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Turning risks into opportunitiesHow Belgian banks can shape their digital futureApril 2018Management summaryIn a poll of Belgian bank executives looking into the main forces bringing uncertainty and (potentially) dis-rupting their business, the most frequently cited were: digital banking, big data, robot process automation, ar-tificial intelligence, peer-to-peer networks, blockchain and open bankingnullIndeed, for each of these digital forces early signs of their impact are already visible nulleither in the develop -ment of nullnnullechs active in the Belgian market or in in -ternational examples of banks that have already em-braced (and successfully managed) these disruptionsnullCalculating the opportunities and risks in each area, we find that the op-portunities far outweigh the potential risks and necessary investments. Banks that manage to effectively leverage four profitability-improving innovations digital banking, artificial intelligence, blockchain and big data can achieve an estimated 1.9 ppt. increase in ROE over the next three to five years and as much as 5 ppt. within the next ten years. Moreover, we find that managing open banking is crucial to control profitability.nullaking action will be key for financial institutions to avoid losing ground to competing Belgian and interna-tional banks, as well as to Big nullechsnullnullving a clear strat -egy on how to (further) leverage these innovations should therefore be top priority for Belgian banksnullIf they want to achieve quick wins as well as a sustainable improvement in profitability, Belgian banks will need to position themselves on these innovations in line with their individual corporate nullnulland strategynull2 Roland Berger Focus Turning risks into opportunitiesContents1. The seven forces of disruption .4Belgian bank executives and the uncertainty of their industry.2. More of a benefit than a threat . 14Why most innovations can improve profitability.Coverphoto: Zentangle / iStockTurning risks into opportunities Roland Berger Focus 3Chapter 1:The seven forces of disruption Belgian bank executives and the uncertainty of their industry.4 Roland Berger Focus Turning risks into opportunitiesBelgian banks have returned to pre-crisis profitability levels, driven by both a decrease in costs and an increase in revenues (mainly fees and commissions)null nulloday, we see several innovations emerging, potentially disrupting the products, processes and business models of the na-tionnull banksnullnullet it remains unclear where the real gains could be or where the biggest threat liesnullnullen nulloland Berger experts advise Belgian bank execu -tives, the latter mostly refer to seven causes of disrup-tion: digital banking, big data, robot process automa-tion, artificial intelligence, peer-to-peer networks, blockchain, open bankingnullnullor each of the seven areas of innovation, we see both early signs of their development through the advent of nullnnullechs active in the Belgian market on the one hand, and international examples of banks that have em-braced these changes ahead of the curve on the othernull nullor all of the innovations, we analynulld the potential im -pact they could have on the ultimate bottom line of Bel-gian banks and identified nullnnullechs working on the is -sues concernednull Anulle base our assessment on the actual state and expect-ed evolution of the underlying technology or business modelnullnulle disruptive forces are bringing uncertainty to the industry and requiring banks to develop specific ap-proaches for how to navigate complexitynullnullis study of -fers useful guidance on which battles Belgian banks should fightnullTHE SEVEN FORCES OF DISRUPTION1. DIGITAL BANKINGnulle shift from a physical client relationship managed in brick and mortar branches to a more digital client rela-tionship has been going on for several yearsnullnullth the introduction of first internet banking and now the wide-spread use of mobile banking, banks have already taken manullr steps into the digitalinulltion of banking servicesnull nullor the last null years, digital banking has tended to in -crease rather than decrease net costs given its role as an additional channel used in a mostly hybrid customer nullurneynullnullwever, we believe that over the next null years, banks will be able to capitalinull on the investments made in the past and reduce costs in the physical branchesnullnullhe impact is illustrated in the plans proposed by several leading Belgian banking groups, which have announced nullnullnullreductions of up to nullnull associated with digitalinulltionnullnullowever, it should be noted that Belgian customers tend to be conservative with regard to digitalinulltion, es -pecially compared to their nullorthern nullropean counter -partsnullnullile services like payments can be expected to become fully digital, a large proportion of the custom-ers will still want a more personal form of contact at key moments like when they are starting a business or get-ting a mortgagenullBanks should therefore find the right balance between digital banking and personal contact at their branches to ensure sufficient customer intimacy, and many Belgian banks are currently rolling out nulln-be -tweennulloptions whereby personal advice is provided re -motelynullnullrthermore, any reduction of branches and staff numbers should be in line with the overall strategy of the banknull Banks who position themselves as custom-er-relationship oriented, for example, are expected to have lower levels of digitalinulltion and cost reduction than banks focusing on digital onlynullnullo additional risks we identified are included in our analysis of the impact of digital banking: a reduction in up-selling and cross-selling activities (given digital bankingnull lower effectiveness than the physical channel in this regard) and a margin reduction (given the fact that digital banking makes products simpler and in-creases transparency)nullnullwever, our analysis shows that digital banking is the innovation with the greatest po-tential to increase profitability for banks both in the short term (nullnullyears) and in the long term (null years)nullTurning risks into opportunities Roland Berger Focus 52. BIG DATABanksnullawareness of the value of the customer data they possess (such as transaction behavior, services used and personal data) rocketed with the advent of big datanullBig data is currently increasingly used to extract relevant in-formation and to understand and predict customer be-haviornullnullile the technology behind big data and data analytics is already fairly mature, there is still signifi-cant potential for banks to further capture and leverage customer data in the coming yearsnullBelgian banks operating in the market today do not yet fully tailor their product offering to their customersnull needs or sufficiently respond to changes in customer A: Selected Belgian FinTechs and international reference players for each of the disruptive innovations.Source: Roland BergerSOURCE OF DISRUPTION INTERNATIONAL REFERENCE PLAYERS (BANKS/PROVIDERS)FINTECHS IN BELGIUMDigital banking The Glue, D!nk DNB Norway, N26Big data INTIX, Scaled Risk Santander, BBVAArtificial intelligence NG Data, NoisyChannels Santander, BBVA, IBMRobot process automation UiPatch, Blue Prism, Automation Any-where, ContextorPeer-to-peer networks Look&Fin, Koalect, Mozzeno Lending club, ProsperBlockchain Finoryx, Keyrock, Orillia UBS, IBM, r3.Open banking Pom, Ibanity, Cashfree, IbanFirst Apple pay, WeChatsituationsnullIn so doing, they do not fully optiminull the value of their offering to the customer and the nullustom -er lifetime valuenullto the banknullnullking effective use of big data will allow banks to increase up-selling and cross-selling by personalinullng product offerings, ulti -mately increasing both interest and fee and commission incomenullnullreover, big data will enable banks to make their marketing efforts more effective and therefore has the potential to reduce their marketing spendnullnullnally, analynullng online behavior and historic data improves banksnullability to estimate customer risk profiles, giving them the opportunity to engage in risk pricingnull6 Roland Berger Focus Turning risks into opportunities3. ROBOT PROCESS AUTOMATIONnullobot process automation refers to the automation of structured, rule-based processes with known output, where the automation is added as a layer on top of the existing Inullinfrastructurenullnullnullis a proven technology with many use cases, such as the automation of manual invoicing and the follow-up of accounts receivable through data comparison from different sourcesnullnullr recent case experience shows a savings potential of up to null-nullnullin several departments (enullnullthe nullnance func -tion and in nullerations)nullnulle of the big advantages of nullnullnullis that it is easy to implement given its compatibil -ity with existing Inullsystems, and it requires limited in -vestmentsnullnullerefore, we consider it to be a quick win that is relatively easy to implementnull4. ARTIFICIAL INTELLIGENCEnulltificial intelligence (null) covers all type of technologies with cognitive functions normally attributed to humans, ranging from machine learning to chatbotsnullnulle null tech -nology has been around since the late nullnulls, but has far from reached its full potentialnullnullny Belgian banks are currently still experimenting with applications to gain experience in how to make full use of null and how to let the systems learn effectivelynullnulltificial intelligence can help banks both increase revenues and reduce costsnullnull enables more effective product offerings, increasing up-selling and cross-selling opportunities, and facilitates improved risk pricingnullnullreover, advice to customers will be available nullnull, thus creating another opportunity for revenue generationnullnull can free up time for commercial staff, thereby enabling a reduction in the number of em-ployees needed andnullr improving the services available to customersnullnullr recent case experience indicates a po -tential null-nullnullimprovement in commercial timenullBanks that lay special emphasis on customer intimacy can par-ticularly benefit from null in further strengthening cus -tomer relationships while still digitalinullng the banknull Making effective use of big data will allow banks to increase up-selling and cross-selling by personalizing product offerings. Moreover, big data will enable banks to make their marketing efforts more effective and therefore has the potential to reduce their marketing spend. Turning risks into opportunities Roland Berger Focus 75. PEER-TO-PEER (P2P) NETWORKSnuller-to-peer networks allow people to connect, share files, and even to trade, invest and lend without the need for an intermediarynullnuller-to-peer lending platforms are in many cases seen as a threat to retail banks, in that they could compete with them in the futurenullnullwever, nullnulllending in Belgium has not yet taken off, especially compared to the current situation in the null and null marketsnullnulle limited success in Belgium can be ex -plained by the strong position of Belgian banks and the high customer loyalty of the Belgian customernullnullre -over, Belgian regulation on nullnullis particularly strict and especially favors the protection of depositorsnullnullertain nullnullinitiatives are currently being developed on the Belgian market (enullnullnullnulleno), but so far adoption has not been overwhelming, with the number of active depositors in the hundreds for the first year of opera-tionsnullnullile we can anticipate an increase in the use of nullnulllending over the coming years, we expect the market share to remain limitednull nulloreover, banks could position themselves as a partner to these platforms as an alterna-tive to traditional bank loans, further offsetting the loss in interest income by increasing the fee incomenullnulle therefore consider nullnullto constitute a minor threatnull 6. BLOCKCHAINBlockchain is probably one of the most debated techno-logical developments in the world todaynull nullspecially in financial services, the evolution of the distributed led-ger technology is being closely followed: substantial amounts are currently being invested and first use cases developednullnullor banks, the biggest potential of blockchain lies in the improvement of processes and the reduction of costsnull nulle of the key features of blockchain is that verification, validation and reconciliation all happen during the ac-tual transactionnullnulloday, this still happens in the main after transactions have been initiatednullArtificial intelligenceNoisyChannels NoisyChannels is a Belgian start-up, founded in 2015. The company combines artificial intelligence (AI) technologies in the form of natural language processing (NLP) and machine learning (ML) to optimize service processes. Through the Service Augmentation Platform of NoisyChan-nels, an organization could increase the speed and efficien-cy of it customer service by anything from 20% up to 50%. NoisyChannels develops intelligent assistance technology that allows customer service experts who handle written queries to work more efficiently, and their Service Augmen-tation Platform adds artificial intelligence to existing systems and processes. NoisyChannels can demonstrate use cases with various clients in financial services and other industries, including a second-line support team at a Belgian financial institution. This support team replies annually to thousands of complex queries from their sales organization and increased its productivity by 20% with the introduction of the Noisy-Channel solution. While AI is one of the most promising innovations for banks, the investments required in AI will be high. Currently, AI remains expensive to develop or purchase, and the technol-ogy is not yet mature. Furthermore, AI is in many ways a second-line innovation, being only feasible if banks develop their big data capabilities. Insights from this data are needed to allow the software to learn and improve. Still, we believe AI has major potential owing to the time savings for commercial staff and greater up-selling and cross-selling capacity it offers by enabling continuous availability to the customer base as well as a more proactive and tailored offering to individual customers.8 Roland Berger Focus Turning risks into opportunitiesBlockchain will improve processes, e.g. verification, validation and reconciliation. And it reduces costs, especially fees paid to intermediaries for clearing and settlement, as well as payments, trade finance, syn dicated loans, internal and external audit and
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