efma-innovation in retail banking v5.indd

Innovation in Retail Banking

October 2014, 6th Annual Edition

Delivering Superior Customer Value

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Innovation in Retail Banking 2014

© 2014 Efma and Infosys limited. All rights reserved.

Contents

Preface .........................................................................................................................3

Executive Summary ........................................................................................................4

Innovation Case Examples ..............................................................................................6

Introduction ...................................................................................................................8

Section 1: Innovation Trends ..........................................................................................11

Section 2: Trending Innovations .....................................................................................19

Section 3: Delivering Value across Channels ...................................................................25

Section 4: Innovation Practices ......................................................................................33

A Regional View of the Key Trends .................................................................................37

Innovation Case Studies ................................................................................................41

Conclusions .................................................................................................................46

About the Research .....................................................................................................48

About Us .....................................................................................................................54

3© 2014 Efma and Infosys limited. All rights reserved.

Efma and Infosys Finacle are proud to present the sixth annual study of innovation in retail banking. The theme of this year’s study is innovating to deliver superior customer value across channels. As always we have also looked at innovation trends on a global basis and the innovation practices being adopted by leading banks. More than a hundred banks from nearly fifty countries contributed to the research for this study.

More and more banks are increasing their investment in innovation, which provides the clearest signal that banks are taking innovation very seriously. One of the driving forces is that the threat from new entrants to the market remains high. There has been a noticeable increase in the number of start-ups being financed in the last few years, particularly in the area of payments, but also now in new types of lending businesses.

Banks also believe that their innovation performance is continuing to improve. The area in which performance is perceived to be strongest is in channels. This has been a consistent finding over the last few years and it is in the area of channels in which most banks are focusing their innovation efforts.

The broad themes which banks consider the most important are mobility, analytics and social. There are numerous opportunities to innovate in each of these areas and the study includes many examples of banks which are doing just that. The challenge is to keep up with customer expectations and also to ensure that the innovation is not just a gimmick but something more meaningful for the customer experience.

There are some signs that more banks are adopting formal innovation practices, and developing their approach to open innovation. However, there are still a large number of banks which do not seem to have good basic practices so there is plenty of room for improvement. Working closely with start-ups is becoming more common and we believe this is a positive trend.

Although many banks in mature markets are now taking innovation more seriously than they were a few years ago, it is often banks in developing markets that are still leading the way and showing more ambition. Banks in countries like Turkey, Poland and Malaysia continue to be recognised as innovation leaders.

We hope that you find this study useful and look forward to continuing to monitor significant developments in retail banking innovation on your behalf in the future.

Preface

Patrick DesmaresSecretary GeneralEfma

Sunil GuptaVice President & Unit Operating Officer – FinacleInfosys Limited

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Threat from new entrants remains high and is perceived to be increasingThe highest threat perceived by banks is from tech companies (such as Google, Apple or Facebook), with 45% of banks in our survey saying this was “high” (i.e. scoring 6 or 7 on a 7 point scale). This is a notable increase from last year. The other most significant threats are believed to be from telcos and start-ups.

Two thirds of banks now have an innovation strategyIn response to this threat and the challenges posed by digitisation, more banks than ever have an innovation strategy. In 2014, 61% of banks have indicated they have an innovation strategy, a small increase from 2013, but a significant increase since our first survey in 2009.

The vast majority of banks are increasing their innovation investment84% of banks have told us they are increasing their innovation investment in 2014 compared to 2013. In 2009, in the heat of the financial crisis, only 13% of banks were increasing innovation investment, but there has been a dramatic change in attitudes since then.

Only half of banks are aiming to be innovation leadersWe have found that 49% of banks are aiming to be innovation leaders in their markets, whereas 38% of banks are content to be fast followers. Being a fast follower is a reasonable strategy so long as banks are aware of their environment and any competitive risks that emerge.

Only a small minority of banks are investing in R&DMost innovation in banking tends to be incremental and our survey shows that only 35% of banks are investing in more advanced R&D type investment. While it may be difficult to fund investment in R&D, particularly for smaller banks, it is important to consider other ways to access potential developments.

The perception of banks is that their innovation performance is improvingWe asked banks to rate their own innovation performance and this increased overall to nearly 5 on a scale of 1 to 7 in 2014, higher than we have measured before. In channels the score is over 5 and this is where banks feel they are performing best.

Mobility is clearly the most important innovation theme for banksWhen we asked banks to rate the importance of various innovation themes, 88% said that the importance of “mobility” is high (i.e. scoring 6 or 7 on a 7 point scale). Following that, 67% said the importance of “big data” is high and 63% said the importance of “social channels” is high.

Mobile, online and branch innovations need to deliver real value to customersBanks have told us which innovations in each channel they think will be the most important for delivering value:

• Mobile-centric banks are illustrating the potential for innovation in the mobile channel, but banks say that mobile payments is the key area for delivering value to customers, and there will be a number of challenges here from innovative start-ups.

• In the online channel, the innovation challenge is around automation of account origination and the ability to deliver personalized offers. With account origination, the issue is not just technological, but also about regulation and business model.

• Branch innovation is focused both on formats (where there is plenty of experimentation taking place) and on the use of technology in branches to support customers and advisers in what needs to be a superior relationship management experience, for example with the use of tablets or videoconferencing.

Executive Summary


Banks are on average only using half of the innovation best practices we surveyedThe most common practices are formal processes for idea generation and screening, which are used by around 60% of banks. Less common are prototyping and staging of investment – less than 50% of banks use these practices.

A reluctance to “accept failure” is a cultural weakness which impacts innovationThe acceptance of failure, and learning from mistakes, is an important entrepreneurial attribute. There is plenty of anecdotal evidence that banks are not good at supporting employees who take calculated risks and fail, and our survey confirms that banks are weak in this area.

Open innovation is increasing and more banks are working with start-upsOne way for banks to access more innovations, and help address their own cultural deficiencies, is to work with start-ups. There is some evidence that more banks are doing this either by partnership or by investment, but it remains a small minority.

Banks in developing markets are showing greater innovation ambitionBanks in fast growing developing markets (like Turkey, Malaysia and Brazil) are more ambitious with their innovation objectives and believe they are more innovative than banks in slower growing developed markets. They are also more likely to have an innovation strategy and invest in R&D activities.

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In addition to the examples in the Innovation Case Studies section that begins on page 41, numerous innovation cases are described throughout the report and these are listed in the table below.

Innovation Case Examples

Innovation ThemesMobility U.S. Bank United States Piloting of voice biometric authentication

for the mobile banking app, for login and transactions.

Mobility NumbrS Germany Mobile focused PFM app which aggregates accounts, analyses spending and makes financial forecasts.

Social Kotak Mahindra India Social bank account designed specifically to be opened and operated from within Facebook.

Social Lenddo United States Online platform for microfinance lending in emerging markets which uses social connections for credit scoring.

Big data LendUp United States Socially responsible online lending using big data for credit scoring.

Bid data Wisely United States Aggregation of card spending data to provide socially based recommendations for local services.

Gamification DSK Bank Bulgaria Gamification application for encouraging customers to save toward financial goals.

Gamification Rabobank Netherlands Development of a gamification hub within the bank to transfer knowledge and best practices.

Location-based services

Denizbank Turkey Hands-free payment application to go with the FastPay wallet, for fast payments in participating retailers.

Location-based services

Westpac Australia iBeacon deployment in branches for customer recognition and delivery of information.

Wearable Tech La Caixa Spain Experimental branch finder and currency converter applications for Google Glass.

Wearable Tech La Caixa Spain Payments wristband for making contactless payments at point-of-sale terminals.

Channel Innovation for Customer ValueMultichannel integration

UniCredit Italy Developing new end-to-end, online to offline, cross-channel integrated processes to manage the customer relationship.


Mobile-centric banking

Soon France Start-up of a mobile-centric bank with features designed specifically for the smartphone.

Mobile payments

Coin United States Wallet solution which stores all card details on a single card-like device which is then used for making payments.

Mobile payments

Loop United States Wallet solution which stores all card data on the smartphone which is then used with a special adapter to make payments.

Tablet applications

National Bank of Canada

Canada Mobile wealth management applications designed specifically for use on tablets.

Automated account opening

CIMB Bank Malaysia Bank account targeted at young professionals and designed for rapid opening online.

Personal financial management

Bank Hapoalim Israel Second generation personal financial management tool with better usability and peer group comparisons.

Personalised offers

mBank Poland Online and mobile real-time personalised offers from merchants which can be location based.

Customer lounges

Virgin Money United Kingdom Dedicated locations for customers to use for relaxation and meetings rather than for banking activities.

Pop-up branches ING Belgium Belgium Pop-up branches in partnership with fashion magazine and incorporating elements of gamification.

Other Case Examples Mobile money T-Mobile United States Mobile money service which is targeted at

the under-banked based on a simple pre-paid account with a payment card.

Mobile money BNP Paribas/Orange

Ivory Coast Linking an existing mobile money service operated by a telco with access to a bank account.

Online micro-lending

Lenddo Colombia, Mexico, Philippines

Online micro-loans using social media connections and online activity for credit scoring.

Account personalisation

IndusInd India Personalisation of the current account by selection of an account number by the customer.

Video banking IndusInd India Service allowing customer to have meetings with bank staff from the customer’s computer or mobile phone.

P2P lending Lending Club United States One of the first P2P lenders, which launched in 2009 and is now profitable and planning for an IPO in 2014.

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Introduction

It is nearly six years since the start of the global financial crisis which was sparked by the collapse of Lehman Brothers. In the immediate aftermath of that event, most banks around the world were simply focused on survival, and in particular on managing their credit risk exposure and their funding requirements. Worrying about the threat of new entrants was a low priority.

One of the results of the crisis in some markets was consolidation and a reduction in competition. In the United States, the five largest banking groups increased their number of branches by merger and acquisition from around 19,000 in 2008 to around 23,000 in 2013. The market share of commercial bank branches for the top five therefore increased from 22% to 27%.

However, it can be difficult to generalise. The market challenges are not the same for countries at different stages of development, and this has an impact on innovation strategy. Analysis for the Efma Yearbook 2013 (see Figure 1) shows the growth rates on a number of key measures for countries which are high, middle or low income (based on GDP per capita). An example of a high income country would be France, a middle income country would be Malaysia, and a low income country would be Nigeria. The correlation is quite clear – the lower the country income level, the higher the growth rate:

• In high income countries, branch numbers are now declining, whereas they continue to grow in low income countries. There is also some evidence that the pace of branch closures is picking up in advanced economies because the use of mobile and online services has grown so dramatically in the last couple of years.

• Although non-cash payments are growing in all types of country, the number of payment cards is more or less flat in high income countries and is continuing to grow strongly in low income countries. Banks in developed economies are therefore now in a position where they have to take market share from competitors in order to grow. Many customers have several cards and competition is intense.

Figure 1: Banking Growth Measures by Country Income Level

Source: Efma Yearbook 2013

Note: The analysis is based on a sample of high, middle and low income countries where there is good historical market data. The figures shown are the average for those samples. PPS is Purchasing Power Standard.

Measure Units Date High Income Countries

Middle Income Countries

Low Income Countries

GDP per capita in PPS Int$ per capita 2012 39,196 21,530 7,675

Branch growth rate % per annum 2007-12 -1.3 3.5 6.6

Non-cash payments growth rate

% per annum 2007-12 4.1 11.6 16.8

Payment cards growth rate

% per annum 2007-12 -0.1 8.0 14.8

Household debt growth rate

% per annum 2007-12 2.7 13.5 19.2


As the markets in general have improved in the last couple of years the competitive environment has started to change in many countries. There are a large number of start-ups and companies from different industries who are now targeting the financial services market. According to one source (CB Insights), on a global basis, 193 payments start-ups received venture capital funding in 2013. Facebook has applied for an e-money licence in the European Union. More and more telcos are launching financial services offerings, sometimes in partnership with banks and sometimes alone, and there were 40 new mobile money services launched around the world in 2013.

In this year’s survey, banks told us they were most concerned by the threat from tech companies (for example Google, Apple and Facebook). The threat from this type of competitor was rated as ”High” by 45% of banks (see Figure 2). After tech companies, the most significant threat is perceived to come from telcos and from start-ups. The perceived level of threat across all of these new players has also increased noticeably in the last 12 months.

In spite of the fact that banks fear tech companies the most, we need to still wait to see the impact from developments like the Google Wallet, and Apple Pay. Telco’s on the other hand are continuing to launch services in both developed and developing markets and banks need to decide whether they want to partner with or compete with these new players. There have been recent contrasting examples of telco/bank strategies in the United States and Ivory Coast:

• T-Mobile has launched a mobile money service in the United States which is targeted at the under-banked but is a broad enough proposition that it could be used by most customers requiring a simple pre-paid account with a payment card. Behind the service sits The Bancorp, the same FDIC regulated bank which provided the support for Simple to launch in the United States. According to The Financial Brand, the T-Mobile service is more of a threat than Simple because of the company’s existing customer base, distribution network, and marketing muscle.1

Figure 2: Perceived Threat of Industry Disruption from New EntrantsProportion of banks rating the threat of new entrants

0 20 40 60 80 100

Tech companies

Start-ups

Retailers

Telcos

Insurers

45 49 6

32 12

26 67 8

8 78 14

5 67 28

High Neutral Low

55

Using a scale of 1 to 7, the categories are High (6 or 7), Neutral (3, 4 or 5), Low (1 or 2)

Source: Efma-Infosys Finacle Innovation Survey 2014

1 Reasons Mobile Money from T-Mobile Should Worry Bankers, Jim Marous, The Financial Brand, January 2014

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• The French bank BNP Paribas and the French telecoms operator Orange have joined forces to offer a mobile banking service in Africa. By linking their account to Orange Money, BNP Paribas customers will be able to buy airtime credit, transfer money and pay their bills with their mobile phone, while Orange Money’s customers will have access to BNP Paribas branches and the bank’s financial services (savings products, bank cards). The joint offering of BNP Paribas and Orange Money is being rolled out initially in Ivory Coast, but there are plans to expand it into other African countries, such as Senegal.

Independent start-ups have a big challenge taking on the banks in established markets. It can take some time to reach critical mass and profitability as the example of Lending Club illustrates. Lending Club was a pioneer of P2P lending in the United States when it launched in 2009. The company grew relatively slowly in its first few years as the business model was refined, but is now originating over US$2bn of personal loans per annum (see Figure 3). The company also reported an operating profit for the first time in 2013 and will most likely have an initial public offering of shares in 2014.

In this study, we take a closer look at how banks are responding to the innovation challenges from new competitors, in terms of strategy, investment and objectives. We have also reviewed some of the innovation practices which are being adopted.

Channel innovation continues to be the main focus for many banks, and is the area in which banks believe they are performing best in terms of innovation. It is in the digital space where many start-ups are coming up with new products and services, and new business models, and most banks have now embraced the challenge of digital innovation. It is particularly important for banks to focus on innovations which create value for customers so we have devoted a section of the report to look at this perspective.

Figure 3: Lending Club Growth ProfileNew personal loans originated per year in US$m

2009 2010 2011

52 102257

718

2,064

2012 2013

Source: Lending Club 10k

1 Innovation Trends

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One of the most obvious trends we see is that more banks have an innovation strategy than ever before. We define a strategy as having clear objectives, processes and metrics for innovation. Figure 4 shows that only 37% of banks had an innovation strategy in 2009, but this has now increased to 61%. However, measurement of success is still an area of potential improvement. Most banks do measure the success of specific innovations, but only 31% say that they measure the overall success of their innovation investments, making it difficult to judge the innovation strategy as a whole.

The other clear trend is that more and more banks are increasing their innovation investment. In 2014, we have found that 84% of banks are increasing innovation investment in comparison to their level of investment in 2013 (see Figure 5). In 2009 only 13% of banks were increasing innovation investment, so the transformation since then has been dramatic. The area where most banks are increasing innovation investment is Channels, and this is closely followed by Customer Service and Experience (see Figure 6).

Innovation Trends

Figure 4: Innovation StrategyProportion of banks with an innovation strategy

2009 2011

37%

50%

60% 61%

2013 2014



Figure 5: Innovation InvestmentProportion of banks increasing innovation investment in each year compared to previous year

2009 2011

13%

70%77%

84%

2013 2014

Source: Efma-Infosys Innovation Surveys 2009-2014

Figure 6: Innovation Investment by Area Proportion of banks increasing or decreasing innovation investment by area

0 20 40 60 80 100

Channels

Customer serviceand experience

Processes

Products

Sales and marketing

89 1 10

78 21

70 3 27

65 5 30

60 8 32

Increasing Decreasing No Change

1


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A good innovation strategy should set clear objectives. Our survey found that 49% of banks have the objective of being an innovation leader, whereas 38% of banks are happy to be innovation fast followers (see Figure 7). The fast follower strategy is sensible in many cases, because being a leader carries more risks and can be more expensive. The relatively slow adoption of innovations in financial services also means that a fast follower strategy does not carry too much risk of being at a competitive disadvantage. However, it does still require a good innovation monitoring system to be in place so that a bank can react quickly to innovations that are taking hold in the market.

Typically, most innovation investment is incremental rather than disruptive. Innovations we mention elsewhere in this report such as allowing customers to view their account balances on the mobile phone without logging in should be thought of as incremental. Disruptive innovation is more difficult for established companies for a whole range of reasons. The culture of banking also means that R&D investment is relatively low. Only 35% of the banks in our survey said that they conduct any form of R&D investment. We have seen examples of this in previous studies e.g. from UniCredit in Italy which has an R&D department working on innovation, but it is still relatively rare. Of course, for many smaller banks R&D investment can be difficult to resource and they would tend to have to rely on the resources of suppliers and partners, which is a key feature of “open innovation”.

Figure 7: Innovation ObjectivesProportion of banks aiming to be innovation leaders or fast followers

LeaderFast FollowerFollowerDon’t know

38

112

49



Figure 8: R&D InvestmentProportion of banks investing in R&D

YesNoDon’t know

51

14

35


Hana Bank from South Korea, was honoured as the co-winner of the Product and Service Innovation Award at the BAI Finacle Global Innovation awards 2013, for the introduction of the first fully processed online mortgage product platform developed to simplify the complicated mortgage process – One Click Mortgage. This product is processed in 5 steps; e-application, e-underwriting, e-signing, e-document and e-closing. During the process, the potential borrowers do not need to visit offline branches. The process is conducted entirely online from e-application to e-closing. By adopting the system One Click Mortgage, potential borrowers save time as well as money because of online accessibility and efficiency.

The only Korean bank with an R&D Center within the organization, Hana Bank R&D Center seeks to create new products or processes by forming strategic alliance with different types of business areas with the aim of expanding and diversifying banking business within the market. Thus, Hana Bank formed a strategic alliance model for One Click Mortgage where it developed an outsourcing system with law firms, a title insurance company and a title company. Simplifying the product along with the participation of partners has led to better collaboration, enhanced the cost efficiency from processing bulky transactions, and eliminated unwanted broker fees.

Research & Development – Hana Bank

Source: http://www.bai.org/globalinnovations/2013-awards/winners/product-service-innovation-award-winner-2013.aspx

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The result of more banks having an innovation strategy, and investing more in innovation, should be that banks are becoming more innovative. That is in fact the perception of the banks themselves as you can see from Figure 9. In 2014, banks rated their own innovation performance at 4.7 on a scale of 1 to 7, which is a notable increase on 2013 and is higher than in any of our previous surveys. The area in which banks feel they are the most innovative is in Channels and here the score increased in 2014 to 5.0 on a scale of 1 to 7. Our research also shows that 76% of banks think they are becoming more innovative in Channels whereas only 49% of banks think they are becoming more innovative in Sales & Marketing (see Figure 10).

Figure 9: Innovation Performance of BanksScale of 1 to 7, where 1 is very low and 7 is very high (self-rating by banks)

4.4 4.25.0 4.7

2013 2014

7

6

5

4

3

2

1

Channels Overall



Figure 10: Innovation Performance of Banks by Area Proportion of banks becoming more or less innovative by area (self-rating by banks)

0 20 40 60 80 100

Channels

Customer serviceand experience

Processes

Products

Sales and marketing

76 3 21

67 31

62 7 31

54 4 42

49 4 47

More Innovative Less Innovative No Change

2


18



2 Trending Innovations

20



Trending Innovations

Many banks organise their innovation activities around specific themes. Figure 11 shows that “Mobility” is currently the most important theme for banks, with 88% of banks rating the importance as “High”. Closely following that are the themes of “Big Data” and “Social Channels”.

MobilityInnovation around “Mobility” means much more than just developing a banking app for the mobile phone. It involves all the related services that could be provided to customers to enhance the user experience and value proposition. Examples of this kind of innovation are:

• Mobile voice biometrics U.S. Bank, one of the largest retail banks in the United States, is among a handful of banks piloting voice authentication for mobile banking. Users register a voice print and this can be used to access the mobile banking app. U.S. Bank believes that voice biometrics is a very user-friendly authentication option with the required level of security. Voice biometrics can also be used when multi-factor authentication is required to perform a transaction on mobile banking. With the growing use of virtual assistants, voice biometrics appears to be an area that will get increased focus from banks as they try to improve the customer experience.

• Mobile personal financial management Personal financial management applications are being extended into the mobile domain by start-up companies like Moven (United States) and NumbrS (Germany). These services provide real time updates on a customer’s spending as they make payments using their phone or card account. NumbrS actually brings together transactions from multiple bank and card accounts and also creates a forecast of future income and expenditure. According to NumbrS “finance on your mobile device should be fun — whether you’re at home, on the bus, the subway, or at the beach”. These services are first generation mobile personal financial management applications so it will be interesting to see how they develop as the companies get more user experience.

Figure 11: Importance of Innovation ThemesProportion of banks rating the importance of the innovation themes

0 20 40 60 80 100

Mobility

Social channels

Big data

Gamification

88

67 32 1

63 37

31 63 6

High Neutral Low

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Also related to the theme of “Mobility” are location-based services and wearable device services, both areas which are getting significant attention. According to our survey, 51% of banks are already investing in location-based services, with a further 24% exploring investment (see Figure 12). Banking on wearable devices is at an earlier stage with only 9% of banks investing so far, and only 20% exploring investment.

However, 2014 may be the year in which smartwatches become mainstream. Google has launched Android Wear which will allow developers to build apps on Android for wearable devices, and a large number of new smartwatches are being launched by LG, Samsung, Motorola, Apple and possibly Microsoft. Paypal has already developed an app for Android Wear which will go out to the company’s beta testing community in June 2014. With the app, a customer will be able to check-in to pay, redeem offers and check notifications. PayPal also says the app will support voice commands in some situations.

Figure 12: Investment in Specific Mobility Themes Proportion of banks investing in location-based services and wearable device services

0 20 40 60 80 100

Location-basedservices

Wearable deviceservices

51 25

9 20 71

Already Investing Exploring Investing No Plan to Invest

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Denizbank is the 5th largest privately owned bank in Turkey, and is a subsidiary of Russia’s Sberbank. Denizbank launched the mobile wallet, FastPay in 2012. This application allows customers to make contactless payments with the mobile phone, and make transfers to other people just using a mobile number. Hands-free payment was launched in 2014 using iBeacon and Bluetooth technology. When a customer is in a participating store, the merchant’s iBeacon system will recognise the presence of the mobile phone with the FastPay wallet application, and the customer can make a payment when they are at the check-out without actually touching their phone. The same iBeacon technology sends out push promotions, such as vouchers so

that customers in the vicinity of the retailer are attracted to enter.

Westpac is the largest retail bank in Australia and is developing the iBeacon technology for use in its branches. The service allows customers to receive notifications on their Bluetooth-enabled smartphone when they are in, or walk past, a branch using the technology. iBeacon will be an opt-in service and customers who want faster recognition can upload their photo on to the mobile application. “iBeacon technology is generating a lot of excitement in small, medium and large businesses globally” according to Simon Pomeroy, Westpac’s Chief Technology Officer.

Location-Based Services

La Caixa (CaixaBank) is the largest retail bank in Spain and has been experimenting recently with various applications for wearable devices:

• Google Glass – Google Glasses’ native services (GPS, locator, voice search, maps…) have been used to provide a fully functional branch finder in the glasses, showing the user the closest branches, relevant details (address, services) and permitting the user to phone and get directions to the branch. The other application developed by La Caixa is a currency converter, using the integrated camera and internet connection to read prices, for example from a label, and to convert the price into any other currency. As of August 2014, these applications are only in test mode and have not yet been made available to customers.

• Smartwatches – The native app of CaixaBank for Smartwatch allows users to check the charts and prices of their favourite stocks from their wrists. The

application shows on the watch the price and stock charts the client has bookmarked as “favourite” in the smartphone, and it allows the client to check them in a list with a carousel format that includes a thumbnail for each of them. The moment one is selected the user will see a bigger and more detailed thumbnail as well as a chart on the screen of the Android smartphone connected through Bluetooth to the user’s Smartwatch.

• Contactless payment wristband – The launch of the first contactless payment wristband in Europe was announced in July 2014. The band allows the bank’s customers to carry payment cards on their wrists, and make fast and convenient payments at more than 300,000 businesses across Spain. The wristband uses contactless payment technology: inside is a microtag with the customer’s encrypted card details, protected with the same security guarantees as normal cards using the EMV system. The contactless chip connects the wristband to PoS systems to complete transactions just like a standard contactless card.

Wearable Device Services


Big DataThe second most important theme for innovation investment is “Big Data”. This theme covers a wide range of analytics-based opportunities from credit risk management to the sale of customer data. According to our research, around 54% of banks are now investing in Big Data projects and a further 35% are exploring investment. Relatively soon, all banks will have Big Data projects underway. Nevertheless, to some extent it is start-ups who are making best use of Big Data technologies and customer information, for example:

• LendUp – is a socially responsible online lender which launched in the United States in 2012. The company focuses on financial education and gamification to encourage responsible lending behaviour. The objective is to enable customers to build a credit history, making it easier to get loans from traditional sources. LendUp uses Big Data to do instant risk analysis and evaluate creditworthiness, and approved loans can be deposited in a customer account in 15 minutes.

• Wisely – a United States based start-up, is a recommendation engine which collects data from a customer’s debit and credit card accounts, analyses their spending, and then creates a personalised guide to services nearby like restaurants. This guide is based on the spending patterns of all the people who are using the Wisely service. According to Wisely, they can create a map of a local economy by analysing spending and this data can be useful to both customers and merchants.

“I’ve seen more and more examples of large corporations using big data to create new products and services in hopes of generating growth. Even financial-services companies like JPMorgan Chase & Company and Barclays have started new business units to develop new offerings around data. I think it’s a really helpful new development. Of all the things you can do with big data, developing new products and services is, I think, the most interesting and valuable.”Tom Davenport, Distinguished Professor in Management and Information Technology at Babson College Interview in Strategy & Business, March 2014

Social ChannelsThe third most important theme for investment is Social Channels. We know that most banks have developed their social media strategies over the last few years and for example use Facebook and Twitter for customer communications and customer service monitoring. Some banks (like ICICI in India and Denizbank in Turkey) have already enabled transactions through a Facebook log in.

However, the integration of social media with business strategy, and the development of services which are specifically designed for social channels are still evolving. For example:

• Kotak Mahindra from India has launched Jifi, a fully-integrated social bank account with youth as the target segment. According to the bank, Jifi transcends digital banking by seamlessly incorporating social networking platforms such as Twitter and Facebook with mainstream banking. The Jifi account can be opened by signing up through Facebook. Jifi also has a loyalty point programme which encourages a high level of interactivity among account holders. In addition to transacting on social media platforms, customers can transact through online and mobile banking. Jifi customers also have access to all of Kotak Mahindra’s branches and ATMs.

• Lenddo is the world’s first online platform that helps the emerging middle class in developing countries to use their social connections to build their creditworthiness and access local financial services. The company was founded in the United States in 2011 and currently provides loans in Colombia, Mexico and the Philippines. Lenddo combines community-based microfinance techniques with social media data, using the principle that the willingness of your community to vouch for you, coupled with data about how you behave online, can unlock opportunities to access much-needed financial services. Lenddo’s community members

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can use their reputation on social networks such as Facebook, LinkedIn, Twitter and Yahoo! to obtain life-improving loans, to use for education, healthcare, home improvement or a small business.

GamificationThe final theme we asked banks to rate for importance was Gamification. This is still an important area but perhaps not as significant as some observers thought it might be a few years ago. Many banks are using gamification in a small way, but there are relatively few examples of a larger scale initiative or programme. Two cases we have reviewed are:

• DSK Bank is the first bank using a gamification application in Bulgaria. Using the principles of gaming, the DSK Gameo application encourages customers to set financial goals for financing of particular needs, undertake certain transactions or interactions, and educate themselves about new products. The mobile features are designed to enhance customer engagement with the bank’s brand and generate sales leads. The saving categories chosen by the customer enable the bank to contribute to the customer’s dream fulfilment, providing them with the best loan offer for the particular saving category. Each user participates in the ranking based on earned points accumulated by making monthly payments to their saving goals, answering questions, completing savings goals, etc. Points earned can be used as part of a loyalty reward scheme. The customer also has the option to share the goal with their friends, and hence socialise the experience.

• Rabobank in the Netherlands has established an internal gamification network to share knowledge and ideas across the bank. This is known as the “Rabobank Gamification Hub” and was described by Maarten Molenaar of Rabobank at the Efma Digital Banking and Social Media conference in 2014. An example of a gamification idea progressed by the bank is from the mortgage process. Customers have to submit around 30 documents when applying for a mortgage and the bank wanted them to do as much of this online as possible, rather than going to a branch. The game was set up so that the more documents that were submitted online, the more precise the mortgage offer. This simple use of gamification has helped to reduce mortgage application costs at the bank.

3 Delivering Value across Channels

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Delivering Value across Channels

Channel innovation remains the key focus for the innovation efforts of most banks, and this is also where they see their own innovation performance improving. A big challenge is where to focus innovation efforts within and across channels. We asked banks which cross-channel capabilities can most improve the value proposition for customers. The importance of having a unified user experience across channels was believed to high or very high by 80% of banks (see Figure 13). Following that in importance were self-service tools and then actionable customer insight.

Creating a unified user experience across channels is believed to be the most important capability. Banks are increasingly having to consider how best to integrate innovations across branch, online and mobile so that there is a consistent and powerful customer experience. Innovating in one channel without matching that in other channels is unlikely to lead to longer term success. Particularly for large banks, cross-channel integration is a challenge but can have significant benefits as demonstrated by UniCredit in Italy (see box).

Self-service functionality is the second most important cross-channel capability. Clearly the growth in online and mobile is part of that trend toward self-service, but it is also visible in branches. More branches are being made teller-free, particularly in developed markets. We are also seeing examples of “video tellers” being deployed in branches, which are not quite pure self-service but are a hybrid development combining self-service and support.

The third most important capability is to be able to create actionable customer insight. Fortunately, technology is providing new opportunities to do this better with advances in analytics and particularly “big data”. Banks are also increasingly using “innovation labs” where they bring in customers to test new products and services at an early stage of development using prototypes. A good example of that was provided by Brian Pearce of Wells Fargo at the Efma Banking on Innovation 2014 conference. Wells Fargo has a multichannel lab which is a physical space to enable customers, partners and employees to experience innovations in‐person and brainstorm. In the lab, the bank makes extensive use of demos and prototypes.

Figure 13: Importance of Cross-Channel Capabilities for Value PropositionProportion of banks rating importance as “high” or “very high” for each capability

Self-service tools

Actionablecustomer insight

Personalisation ofproduct offerings

Distinct user experienceby customer segment

Personalisation ofuser experience

70

68

66

58

45

Unified user experienceacross channels 80

0 20 40 60 80 100



Our survey this year also asked banks to identify which innovations will deliver the most value to customers in specific channels: mobile, online, and branch.

Mobile InnovationsMobile is getting the most focus from banks when it comes to innovation. The first mobile-only bank was Jibun Bank in Japan (a joint venture between Bank of Tokyo-Mitsubishi UFJ and KDDI), which was ahead of its time and launched several years ago. More recently, we have seen a number of new mobile-centric banks being started. The list includes, among others:

• Moven (United States)• Simple (United States)• GoBank (United States)• Hello bank! (Belgium, Germany, Italy, France)• Instabank (Russia)• Soon (France)

Other new mobile-centric banks are in development, such as Atom in the United Kingdom. Raphael Krivine, who developed Soon for Axa Banque, described the key features of their approach at the Efma Banking on Innovation 2014 conference:

• Make it mobile first, useful and simple• Use “nudge theory” to change customer behaviour• Aggregate relevant services e.g. Paypal rather than develop all in-house• Focus on user design, and making it fun and social• Launch like a start-up would• Make sure the operation is scalable, inside and outside the core market

In the mobile channel, according to our survey results, the areas that were perceived by the banks to have the most value for customers were mobile payments and services on multiple device types (e.g. tablet applications). Following that was personalisation of marketing offers and mobile wealth management and advisory services.

UniCredit is developing and executing new end-to-end, online to offline, cross-channel integrated processes to manage the customer relationship which the bank expects will deliver great value in terms of increased sales and customer satisfaction. Conversion rates have more than doubled since they moved from a single-channel application process to a multichannel end-to-end process – and 85% of users have said that they are very

satisfied. There has been an increased ability to attract and acquire new customers, a significant increase in cross-selling through the integrated and coordinated use of various channels, drastic rationalisation of traditional distribution and hence optimization of the cost-to serve (savings of 10-20% on costs), increased customer satisfaction and loyalty, and a tangible reduction in churn (2-5% decrease in attrition).

Creating a Unified User Experience across Channels

Source: “Google Isn’t Making Banks Stupid”, Alessandro Colafranceschi, Head of Global Online and Mobile Banking, UniCredit, Efma Journal 237

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Mobile payments are of course an area which has received a significant focus from banks, and from start-ups. There seems to be an endless stream of new services being launched and working out which ones will gain critical mass and succeed over the long term is still quite difficult. There is no doubt that technology can make significant improvements on what is available today, but predicting customer behaviour in the context of making payments is always difficult, and the infrastructure issues involved in the payments system mean that even attractive innovations can take a long time to be adopted.

• Mobile payments Coin and Loop are good examples of very innovative payments start-ups, both based in the United States. Coin has developed a digital wallet which is effectively a single card where all of the user’s debit, credit and loyalty card details are stored. This card is controlled by the user’s smartphone. Loop on the other hand stores all of the card data on the smartphone and then a device which is attached to the smartphone allows the smartphone itself to make payments via a standard payments terminal at a merchant. This is achieved by “fooling” the payments terminal into thinking that a card has been swiped when in fact it has not.

• Mobile applications for multiple devices More and more banks have developed applications for tablets. According to the Efma 2013 digital channels survey, 37% of banks had specific tablet applications and most of the remaining banks had these applications under development. A good example is from Mashreq in the UAE which has also packaged a new account with a free tablet – the offer is called Mashreq Max. National Bank of Canada has developed an “Investment Track” app which helps users plan their retirement and life events on an iPad. By entering criteria such as current income, accumulated retirement savings and investor profile, users can identify how much income will be required for their retirement, and the capital needed to get there. At an earlier stage of development are applications for wearable devices like smartwatches or wristbands and we expect this trend to become much more significant in the next few years (see page 22 for a description of some examples).

Figure 14: Mobile InnovationsBank views on which mobile innovations will deliver the most value to customers



0 20 40 60 80 100

Mobile applications on various mobile devices

Personalised mobile marketing offers

Specific apps for different customer segments

Mobile based wealth management services

Advanced visualisation using augmented reality

70

3

38 6

35 57

5

High Neutral Low

46

Mobile payments 75 24 2

30

51

33

56

8

62


Online InnovationsWe are starting to see a new generation of online services from banks. A good example is the new mBank development in Poland, which was the winner of the Efma/Accenture 2013 innovation award for “Digital and Mobile Excellence”. The new mBank initiative was started in April 2012 and launched in June 2013 delivering over 200 innovative features grouped across 10 major innovation areas in online and mobile. These included:

• Unique design of online banking – interactive and functional• Smart transaction search engine with Google-like experience• Redesigned money transfers following simplicity of popular messaging services• P2P payments via Facebook and text messaging• Next-generation PFM integrated into everyday banking scenarios• Merchant-funded transactional marketing of highly targeted offers• Gamification platform to build engagement and provide tutorials• Personalized real-time targeted messages based on customer behavior patterns

The two most important areas identified by banks in the survey for delivering customer value in the online channel were personalisation of marketing offers and automated account origination. Following that were personal financial management tools and simulation tools for comparing products. mBank (Poland) has incorporated the latest personalisation capabilities in its new online service. CIMB (Malaysia) provides a good example of automated account origination, and Bank Hapoalim (Israel) provides a good example of the latest personal financial management service capability.

Figure 15: Online InnovationsBank views on which online innovations will deliver the most value to customers



0 20 40 60 80 100

Personalised online marketing offers

Personal financial management tools

Self-configuration ofproducts and product bundles

Product comparison tools and simulations

Integrated product reviews and ratings

59

49

39 59

3

High Neutral Low

53

Fully automated online account origination 70 28 2

40

47

39

49

58

2

2

2

30



• Fully automated online account origination In Malaysia, CIMB has launched an innovative account which can be opened quickly online in about 5 minutes, targeted at young people. Opening an account has never been easier and quicker – neither a prior relationship nor a minimum deposit is required. The account is opened as soon as the customer enters their details. In order to ensure the primary objective of remote account opening was not compromised, the team decided to use the prepaid card platform. To mitigate risks of money laundering, a maximum Kwik account balance was set and there are multiple unique identification fields required for a new account opening. Apart from the identification rules, CIMB has put in place a robust velocity check against the transactions to pick out irregular transactional patterns.

• Online personal financial management Bank Hapoalim in Israel has launched a second generation personal financial management tool which allows smart, controlled management of household budgets at any time through the bank’s website. The service presents customers with a daily updated and detailed comparison of income with expenses, so that they can understand their cash flow, track their budget and plan better for the future. The new PFM tool offers an innovative new customer experience – more intuitive, personalized, enjoyable and fun. The service automatically collects customers’ income and expense data from various sources (directly deposited salaries, checks, bank credit cards, etc.), sorts the items into categories, and allows customers to add and categorize information according to their needs. In addition, customers can analyse their financial conduct, not only relative to their own personal goals, but in comparison to a peer group of customers with a similar family and financial profile.

Branch InnovationsBranches are often considered the “ugly sister” of channel innovation but nevertheless there is still much that can be done. Branches need to be transformed to reflect a new type of relationship with customers and lots of new models and technologies are being tested and adopted. Two interesting cases of experimental formats are from Virgin Money and ING Belgium:

• Virgin Money has recently started opening dedicated “lounges” for the exclusive use of its customers. These are being centrally located in major cities in the UK and provide customers with a place to meet or relax rather than carry out banking business. There are no tellers or sales representatives although the concierge can put customers in touch with someone from the bank if they need to speak about banking. Computers and tablets are provided if customers want to go online. Customers can also use meeting space in the lounges. Lounges are available free of charge for community events and are open 7 days per week.

• ING Belgium used a “pop-up” store in Antwerp to promote saving money. There was an orange theme so the store was full of orange items (including Chanel bags). A gamification element was introduced by asking customers to guess the price of each item, for which they could win one of the items as a prize. The store was jointly designed with a women’s magazine, Flair, who also promoted the store in the magazine. Pop-ups are being used by other banks like Barclays in the United Kingdom and PNC in the United States and represent an important element of the brand promotion strategy.

The innovations which banks identified as the most important were both support tools for advisers based in branches – analytics led cross-sell suggestions, and financial planning tools. Also important were the automatic identification of customers when entering a branch, and the provision of touchscreens and tablets for customers to use.


Figure 16: Branch InnovationsBank views on which branch innovations will deliver the most value to customers


Source: Efma-Infosys Finacle Innovation Surbey 2014

0 20 40 60 80 100

Financial planning tools for more personalized services

360 degree view of customers entering the branch

Technology led advisory services like video-conferencing

Touchscreens and tablets for use by advisers/customers

Cashless branches

67

43

35 57

15

High Neutral Low

53

Analytics led cross sell suggestions by advisors 80 20

33

43

24

52

61

5

8

5

32




4 Innovation Practices

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Innovation Practices

Making a success of innovation requires a certain amount of organisation and focus – this is not an activity which relies entirely upon inspiration and creativity. Most banks (63%) have dedicated resources for innovation, either in a centralised department or distributed within business units. The optimal configuration of these resources will depend on factors like the size of the bank, and the innovation strategy and focus being adopted, so it is difficult to be prescriptive. However, the general consensus is now that it makes sense to have some dedicated staff otherwise it is difficult to make progress.

If you are setting up an innovation team it is important to carefully manage expectations upfront, agree how success will be measured, start with some low risk ideas to show success, and to generate a mix of different types of innovation options for the bank to prioritise from.2

Where innovation activity is spread across the organisation, and particularly for multi-national operations, it is also a good idea to have strong innovation communication mechanisms. Most common are innovation events or workshops for staff, followed by innovation communities (usually online) and then innovation forums. Communication has to be at the centre of any innovation strategy if a bank is to be successful with its innovation efforts.

Formal processes are essential even for a creative discipline like innovation. A majority of banks have clear processes for idea generation and idea screening – the early stages of the innovation funnel (see Figure 17). Processes for transition to business-as-usual for an innovation are also in place for the majority of banks. Slightly less common are prototyping and staging of investment. Overall, more than 40% of banks are not using one or more of these processes and that appears to be a significant weakness which is relatively easy to address.

Figure 17: Use of Innovation ProcessesProportion of banks with clearly defined innovation processes

Idea generation

Idea screening

Transition tobusiness as usual

Prototyping

Staging of investment

59

58

56

44

43

0 20 40 60 80 100


2 “How Samsung Gets Innovations to Market”, Thomas Wedell-Wedellsborg and Paddy Miller, Harvard Business Review Blog, May 2014


We know from previous research that one of the big barriers to innovation, particularly in larger banks, is culture. This year we asked banks to rate their own level on three cultural attributes which can contribute to superior innovation performance (see Figure 18). It is clear that “acceptance of failure” is the cultural attribute which is the least strong, confirming what we have believed was the case from discussions with banks over the last several years. A score of less than 4 on this particular attribute is very low. The scores for cross-silo working and entrepreneurial behaviour are slightly better but only just over 4. Banks need to focus on improving their performance in all of these areas, as a foundation for better overall innovation performance.

One way to boost the innovation process is to embrace open innovation and increasingly banks are using a range of approaches. Most common is partnering with a supplier which is used by 80% of banks, and least common are investing in start-ups and competitions for non-staff (see Figure 19).

Investing in start-ups is however being used by more banks to get early insights into new technologies, with Bank Leumi in Israel providing a good example (see case study on page 43). If a dedicated programme of investment is not possible, banks can participate in collaborative activities like the one set up in London by Startupbootcamp (see box on page 36). We are also starting to see more examples of competitions for non-staff, such as the “hackathons” organised by Barclays and Rabobank.

Figure 18: Cultural Attributes Supporting InnovationScale of 1 to 7, where 1 is very low and 7 is very high (self-rating by banks)

321

Collaborative,cross-silo working

Entrepreneurialbehaviour

Acceptureof failure

4.5

4.3

3.7

4 5 6 7


36



Figure 19: Open Innovation ApproachesProportion of banks using each open innovation approach

Partnering with ITcompanies or other suppliers

Competitions for staff

Relationships withacademic institutions

Investment in start-ups

Competitions for non-staff

80

56

51

26

22

0 20 40 60 80 100


Startupbootcamp claims to be the leading accelerator focused on financial innovation, providing funding, mentorship, office space in the heart of London and access to a global network of investors and VCs, for up to 10 selected FinTech start-ups. Over a period of 3 months, the selected start-ups collaborate with over one hundred mentors, partners, and investors to build new products and services, with the ultimate goal of becoming industry leading companies.

Startupbootcamp has partnered with MasterCard, Lloyds Banking Group,

Rabobank Group, and others to provide the expertise, exposure to channels, APIs and access to a network of industry professionals that most early-stage FinTech start-ups would not be able to access otherwise. All teams receive f15,000 in cash per team, more than f450,000 in partner services, and free office space. After 3 months of acceleration the 10 teams are invited to present their companies to investors, mentors, and partners during a “Demo Day”. Pitch preparation includes hands-on guidance from investors, and leads into 3 months of fundraising support.

Working with Start-ups


A Regional View of the Key Trends

We have noticed in recent studies there is a converging innovation trend across regions. Some of this is to do with the digital revolution which is affecting all markets. There are, of course, differences and there are some countries where there is more focus on mobile than on online, and there are countries which are at a very low level of economic development where financial inclusion is a key focus. Many developing countries actually have a sort of two tier scenario where the developments for the middle and affluent classes are quite similar to those in developed countries, but there is also very specific innovation taking place for the lower income segments of the population. A good example would be in Brazil where we see branch of the future and social media banking innovations, but also mobile money for the underbanked.

An analysis of our survey results shows there are some notable innovation differences between two types of country where we have a good selection of responses to compare:

• Group 1 – High income and relatively low growth: United States, France, Italy, Sweden, Norway, Belgium, Netherlands

• Group 2 – Middle income and relatively high growth: Turkey, Poland, Malaysia, Russia, Brazil, South Africa

Figure 20 shows the differences between these countries. It is interesting that banks from the Group 2 countries on average are more likely to have an innovation strategy, are more likely to be aiming to be innovation leaders, and are more likely to be investing in R&D. Overall, the self-rating of innovation performance of the banks in Group 2 is significantly higher than the self-rating of the banks in Group 1. This highlights to some extent a mind-set difference about innovation in growing economies compared to the challenges that are faced by banks in more developed economies. All of the banks in the sample from the developed economies said they were increasing investment in 2014 compared to 2013, which is a sign that they are now attempting to catch up. Clearly, these conclusions are only based on averages and there are exceptions in all countries, but the general picture is instructive.

High Income Group

Middle Income Group

Percentage of banks with an innovation strategy 54% 69%Percentage of banks aiming to be an innovation leader 22% 50%Percentage of banks investing in R&D 25% 44%Innovation performance level on scale of 1 to 7, where 1 is low and 7 is high 4.4 4.9Percentage of banks becoming more innovative in the last 12 months 71% 71%Percentage of banks increasing investment in 2014 versus 2013 100% 82%

Figure 20: Comparison of Country GroupsSelection of innovation indicators by country group


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The views of banks from different regions of the world also highlight some of the different perspectives. Standard Chartered, Wells Fargo and BNP Paribas presented their particular views at the Efma Banking on Innovation 2014 conference (see boxes). It is interesting that banks like Standard Chartered, based in Singapore, are looking closely at innovations in the Chinese market. BNP Paribas, which is also a very global bank, has made sure it has a window on the Chinese market. In contrast, Wells Fargo is slightly more focused on the closer to home innovations that will be nearer term opportunities in the core US market.

Innovating in developing markets can pose challenges because of the lack of information on customers or potential customers. Lenddo is an online micro lending service, based in the United States but operating in Colombia, Mexico and the Philippines using innovative credit scoring techniques. It is the world’s first online platform that helps the emerging middle class in developing countries to use their social connections to build their creditworthiness and access local financial services. Lenddo combines community-based microfinance techniques with social media data, using the principle that the willingness of your community to vouch for you, coupled with data about how you behave online, can unlock opportunities to access much-needed financial services. Lenddo’s community members can use their reputation on social networks such as Facebook, Linkedin, Twitter and Yahoo! to obtain life-improving loans, to use for education, healthcare, home improvement or a small business. The process to apply for a loan with Lenddo is fast, easy and with the least amount of bureaucracy possible. In May 2014, Lenddo announced that it will launch its first app for Facebook, meaning people no longer have to leave Facebook to apply for and get access to Lenddo loans.

India is a good example of a market where we have seen innovations both for the lower end of the market (financial inclusion) and for the middle and high end of the market. IndusInd Bank in India believes in driving its business through technology with an underlying theme of being a “technology backed customer centric bank”. The bank truly believes in the power of innovation and this is not just a top down management initiative but part of the bank’s DNA. Generally ideas originate across all organizational levels and are captured on the online idea generation portals. The bank has recently constituted a new unit - the “Innovation Delivery Group” - with a focus on strategic idea generation and digitization. Two notable recent innovations from the bank are:

• My Account My Number – The bank launched an innovative service called ‘My Account My Number’ where the customers can get bank account numbers of their choice. This service is exclusively offered by IndusInd bank in the country. The attempt is to prompt the customers to come into the Indusind bank domain and make their ‘CHOICE’ Account their primary account. The simple proposition which was a least cost innovation has been taken very positively by the market. The customers are opting for higher variant accounts available in the bank’s product bouquet. The bank has seen an almost 70% increase in the ratio of higher variant accounts opened under the “My Account My Number” proposition as compared to a similar ratio on other accounts. The bank has also seen a 377% growth in customers from July 2013 to July 2014.

• Video Branch – IndusInd Bank has also launched a new customer-centric service titled Video Branch. This innovative offering enables the customers to do a video conference with the bank staff. A customer will have to schedule a video call with the branch manager or connect to the central video branch either from his desktop or laptop computer. They can also do it through an Apple or Android smart phone. Digitization of businesses is the key focus area of the bank in this financial year and this initiative is a step forward to the on-going Responsive Innovation theme.


Aman Narain is Global Head of Internet & Mobile Banking at Standard Chartered Bank. The big innovation themes seen by Aman are connected devices and cloud computing, which is helping start-ups to enter the financial services space more easily. From an Asian perspective, some of the developments in China are particularly interesting – WeChat (a mobile text and voice messaging service) has launched the My Bank Card, and Alipay (payments service linked to Alibaba) has launched a mutual

funds business. Both of these developments are potentially disruptive. What it will take for banks to win, according to Aman, is investment, scale, risk-taking, alliances, and building the right culture and mindset of employees. By risk-taking, what is meant is that banks have to be ready to launch products even if they are not perfect, then learn and adapt. Banks also need to be prepared to cannibalise revenues to stay in the game, for example by looking at introducing P2P lending models.

Standard Chartered (Singapore)

Brian Pearce, SVP and Head of Digital Innovations, described how Wells Fargo takes a very practical approach to innovation. This is customer focused and based on what makes sense for the bank. The aim is to move quickly – try, fail and adapt. The role of the innovation team is to inspire product teams with ideas, develop prototypes and demos, but not to take innovations to market. Nobody in the bank should be seen to “own” innovation. The objective of Brian’s team is to create a minimum viable experiment – at one

extreme this could simply be a prototype in a lab which stakeholders can experience, and at the other end it could be an employee or customer pilot with a much more developed product or service being tested in real situations. One interesting point raised by Brian was that innovative services like social media banking, which have been launched in countries like Turkey, have not tested well with consumers in the United States. This clearly illustrates that innovation lessons have to be adapted to local markets.

Wells Fargo (United States)

BNP Paribas is well known for its commitment to innovation. For example, the bank has traditionally staged an innovation awards ceremony for its employees and the successes are highlighted in the bank’s annual report. One lesser known part of its innovation strategy is the market intelligence work done by L’Atelier BNP Paribas which is a technology and innovation tracking unit with offices in Paris, San Francisco and Shanghai. Matthieu Sole is a strategic analyst at L’Atelier and described at the Efma Banking on Innovation conference in 2014 how they

track innovations around the world, and how this information is disseminated within BNP Paribas. Having a global perspective is particularly important: for example being close to the technology eco-system of Silicon Valley, but at the same time seeing the innovations that are coming out of totally different markets in Asia from their base in China. One role that L’Atelier can also play is helping to change the culture (or at least influence the culture) of a more traditional banking institution which is naturally focused on risk management.

BNP Paribas (France)

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Innovation Case Studies

In this section we have looked in more detail at a few interesting innovation cases, incorporating the views of the individuals who are involved in the innovation process. The cases are:

• Rabobank – Developing an innovation eco-system and supporting an innovation culture in a large, global bank.

• Bank Leumi – Creating a FinTech innovation hub in Israel in order to get early access to innovations for the core business.

• Citi – Launching a new mobile innovation, while at the same time innovating safely in the context of a large, global bank.

• Instabank – Developing and launching a new mobile-centric bank by a team of experienced mobile developers and entrepreneurs.

The Rabobank case illustrates how to take a multi-pronged approach to build an innovation culture in a large bank. This requires commitment and passion over an extended period of time. Bank Leumi illustrates the potential from working with start-ups, benefiting from a local eco-system of innovation. Citi, like Rabobank, is a large and global bank and the case shows how developing a particular mobile innovation needs to be handled in practice in such an institution. By contrast, Instabank can innovate in the mobile space like a start-up but ultimately needs banking partners in order to succeed. Overall, the cases demonstrate the broad spectrum of activities that are involved in banking innovation.

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A multi-faceted innovation strategy

Rabobank is the largest retail bank in the Netherlands, based on number of branches, and has operations in 48 countries around the world. The bank is a co-operative with almost 500 autonomous local banks, and has a history derived from the agricultural sector. It has always taken a long term view, and while it is conservatively managed with a strong credit rating, it is also prepared to invest in innovation.

The bank’s innovation strategy is based around co-creation, autonomy and collaboration:

• Co-creation – The bank has an online platform to enable co-creation with customers, and also uses social media extensively to engage with customers and generate ideas. One unique approach is a “get satisfaction” forum for customers where they can help each other solve problems. The bank’s user experience centre is a place where customers can try out new products and services, and new technologies, and provide direct feedback.

• Culture – The bank is encouraging a culture of “autonomy” for its staff. Central to this is the ability to carry out experiments without fear of failure. Meeting places have been designed to encourage staff interaction and they are able to work effectively from anywhere in a flexible working environment. Staff have a great deal of freedom in “how to” get things done.

• Collaboration – There are several different collaboration mechanisms. There is an internal facilitator network and a number of brainstorming facilities. There is also an e-coaching network for innovation and training courses for innovation. Working with other companies is an important part of collaboration so the bank shares employees on different projects to get new perspectives. Internal “hackathons” have been organised to get employees working together in new ways. Rabobank is also participating in the Startupbootcamp FinTech accelerator programme in London, and runs a Dutch FinTech hackathon.

Maarten Korz is Innovation Manager at Rabobank and provides a weekly innovation update in the form of a newsletter and video. Speaking at the Efma Banking on Innovation conference in 2014, Maarten described some of the innovation practices adopted by the bank and some of the successful innovations that have been developed. These include the MyOrder operating platform for mobile payments which Rabobank acquired control of when it was a startup.

Rabobank


Using open innovation to boost innovation performance

Bank Leumi is the second largest bank in Israel and has been increasing its investment in innovation in recent years, including setting up a dedicated innovation strategy team. One example of an innovative service for customers that has emerged from this new focus is the “My Facebook Bank Account” which was launched in March 2014.

To support the internal innovation effort, the bank has also been developing its approach to open innovation and this is demonstrated by its work with FinTech start-ups. In partnership with Elevator Fund, the bank launched a programme to identify and invest in FinTech companies of interest to the bank – in the first phase of the program which started in late 2013, five start-ups were selected to receive $20,000 of investment each.

The selected companies were housed in the offices of Elevator for six months and benefited from:

• mentoring support from Elevator and from the bank’s high tech business sector experts

• exposure to Bank Leumi’s “eco-system” and direct access to the bank’s Beta Site

• support from the bank’s technology development experts

• introductions to potential investors and support in raising funds

One of the main goals of the program was to enable entrepreneurs to make a significant leap forward - in a short period of time - using a direct link to the bank’s systems. Dorel Blitz, Innovation Manager at Bank Leumi, described to Efma the success of the program and the plans for more phases of investment. According to Blitz, three of the five companies from the first wave are actively working on pilots with Bank Leumi and all the companies have been able to raise substantial seed financing.

The start-ups in the program included:

• a platform for securing online banking and payments, combined with a fast user experience

• a solution for accelerating and cross-checking of data in Big Data systems

• a service for assisting consumers with their online payment process and experience

For Bank Leumi the relationship allows early access to FinTech innovation in the market as well as the opportunity to help shape product efforts to help support the bank’s biggest needs. Bank Leumi is still in the early days of implementing the new innovation strategy and success is a result of collaboration, prioritization and speed. According to Blitz “we have been able to take processes that typically take months and complete them in three business days”.

Bank Leumi

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Innovating safely in mobile banking at a global bank

Citi’s global consumer banking business has a wide ranging approach to innovation. The bank has a ventures group in Palo Alto for making investments in start-ups of interest, innovation labs in five locations around the world, and a global digital strategy group. Individual business units also have innovation teams.

At the 2014 Efma innovation conference in Barcelona, Andres Wolberg-Stok, Global Mobile Banking Director of Citi Consumer Banking, described how the bank developed and launched the Citi Mobile Snapshot innovation. In May 2014, this service became the first no-login access to account balances and transactions available to customers from a major bank in the United States. The launch proved successful with over 100,000 users signing up in the first two days.

The patent pending design was built to ensure customers’ information is protected to the greatest extent possible. Various pieces of information are validated every time a customer comes to view a Snapshot session. If any of these criteria are not met, then the customer is asked to fully log in to continue. All of this was done with the intention of protecting the customers’ information. Additionally, because of this level of protection, customers are able to view more information than is currently available from any other major bank in the United States.

Wolberg-Stok explained how it was important to balance safety and innovation in a development of this type which required the involvement of numerous departments within the bank and took around one year to complete. The innovation process followed these five ground rules:

• Survey terrain beforehand – understand the current organisational appetite for risk and innovation, the regulatory boundaries and trends, the fraud and risk environment, and the state of information security.

• Be mindful of timing – understand the recent history of innovations at the bank and the status of competing major initiatives within the bank.

• Pull the organisation along – identify and engage key stakeholders, mobilise allies, manage opponents and communicate and sell at every step.

• No submarines – avoid secrecy which can feed resistance, and use gradual acclimation with no surprises.

• Beware the forces unleashed – look out for uncontrolled initiatives, organisational backlash and unplanned business cannibalisation.

Citi


Starting up a mobile-centric bank

Instabank is a good example of the type of start-up, mobile-centric bank we are seeing emerge in many different parts of the world. The company shares some similarities to start-ups like Simple in the United States and Soon in France.

Instabank has developed an innovative mobile banking “white label solution” and launched its first mobile bank in Russia in partnership with Russian bank VPB in 2014. Instabank was founded in 2012 by Roman Potemkin, Valentin Kravtsov and Dmitry Feofanov, who had previously been developing mobile banking solutions for several years at IDA Technology. The company is backed by the Russian venture capital investor, Life.Sreda, and is based in Ireland with developers in the Czech Republic.

Instabank is a fully fledged bank that fits in the mobile phone. It’s designed to be as simple as the iPhone, as social as Facebook, and as beautiful as Instagram. There are 2 product propositions:

• A virtual pre-paid Mastercard account which can be opened immediately without any face-to-face contact, subject to certain deposit and transaction limits.

• A full service account which requires the customer to provide information to a call centre, following which a card is delivered by person to the customer and documents are signed.

Roman Potemkin and Dmitry Feofanov presented the Instabank proposition at the 2014 Efma innovation conference in Barcelona. The core of the business strategy is to harness viral customer acquisition for retail banking, like Dropbox did in the disk space hosting business. Some of the key features are:

• Transferring money to friends is as easy as sending a text message, even if they are not Instabank customers, and users can request money from friends to contribute to, for example, a birthday gift or restaurant bill.

• Easy-to-read statements and smart reports on spending, with searchable transactions, push notifications when using the debit card, and customised card designs using photos from Instagram.

Instabank is in the process of building its business in Russia, as well as seeking an e-money license and banking partners in other countries in order to launch more operations.

Instabank

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Conclusions

The banking system is emerging from the financial crisis in most parts of the world, although there are still countries where banks are under stress, and there are of course risks ahead in the global financial system. However, it appears that a more favourable market environment in general is attracting even more competition. It takes several years for start-ups with new business models to become established so we are yet to see the full impact of many of the new competitors that are entering the industry now.

There continues to be a lot of positive momentum for innovation in retail banking in all parts of the world. Banks recognise the threat from new entrants, and the opportunities for growth, and are investing more. Innovation performance, on a self-assessment basis, appears to be improving.

Not surprisingly, the focus of banks is on the theme of “mobility”, which reflects changing customer behaviour. The number of smartphones and tablets in use is still growing very fast and the capabilities of these channels make new types of services possible. Already coming onto the radar screen are “wearable tech” devices like smartwatches, and some banks have started to develop applications for these platforms.

Big data and analytics is also another important innovation theme but we are perhaps not yet seeing enough innovation in these areas from banks. Other companies are leading the way with big data innovations and banks need to be careful not to be left behind.

Ultimately, any innovation has to be of benefit to consumers and it is important for banks to focus on services which can improve the value proposition. Banks see the most important areas for delivering value as:

• mobile payments• applications for different mobile platforms• automated account origination

Progress is being made on innovation processes but there is still a large minority of banks who do not have best practice processes. Also of concern is that the majority of banks do not measure the overall success of their innovation efforts, and this needs to be addressed.

One area that is clearly gaining momentum is working with start-ups. This can take the form of partnerships or direct investment. There is a FinTech investment boom taking place globally at the moment and banks need to tap into that to identify early some of the most important innovations for the next few years.

One of the most interesting findings from the research is that banks in faster growing, middle income countries like Turkey, Poland and Malaysia are more ambitious with their innovation efforts and are more likely to be investing in R&D activities which can drive disruptive innovation. However, there is also evidence that banks in the more developed, slower growth markets are stepping up their innovation investment after being held back for several years by the financial crisis.

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About the Research

There were 108 respondents to our survey in 2014, from 47 countries around the world. For example, leading banks in countries like France, Spain, Malaysia, United Arab Emirates, South Africa, Brazil and Turkey all participated. Overall, 43% of respondents were from high income countries and 57% were from middle or low income countries. We define a high income country as one with a GDP per capita on a PPS basis of more than US$30,000.

Figure 21: Survey Respondents by Country Income Level

Medium/Low Income CountryHigh Income Country

43%

57%



Online Survey Questions

1. Does your bank have a clearly defined innovation strategy?

2. Do you expect to increase or decrease the level of investment in innovation in 2014 compared to 2013?

3. Do you think your bank has become more or less innovative in the last 12 months?

4. How do you rate your bank’s innovation level in each of these areas and overall? • Products • Channels • Customer service and experience • Sales and marketing • Processes • Overall

4. How significant is the threat of disruptive innovation from different actual or potential competitors? • Banks • Insurers • Retailers • Telcos • Tech companies • Start-ups

5. How do you rate your bank’s innovation level in each of these channels? • Online • Mobile • Branches

6. Do you measure the overall success of your innovation investment (not just project by project)?

7. Is your bank aiming to be an innovation leader or fast follower, or is it content to be a follower?

8. Do you have clearly defined innovation management processes? • Idea generation • Idea screening • Prototyping • Transition to business as usual • Staging of investment • Measurement of success

50



9. To what extent does your bank have the following cultural attributes which support innovation? • Entrepreneurial behaviour • Acceptance of failure • Collaborative, cross-silo working

10. Which of the following internal innovation communication mechanisms do you use? • Innovation communities • Regular cross-business innovation forums • Innovation events or workshops for staff

11. Does your bank have employees dedicated to innovation - either in a dedicated unit or spread across the business?

12. Does your bank have a dedicated budget or budgets for innovation - either in a dedicated unit or spread across the business?

13. Do you require your innovation investments to have a financial business case that shows a positive return on investment?

14. Do you develop any innovations as stand-alone projects, outside of the existing business lines?

15. Does your bank allocate any resources (employees or budget) for more advanced R&D or disruptive innovation activities?

16. Does your bank provide any systematic employee training for innovation?

17. Which approaches to “open innovation” does your bank use? • Relationships with academic institutions • Investment in start-ups • Partnering with IT companies or other suppliers • Competitions for staff • Competitions for non-staff • Other crowdsourcing of ideas

18. How important do you think it will be to innovate in the following areas in the next few years? • Big data • Gamification • Mobility • Social channels • Location based services • Banking on wearable devices such as google glass


19. What’s the current state of investments in the following areas at your bank? • Big data • Gamification • Mobility • Social channels • Location based services • Banking on wearable devices such as Google Glass

20. To improve your value proposition in the market, how important are the following factors or capabilities across channels? • Unified end customer experience across channels • Actionable customer insight • Personalisation of product offerings • Distinct user experience by customer segment • Personalisation of user experience by end consumer • Self-service tools

21. In the online banking channel, how important are the following to deliver value to your customers? • Personal financial management tools • Integration with social media • Fully automated online account origination • Self-configuration of products and product bundles • Personalised online marketing offers • Graphical tools and simulation to compare products • Integrated reviews and ratings for product offerings

22. In the mobile channel, how important are the following to deliver value to your customers? • Mobile payments • Advanced visualisation using augmented reality • Mobile applications on various mobile devices • Mobile based wealth management and advisory services • Personalised mobile marketing offers, such as location based • Specific apps for different customer segments

23. In the branch channel, how important are the following to deliver value to your customers? • Cashless branches • Technology led advisory services like video-conferencing • Touchscreens and tablets for use by advisers and customers • Automatic identification and 360 degree view of customers entering the branch • Financial planning tools for more personalized services • Analytics led cross sell suggestions by advisors

Notes


54 © 2014 Efma and Infosys limited. All rights reserved.


About us

As a global not-for-profit organisation, Efma brings together more than 3,300 retail financial services companies from over 130 countries. With membership from almost a third of all large retail banks worldwide, Efma has proven to be a valuable resource for the global industry, offering members exclusive access to a multitude of resources, databases, studies, articles, news feeds and publications. Efma also provides numerous networking opportunities through work groups, online communities and international meetings.

For more information: www.efma.com

Infosys is a global leader in consulting, technology, and outsourcing solutions. As a proven partner focused on building tomorrow’s enterprise, Infosys enables clients to outperform the competition and stay ahead of the innovation curve. With US$8.25bn in FY14 revenues and 160,000+ employees, Infosys provides enterprises with strategic insights on what lies ahead. Infosys helps enterprises transform and thrive in a changing world through strategic consulting, operational leadership, and the co-creation of breakthrough solutions, including those in mobility, sustainability, big data, and cloud computing.

Finacle is the award-winning universal banking solution from Infosys. Finacle partners with banks to ‘simplify’ banking and arms them with accelerated innovation to build tomorrow’s bank, today. Finacle is the choice of banks across 84 countries and serves over 442 million customers. Finacle solutions address the core banking, e-banking, mobile banking, CRM, payments, treasury, origination, liquidity management, wealth management and Islamic banking requirements of retail, corporate and universal banks worldwide. The solution’s componentized structure and enterprise-class capabilities help banks enhance the agility and efficiency of their operations significantly as well as improve customer experience across channels.

For more information: www.infosys.com/finacle

About the authorMichael Pearson is a strategy and corporate development expert with 25 years’ experience working for and advising financial institutions worldwide, developing new ventures, and investing in start-ups. Michael founded Clarus Investments in 2006 to invest in early stage ventures, with a particular focus on financial services and then set up Clarus Insight to report on trends and developments in financial services and strategic management. Michael is also the author of the Efma report “Strategic Insights and Best Practices in Retail Banking” and provides advice on strategy to entrepreneurs and financial services firms in developed and emerging markets. Michael has an MBA from Harvard Business School.

© 2014 Efma and Infosys Limited.

All Rights Reserved. Efma, Infosys Limited, Finacle from Infosys, their services mentioned herein as well astheir respective logos, are trademarks or registered trademarks of their respective companies. All othercompany, product and service names mentioned are the trademarks of their respective owners and are

used herein with no intention of trademark infringement. No part of this document may be reproduced orcopied in any form or by any means without written permission from Efma and Infosys Limited.

Disclaimer

The information contained herein is general in nature and is not intended, and should not be construed, as professional advice or opinion provided to the user. This document does not purport to be a

complete statement of the approaches or steps, which may vary accordingly to individual factors and circumstances, necessary for a business to accomplish any particular business goal.

This document is provided for informational purposes only; it is meant solely to provide helpful information to the user. This document is not a recommendation of any particular approach and should not be relied upon to address or solve any particular matter. The information provided herein is on an

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Innovation in Retail Banking

October 2014

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