It may have become a hackneyed cliché to state that the exponential advances in technology are transforming our lives. In all areas of life, especially in healthcare and in financial services, the digitalisation of services has brought about changes that many in our society now take for granted.
Following the financial crisis that started a decade ago and the subsequent tightening of regulation, financial services operators are now seeing the digitalisation of their services as the next big challenge to update their business models. Of course, not all financial services operators are willing to take the plunge just yet and prefer to adopt a wait-and-see attitude, hoping to learn from the experience of the more innovative operators.
One such innovative operator is the French bank BNP Paribas that will be spending €3 billion to support its digital strategy. BNP starts from a position of strength. It has just announced a 15 per cent increase in annual profits to €7.7 billion. BNP CEO Jean-Laurent Bonnafe told the Financial Times that they wanted to ‘transform their business’ by boosting spending on digital initiatives by 50 per cent over the next three years.
It is a sobering reality that more and more financial services clients want to do operations online rather than face to face. But another reality that financial services providers are facing is the struggle to control costs, especially in those organisations that have large brick-and-mortar retail networks.
Unfortunately, the digitalisation of bank services will mean the slashing of jobs and closing of hundreds of traditional branches by BNP as indeed by other banks taking this route. At the same time new jobs, especially in the ITC sector, will be created as new skills will replace the old.
Mr Bonnafe sees no reason why the digitalisation trend that means net bank closures would change over the next three years. This would help BNP to cut its cost-to-income ratio from 68.8 per cent to 63 per cent.
All service providers must update their business model constantly... change as always will eventually become inevitable
Interestingly, not all financial services operators are rushing to adopt the digitalisation strategy. The Nationwide Building Society in the UK competes with the major banks and has just announced a £500 million branch investment programme that will affect most of its 500 retail outlets.
Many will agree with Graeme Hughes, Nationwide’s direction for distribution, when he says: “The importance of a branch for our members is that they have a human face they can talk to.”
A recent survey by the consultancy firm Accenture confirms that it is not just baby boomers and Generation X people that want to interact with a human being when discussing their financial needs. The survey confirms that “digitally aware younger customers are especially keen to discuss major financial decisions with branch staff”.
The retail industry can serve as a good model for financial service providers on how to cater for the different generation in our society. While online purchasing has been growing exponentially in the past decade, many major retailers have adopted a click-and-brick delivery strategy whereby they deliver their goods both through online e-commerce and also through their high street shops.
But many analysts say that the financial services industry will adopt the digitalisation of services with more surgical precision in order to optimise returns. It is always a dilemma for service providers when they have to decide which branches to close and replace with online services. Where one cuts, some bleeding will be inevitable.
Unfortunately, the most vulnerable customers because of their age and little familiarity with digital technology, will suffer most when branches of financial services providers are closed in an economy drive.
Many argue that this challenge can best be addressed through competition whereby financial services entrepreneurs will identify gaps in the market and provide the services that a section of society may demand.
Baby boomers and Generation X people are hopefully not going to disappear anytime soon and they may be more affluent than their children and grandchildren. So those of these older generations who want to get financial services by going to a branch, may inspire operators to build financial services niches for these clients.
Progress in technology and the better preparedness of the younger generations to make good use of this technology will mean that all service providers must update their business model constantly.
This change is already happening in Malta, even if not all financial services operators have embraced digital services wholeheartedly. But change as always will eventually become inevitable.
johncassarwhite@yahoo.com