Bank, Neobank, and Ecosystem: How the financial sector is changing

It is obvious that technology dictates new rules of the game for banks. The current fintech trends include the introduction of artificial intelligence in business processes and the creation of ecosystems for customers. What development paths do banks have today and is digital transformation beneficial for them, discusses Dmitry Levkovets, Strategic Consultant at BDCenter Digital.

— Previously, banks interacted with clients directly, without the presence of intermediaries. Now, thanks to technology, progressive projects have an opportunity to integrate into this relationship, to dictate the price (and not only) terms: they become the holder of the customer relationship and thereby make the banks normal back offices.

For example, the biggest money today in the "production-implementation" chain can be earned where there is a direct interaction with the customer. Therefore, retail chains receive the main margin, not the producers of a product or service. Look how the large stores work: manufacturers of goods who want to appear on the shelves of retail chains, have to either accept their terms or refuse to cooperate.

The same thing is happening now in the financial sphere. Neobanks are a case in point. Neobank is a type of direct bank that is 100% digital and is available to customers through mobile applications and personal computers only as Neobanks do not use traditional physical branch networks.

Such banks are divided into two types: those that acquire their banking license, and those that receive the right to use it from traditional banks. In the latter case, the bank simply acts as an operating unit. Here I see two ways of further developments.

Banks' interaction with customers

As I said, there are two ways of development in the interaction between the bank and the customer:

1. Banks give communication with the consumer, work with services, etc. to technology companies, for example, neobanks. This way, now the DeloBank digital bank operates under the license of SKB-Bank.

Sometimes, if there is sufficient equity, neobanks may be interested in obtaining their license, as it reduces the cost of their services.

The Revolut Project is an example. It has created an entire ecosystem that offers all the same services as traditional banks, but operates more quickly, without visiting offices. Customers can open an account directly from their phone in minutes and get better conditions than in a traditional bank for currency exchange, saving money (in the application you can set a monthly budget for food and entertainment, set up automatic saving of funds), purchase cryptocurrencies, etc.

2. The bank itself builds the entire external outline of customer interactions, creating useful products with the help of small IT commands. For example, accounting and paperwork programs, launching their P2P services that allow transactions to be conducted from user to user.

It is hard to say which of these strategies will win. Maybe the banks will be divided into two parts: those that use the services of third-party technology companies; and those that build a niche of connected companies around themselves to control the value chain together.

The choice of a particular way, in my opinion, depends on the willingness of the company to spend resources on creating an ecosystem: to acquire new skills, invest in technology, change business processes, test new products, and calculate profits in detail.

At the same time, you need to understand that the digital format of the bank does not guarantee success. In 2018, the Neobank, Touch Bank, which operated under the license of OTP Bank , was closed. 40 million euros were allocated for its launch. The bank misidentified the development strategy and changed, even when the loss was more than RUB 1 billion. Therefore, a clear understanding of exactly what and to what extent will be profitable is the key to creating an ecosystem.

Automation is a help, not a threat

Digital transformation and automation are processes for transferring an enterprise to a more "flexible", clearer, and well-organized state concerning all processes. For example, an analysis of AI survey data already helps professional bankers determine whether a loan fee would be paid properly.

According to the Crowd Learning Hub, Robotic Process Automation (RPA) software, which helps automate repetitive processes, will be used in 75% of entities providing financial services by the end of 2019. The banking system now has a huge number of routine tasks. For example, data entry: a robot may do this well, rather than an employee, by using Microsoft Excel and the company's CRM.

The introduction of bots for such manual processes can reduce processing cost from 30% to 70%.

For example, The Russian Alpha Bank has robotized the formation and unloading of statements, transferring information from the system to the system and checking customer data, which it plans to save up to 1.3 billion USD a year.

The annual cost of such software quickly pays off in comparison to the cost per employee who will perform the same tasks, but much slower. According to Forrester Research, by 2021, the RPA product market will reach 2.9 billion USD, up from 250 million USD in 2016.

As for the automation of banks in Belarus, one of the brightest examples is the introduction of voice biometrics into the work of the contact center. How does it work? If a customer calls with questions about his/her account, the operator is required to identify him/her before reporting the information. The voice biometrics system recognizes a person by voice, and the contact center employee no longer needs to waste time and request a passport, account or card number. The customer does not need to remember all this or have it with him/her.

But how do you know if your bank needs automation?

1. First, it is necessary to identify weak points and analyze the robotic sizing of which processes will accelerate and improve the work.
2. Then, you need to test suitable technologies and calculate how soon they will pay off.

Reducing operating costs through automation will allow you to compete on price, build up the scale of the business, by directing the resources to create an ecosystem.

How to create an ecosystem?

I previously mentioned that its creation is necessary and is already happening. Here is what a bank can do to create an ecosystem now:

• Identify customer needs. Customers are a key factor in creating ecosystems. What products to develop and what partnerships to conclude depends only on their needs. To do this, banks must be sensitive to changes in the habits and behavior of people: understand how they communicate, make purchases, do business — and respond to it.

In building an ecosystem, it is possible to go beyond the provision of basic financial services. For example, advise on building a house or offer an application that will help the customer manage his/her finances. Integrating products and services from different providers that will make the consumer's life easier with one phone and the Internet, in my opinion, is the future of the banking sector.

• Identify a strategy for innovation. Based on the customer's pain points and needs, it is necessary to analyze what innovative technologies the bank can integrate into its work and how to do so that the current business processes are not affected.

As far as partnerships are concerned, you can create an ecosystem where there is synergy and good relationships with a corporate client. It is possible to benefit by offering additional conditions for your customer's customers. The example is the ecosystem of selling banking services at gas stations. Its implementation does not require a huge investment, but a special agreement with a corporate customer with whom the synergy exists.

• Develop the right product. The essence of the ecosystem is to offer a person something that will cover his/her needs at the right time. If you make a mistake many times, the consumer would take it as spam and would never open your messages again. A good ecosystem should not teach someone to do accounting: it provides a tax return at the right time and, of course, is responsible for everything being i done correctly. For example, there is a product that offers accounting and banking services within one platform, which is extremely convenient.

Interaction with the customer is also important. Some banks are even switching from a mobile or Internet bank to creating a universal and operational assistant that is ready to enter into a dialogue at any time to help the customer. For example, Talk Bank, whose customers manage their finances through bots in popular messengers.

The bank is already fintech

The speed with which banks innovate and create ecosystems raises debate about whether they will become IT companies. But the bank is already a fintech, which constantly uses new technologies to better perform its usual functions.

A striking example of this is a new approach to scoring. Now, to decide on a loan, banks are based not on the customer's credit history, but on information about the habits of the person and his/her lifestyle, which makes it more likely to determine his/her solvency and credit discipline. The new model, unlike the old one, gives the opportunity to issue more credits, which will be returned. In addition to customer loyalty, it increases the income of the bank.

The example from the U.S. market is Carpe Data, which collects and analyzes business information for insurance companies. It studies its visibility on the Internet and social networks, checks the reputation and reviews of customers. As a result of this analysis, the insurance company better understand the risks, which helps to make a decision and provide for all other aspects.

Technology influences belong not only from the work of companies, but also the formation of new habits in people whom fintech can use as its advantage.

For example, in the age of innovation, emotions are valued. The company that will meet not only the transactional needs of the client, but also emotional ones, will always be one of the main players in the market.

People want to communicate with their device the same way they do with a person. Therefore, one of the closest trends is smart assistants, whom a person will fully trust. Companies will build their marketing based on that, to enter into the trust not only from the consumer, but his/her smart assistant — Alexa, Siri or Alice.

To help voice assistants find your services, you can use these tips:

1. Adapt the content. Voice assistants like clear and concise information. A three-paragraph story about your company's mission is a good thing, but if the site doesn't have a clear text about what you're doing, Siri is unlikely to show it to the phone's owner. Think about the questions users ask their assistants when searching for information, and adapt your content accordingly.
2. Increase the credibility of your website domain. Smart assistants prefer to take information from proven resources. Links to third-party resources on your site and domain payment for 3-5 years in advance, helps to increase the authority of the domain.
3. Take care of SEO promotion of the site. Sites on the first page of the issue are more likely to get into the "recommended" ones to voice assistants.