August 2015

Digital Success Remains Contingent on Relationship Banking
Digital technology and disruption are fundamentally transforming how businesses interact with banks. Although the threat of disruption for incumbents is only intensified by the ‘fear of the unknown’, disrupters are equally perplexed at specifically where the most lucrative opportunities exist.

Annual technology investment by the major Australian banks is estimated at over A$1 billion - each - however “flipping” standardised approaches to core transaction banking and credit processes on their head is an exceptionally uncomfortable procedure fraught with difficulty.

Board members from thirteen of the largest US enterprises surveyed by MIT's Centre for Information Systems in April 2015 estimate the threat of digital disruption at 32 percent of revenue over the next five years, with fully 60 percent of surveyed board members attesting that their boards should spend significantly more time on the strategic challenge in 2016.

Following the noteworthy data sharing collaboration of the Big Four on retail branch costs to identify areas for improvement and cost reduction conducted recently by Turner & Townsend, it is clear that reducing operating costs without removing the key element of what essentially makes a bank a ‘bank’ is central to decision making.

Strategic decision makers in banking and finance, the industry which is repeatedly nominated as the most susceptible to disruption given enviably high margins and the prevalence of manual processes and legacy systems, are seriously challenged by this prospect.

Trade finance, asset finance and business FX products are all firmly falling into the cross hairs of new entrants and non-bank competitors.

At the periphery of the process is the requirement to align with stricter regulatory guidelines and bulked up risk capital frameworks. The proportion of IT investment budgets allocated to keeping pace with compliance and risk management requirements was recently estimated between 50 to 90 percent in a recent UK retail banking study conducted by Adaptive Lab.

Yet at the core of the transition, a recurring theme continues to emerge – relationship banking is not suffering the slow and painful death many analysts predicted in a post-GFC world.
Quite the opposite is playing out. The more innovation that takes place, the greater the urge to deal with a ‘real person’ or ‘human face’. CFOs and treasurers across Australia express a clear desire to further develop an underlying sense of trust and personability in their dealings with their bank despite mounting pressure on the time they have available to devote to treasury processes around day-to-day requirements of running a business, available resources and bandwidth to consider new alternatives.

In the techno-race to deliver the latest and greatest digital products, East & Partners Business Banking Index clearly demonstrates that a side-effect has emerged, with customer loyalty and advocacy in a tailspin.

Significantly, among 983 CFOs and treasurers surveyed for the program, 33.8 percent of respondents nominated the service level they experienced as the most important drivers encouraging advocating their primary bank.

Steven De La Castro, head of digital banking and financial services at US consultancy Cognizant, believes that digital banking encompasses more than just web and application experiences as it includes the way banks seamlessly blend the physical and virtual touchpoints needed to create a consistent omni-channel experience. He states “although branches will continue their decline over the next few years, they will maintain a prevalent role in acquiring, retaining and serving customers across digital and physical channels."

What is quickly becoming apparent is that the proliferation of fintech with corporates, not only for institutional sized enterprises but vitally small businesses, is a long term transformative trend that has been ongoing for many years and will continue to take place well into the foreseeable future.

Ultimately, incumbents and established financial services providers have access to the insight, man-power and funding required to lead digital innovation. They also have the regulatory knowledge and framework to assist in seamless implementation and integration with existing products.

However, interrogating end users, corporate treasurers and CFOs has never been more important given expectations are rarely in line with reality when it comes to discovering or competing with the next ‘Uber’ or ‘Airbnb’ of the banking world.
Most Important Driver Encouraging Advocating Primary Bank – May 2015
% of Respondents

Source: East & Partners Business Banking Index – July 2015

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