How Banks Can Focus on Innovation and Improve ROE

The banking sector has  been regarded as one of the most stable, with reliable returns on equity (RoE). The development of fintechs and the entry of tech behemoths into the industry has completely transformed the landscape. These digital native businesses have effectively used technology to address client pain areas, paving the path for a new era of hyper personalization, tailored services, and intuitive banking. 

They have already smoothly integrated banking functions in areas such as e-commerce, social networking, gaming, digital entertainment, travel, health, and home-buying in many cases. Traditional banks are unable to maintain or improve their ROE as consumers' loyalties are shifting. According to McKinsey, global banking ROE was 10.5% in 2018 and 56% of banks across the world were not generating their cost of equity (CoE). Well, how can traditional banks then chart out a strategy for the disruption caused by the new entrants and how improve their RoE even under these circumstances?

Innovation is Key

The Spanish bank BBVA has launched Bconomy, an app that lets clients set objectives, save money, and measure their savings progress. It also assists clients in making more informed purchases by providing money-saving ideas and comparing pricing on utilities and food. Bconomy had half a million users within the first three weeks of its inception. In South Africa, NedBank provides market intelligence services to merchants, and UBS provides real-time customized portfolio analytics to their high-net-worth clientele. 

This wave of innovation isn't only about banking services. Banks are working hard to provide value-added services to their clients and to build a comprehensive support environment. For instance, KBC Bank of Belgium has introduced a blockchain based product to facilitate a  seamless end-to-end car loan experience. 

Banks are also looking to improve customer experience by integrating technology into the way they function. Chase Bank has introduced Kiosks and Express Branches with an advice bar for digital products or new accounts in a bid to streamlines transactions. 

The Roadmap to Innovation

Innovation is no longer viewed as a long-term investment with advantages accruing over time. Given the current market pressures, banks must accelerate their innovation . Unfortunately, the present financial infrastructure is not only obsolete, but also extremely complicated. It is not open to agile innovation tactics in its existing state. However, a comprehensive digital transformation of the financial core is a difficult, costly, and risky enterprise. One method to handle this is to partner with best-in-class vendors to bring in middleware that is capable of providing the required agility. These middleware solutions can help banks introduce out-of-the-box products and services and boost client loyalty by improving customer segmentation and pricing. They can also assist in lowering operating costs, resulting in higher profit margins.

Traditional banks and fintechs are forming strategic alliances that are gaining traction. Digital native fintechs, despite their new offers, lack the skills to manage the entire financial lifecycle. Traditional banks have a wealth of knowledge in managing the customer lifecycle across all segments, as well as a much broader geographic reach than newcomers. By successfully bridging the gaps in their arsenal and providing outstanding omnichannel customer experiences to boost margins, a strategic alliance is sure to benefit both players. In the end, success will be determined by an efficient operating model that links innovation to commercial requirements.

Success in the context of the current market scenario depends on how banks focus on technology driven innovation. Innovating quickly without incurring monumental costs and adhering to norms, isn’t an impossible task anymore. Success for banks  truly depends on their ability to build a comprehensive and strong ecosystem by collaborating with market utilities, e-commerce players, fintechs and managed service providers

To thrive in the current market situation, banks must focus on technology driven innovation. To innovate quickly, effectively, without incurring massive costs and while meeting regulatory requirements is no mean feat. But, as countless banks are proving, this is not impossible to achieve. Success will depend on their ability to build a comprehensive and strong ecosystem by collaborating with market utilities, e-commerce players, fintechs and managed service providers.

Banks can earn considerable market share in the four fast-growing business categories of retail banking, wealth management, SME lending, and transaction banking by focusing more on innovation. As the business grows, banks must concentrate on increasing their return on equity (ROE) by implementing clear technology-driven processes and rules that allow them to consistently innovate and stay ahead of client expectations.