"Technology developments could reduce the number of people working in banks by 30% within the next five years," forecasts Vikram Pandit, former CEO of Citigroup, in an interview with Bloomberg. Stretching the time horizon, we could be talking about a loss of 770,000 jobs in the USA and about one million in Europe by 2025. After the economic and financial crisis of 2008-2011, it looks like innovation will set off the next big earthquake in the banking sector. Automation, digitalisation, use of algorithms and artificial intelligence will be the drivers of a change that could put an end to the image of bespectacled bankers intent on counting money and filling out forms behind a glass partition. "In our bank, there are people who do the work of robots. Soon, there will be robots that do the work of humans. It doesn't matter whether we, as banks, take part in the change. It's already happening," ruled John Cryan, Chief Executive of Deutsche Bank, in an interview with the Financial Times. Indeed, over the past three years the German credit institution has already cut 4,000 jobs out of a total of 97,000.

Furthermore, with the advent of online banks, and with them the ability to consult current accounts on an app or pay bills with a few simple clicks, the physical bank has gradually lost its importance in the life of people. According to the last CheBanca! report, published in November 2017, 24% of current account holders has never set foot in a branch over the last three years. Moreover, out of the 29 million Italians who use the Internet, 18.4 million check their account online every month (on average, three times per month). These figures speak for themselves: to gain ground and retain their customers, banks need to be open to digitisation. The "Uber moment" - as Antony Jenkins, former Chief Executive of Barclays, called it - is fast approaching. In other words, the market will soon be overwhelmed by a technology that is so disruptive as to seriously endanger this consolidated sector with traditional market players. Just like what happened to taxi drivers with the arrival of the company founded by Travis Kalanick. But what could these innovations involve?

"In our bank, there are people who do the work of robots. Soon, there will be robots that do the work of humans. It doesn't matter whether we, as banks, take part in the change. It's already happening."

John Cyran, Deutsche Bank

A quick trip to Sweden reveals all. Here, the financial institution Seb has adopted Aida, a chatbot designed to enable digital communication with customers. Nordea Bank, instead, has introduced Nova, a virtual assistant that advises customers on possible investments or helps them open an account. Finally, Swed Bank offers its current account holders the support of Nina, another chatbot enhanced by an algorithm capable of finding the best financial solution for its customers' needs. In the United States, instead, the online Atom Bank is already one step ahead: all it takes are three seconds to apply for a mortgage, the parameters of which are calculated and tailored to the customer's needs by means of artificial intelligence.

This same technology is also used to rationalise the internal organisation and management costs of credit institutions, staring from the selection of personnel. Goldman Sachs, Morgan Stanley, USB and others have already introduced algorithms capable of analysing CVs, selecting the best candidates and testing them at an interview. Hirevue and Korn specialise in just such a service. The former develops video interview systems where the interviewer is artificially intelligent; the latter analyses customer data to find the right algorithm capable of selecting the best possible banker.

In Italy, Intesa San Paolo has recently outlined its technology strategy: 2.8 billion of investments by 2021 in digital transformation and 1 billion in staff training, with a view to reaching a net profit of EUR 6 billion by the end of the next three years (roughly twice the figure registered in 2017). The entire process will be followed by a new ad hoc managerial figure: the Chief IT, Digital & Innovation Officer. Similar investments are also expected from UBI Banca which, after investing EUR 90 million over the last three years, is ready to fork out another EUR 20 million in 2018 to digitalise approximately 700 of its 1,800 branches. In general, 86% of Italian institutes are in the process of developing a digital strategy and 78% are already implementing one (source: FTC Technologies). By 2020, about 70% of transactions and 55% of sales are expected to run through digital channels (source: KPMG).

These investments and projects are getting banks ready for the big clash with digital giants such as Amazon, Facebook, Google and Apple, which are increasingly turning their sights on fintech services. What's at stake is not just the savers' money, but also their data. While banks once seemed like impregnable forts, this could soon change as a result of the introduction of new European regulations. The first is the GDPR (General Data Protection Regulation), which will force banking institutions to adopt transparent, standard methods to achieve greater protection of their customers' sensitive data. The second is the PsD2 directive, as a result of which the banks' monopoly on their customer's data is about to disappear. And all this while another technology known as blockchain (which underlies all crypto currencies) is making more and more way for itself as a decentralised guarantee of secure transitions.

So what will happen to traditional banks? They will have to change, following in the wake of a number of ongoing trends. Firstly, there's "omnichannel" banking. Already widespread in the retail sector, for banking this means 24-hour ATM and online services, video conferencing, and continuity between physical and virtual services, with a view to increasingly retaining customers. Secondly, branches will also change. They'll no longer be dotted around the territory, but concentrated in a single multi-brand hub so as to share infrastructure costs. This reorganisation must then be followed by an increase in mobile banking services, which are used by more than 30% of the banking population. Finally, there's data and biometrics, two sides of the same coin that can be leveraged to ensure greater security, for example through the use of iris recognition and fingerprint scanning to counteract the risk of hacking. Bankers hope that such systems will help credit institutions to regain their reputation and credibility - in this, however, a good handshake can be worth much more than a string of code.

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