Industry sign banking new mexico presentation fast
hello everybody my name is paolo cironi i'm the global research leader in banking and financial markets for ibm the institute for business value we convene here today for this presentation about the essentials for the postmandame bank why extreme digitization is a must for financial services and i want to draw some lessons learned coming from the pandemic environment to explain how we can address the generation of value for customers looking at the digitization of financial services i want to share five different pieces today of five different chapters first of all i will highlight the key takeaways from this recent paper essentials for the pandemic bank second i want to discuss the fact that uncertainty is the new normal because it changes everything the war is very different compared to what it was before uncertainty was already rising therefore we need to make sure that we play the business model and the technology around that in a different way to become resilient survive and generate value for the banking clients third i want to discuss the digital business model because the digitization of financial services is much more about changing the business model the plug-in give new technology we can therefore discuss what is really happening in terms of detention towards the bank of the future looking at contextual banking and bundle banking and we finished this presentation looking at some of the insights of the recent c suite study which is a large survey the ibm has conducted and on the sea level of banks worldwide discussed in the topic how to build the trust advantage in today's world so which are the key takeaways of this recent paper essentials for the postpandemi bank well first of all banks need to master extreme digitization to succeed in the postpandemic environment the key concept that i want to develop with you is the fact that the future is uncertain our present is very uncertain therefore we need to make sure that new business models are created to face in a certain world that banks operate on secured cloud access they develop advanced automation and they foster the simplification of system products and processes second key takeaway of this latest paper of ibv is the discussion that the different normal touches every corner virtual and otherwise of banks therefore banks have to transform end to end to achieve resiliency with cloud-native operations and last but not least the fact that as digitization grows and accelerates people may be left behind therefore it is important that the data driven bank is based on the data enabled client client proximity is core to everything that's why we need to learn how to redesign human and digital relationships with the highest scale in a way that matters so then if these are the key concepts we start with the discussion about uncertainty because it is the element that changes everything and that explains to us that the way business was conducted before will not work in the future i start with the video of cristalina gilletta the chairwoman of the imf in december 2019 she was speaking on the cnn well before the pandemic outbreak and she reminded the audience that the world was already facing a fast growing of the uncertainty level which would require business people decision makers bank ceo to act differently compared to the past we listen to her words uncertainty is the new normal and therefore we have to help our membership to be more agile more adaptable to this fast-changing world so how can we help banks to be more agile to be more adaptable to this fast-changing world knowing that uncertainty is the new normal thinking about the covetous break i came across the interview of the foreign minister of south korea miss kang kyungwa you know that south korea has a particular history through the pandemic because he managed to avoid a strong lockdown by playing a special game that was about data technology and communications to the people in essence miss khan q1 focused the strategy of the south korean government on three key pillars which matters to us openness transparency and ongoing advice i want you to listen carefully to this interview that she gave on cnbc in early 2020 well the basic principle is openness transparency and fully keeping the public informed you're not going into the same kind of lockdown the social exclusion that a lot of european countries are but instead you're monitoring people by phone app again can you explain why you're doing that and not closing down large chunks of your country well i think this is being faithful to the values of our very vibrant democracy which is which is uh open and and you know the government fully in the service of the people and i have to say our public is very demanding and we quite you know you know expects the highest standards from government services and i think this is the key the drive of our of our of our response to this after the chinese authorities released the genetic sequence of the virus in mid-january our health authorities quickly conferred with the the the research institutions here and and then and shared that uh result with the uh pharmaceutical companies who then produced the reagent and the equipments needed for the testing it may not be applicable in other countries with you know less i.t infrastructure and other values but i think in the end we have to acknowledge that this is not going to be the last time a novel pathogen becomes a global health threat clearly this is not endorsement to any foreign government and i also believe that every government and the country decided in their best interest to deal with the pandemic in different ways however i believe that this interview is revealing in the light of what digital banks needs to become especially facing a very uncertain world these three elements are openness transparency and awareness why they are so important because when the world is very uncertain only by opening up and sharing the data we proved that we could accelerate the research looking for a vaccine or a new treatment for patients the right to face intensive care at the same time only by opening the data inside the bank and outside the bank it is possible for banks to improve the speed of innovation across every multi-crowd so openness is what matters especially when the world becomes more uncertain to accelerate the transformation toward the new normal second whatever happens transparency scheme we saw that during the pandemic how difficult and important it is to get good data to communicate the data to know exactly the assumptions that lead to any very complex decision that impacts the lives of people and also the fate of an economy at the same time transparency is a core principle of platform economies transparency needs to be applied on contracts on relationships on ai and beta because only through transparency banks can build resilient platforms and businesses facing uncertainty and clan scrutiny and the third lesson learned is the one of awareness how important it is that to remind citizens the fact that the behavior they had during the pandemic is also important when the pandemic seems to be relaxing as it might come back therefore awareness is the value which is generated when times are very uncertain so enabling clients to be more aware about the financial relationship to make financial decisions where they need them most is core to generate value with digital for final clients and enterprises this is the way to place clients front and center therefore openness transparency and awareness facing an uncertain world as what it takes for banks to design the digital platforms and look at ecosystem interaction in a way that they can become more resilient and shifted towards a different value generating mechanism this leads us into the conceptualization on what is the digital business model that might matter looking at an uncertain world and the digitization of financial services now andrea and henria the chair of the european central bank supervisory board gave a speech in june 2019 again well before the pandemical break the lockdown of people and economies and the recessionary consequences on the world economy it was looking at the non-performing loss ratios of the european countries that basically significantly significantly reduced since from their peak in 2008 at the heart of the global franchise crisis however he reminded the banking audience that we have to solve still the issue of npls while the economy is resilient he said that if banks have to sail into the next storm with too many mpls on their balance sheets they will be less able to weather it and come out safely on the other side how unfortunately patient because the cavital breaker started and banks were still in a position that made them fairly weak facing a very uncertain event so the word asked itself whether the recovery would be a v-shape an l-shape a double shape is difficult to say even though months into the pandemic outbreak we see that the recession may be more protracted that we possibly thought a direct consequence of the pandemical break was the intervention of the central banks and to lower the interest rate and to very minimum levels you already know that in europe interest rates were negative for the last years the u.s lowered them after the global franchise crisis started in 2008 to rebound them up a bit and now flattened the curve to the zero level there is expectation that they could become also negative anytime soon in asia pacific interest rate dropped in latin america interest rates were also reduced trying to support the economy but most of all there is an expectation that credit defaults that will be on the rise clearly this cannot be seen immediately at the beginning of a crisis like a health care crisis but through the year 2020 and at the beginning of 2001 it is fair to expect that banks will start realizing the amount of damage that the pandemic has created on the real economy which will be reflected in higher credit defaults therefore in a further increase of the non-performing loan ratio what you can see here is how banks started reacting as the pandemic developed looking now at europe and u.s which is where the pandemic initially had the first revelation we see that the u.s banks decided to get hit in the chin much faster than european banks which is also a reflection of a differently we have a different regulatory treatment but basically across the board banks started to put us out money provisions substantially preparing for an uncertain and troubled future we actually saw that in q2 2020 quite a few banks reported very good results from their investment banking capabilities and banks instead they don't have investment banking we're not capable of weathering the storm at the same way and that is just because there were a lot of intermediation generated by the central bank which enabled investment banks to get a one-off profit that could have been used to compensate for the expectation of higher credit defaults at the same time a lot of people started moving money or keeping money into large banks the so-called the flight to quality the safe haven of banks which are too big to fail and so banks saw their amount of deposits increase unfortunately given the looming future they may not be able to make use of that deposit in profit from interest rate margins as interest rates are lowering across the board we expected that in h2 so in the second half of the year we will see further decrease of the interest rate margin possibly an increase of the npl ratio expectations and if you like a shift further shifted towards the well management activities which is basically where the money families and enterprises can be invested though on volatile markets without having to consume capital which is going to be very much tight for banks due to the non-performing losses cycle and we can also expect that there will be an acceleration of the digitization of financial services especially towards the platformization of corporate banking for the smes in order to provide a proximity to the clients in a time where that cannot be sufficiently supported by human relationships through the lockdown and there is a revelation of the fact that digital can effectively help not just to replace but to keep a relationship ongoing at the time when human relationship can be put under stress but if this is the environment that is going to be revealed going forward therefore an environment made of very low interest rate and high cost of capital which further squeezes the capability of banks to generate value for shareholders with the interest rate margin i want you to listen carefully to what mario draghi the former chairman of the european central bank said in 2019 we are back in september 2019 basically one week before maru draghi left and was replaced at the helm of the european central bank by ms lagarde he was responding in this interview in the press room of the ecb to the question of the journalist about the consequences of protracted and negative interest rates listen carefully to what is said about the need to adjust the business model of banks to the digitalization banks would like to have positive rates unquestionably so whenever they have negative rates they don't like it but i wouldn't go as far as saying the negative rates would cause the collapse of the financial system because before getting there one has to look at other things of our banks for example the cost income ratio many of our banks have cost income ratios which are completely way off any average indicator both in europe and even more so in the world if compared with other banks in the other parts of the world there are certain structural weaknesses in the banking sector more pronounced in certain parts of the eurozone than in others i think these these sort of considerations affect much more than negative rates banks profitability banks capacity to land the necessity to adjust the business model to the digitalization to the change in changes in technology is something much more compelling than uh being angry about negative rates so if i can summarize it the coveted break is not creating something new in financial markets but is accelerating a trend that started with the global financial crisis after the default of lehman brothers the fact that the low interest rate and high cost of capital might make interest rate margins insufficient to generate value for slaughters which is the reason why banks are shifting from interest rate margins towards intermediate margins which is made of payments that through digital will further squeeze their magic contribution and wealth management lato senso for retail upfront and a network made of investment products and insurance products what the post pandemic has revealed that is that effectively banks have become inefficient centers of money creation basically inefficient mechanism of the transmitter of the monetary policy and that is the reason why central banks might even consider to make further steps ahead in looking at the central bank digital currencies because the mechanism that credit institutions played inside the capitalistic economy is not so effective as it used to be and therefore banks are moving from centers of money creation towards the centers of advisory competencies by which bear this with me by bringing the liabilities of families and enterprises which means their loans even their children's the fed they have pay for education there is a liability there is a goal inside the advisor relationship so they will manage my relationship bundle it inside the planning mechanism they will be able effectively to personalize the relationship because personalization is a big mantra in digital but that doesn't simply count looking at payments and looking at the asset classes of their food that comes really to understand the goals and the needs of the individuals and therefore drop the barriers the data barriers between credit lending payment investing and ensuring in order to create compelling solutions that enable people to move themselves forward on digital however we need to recognize that the digitization is not so easy because of the asymmetry of information which is particularly financial services that means that not all of the pro
ucts that are currently sold by banks through the distribution channels conform easily to the characteristics of the digital economy i put on these uh arrow the major products or solutions which are sold by banks of course i forgot some but just to exemplify the concept to the left you have low intensity of assimilative information payment because you know what you are going to buy so you understand that the value of the relationship and to the right we have the most asymmetrical product which is insurance product how can i explain that to you to reveal the concept of the pull and push mechanism so the fact that while digital technology largely speaking that's my phone is a full technology a technology of the demand the revenues that matter going forward for banks which are related to the intermediation margins operate in enough driven environments so we need to understand how to put a push economy an offer driven environment onto a pool technology which is demand driven so i said the payments are largely symmetrical borrowing is still symmetrical to a bit less i explained to you this way if you go to your apple store now and download my app the pcrony.com and you click on it i promise i will give you one thousand dollars zero interest rate zero fees and commissions you can give me back the money whatever you want i bet a lot of you are going to do that right now you will be happy but i will be left with a huge risk management problem instead if i tell you go to the apple store download the pcrony.com act and click on it and you will give me one thousand dollars to invest into a portfolio with confirmed with a pull to parity strategy most of you will be frowning asking to the collector what is this strategy is paolo a reputable individual so you see immediately the level of understanding is lower so the assimilator of information is higher and therefore banks have to spend much more through the fintech to explain the developer position which tells you why the biggest examples of the fintech innovation are all related to payment and some to borrowing and way less with the same extreme to investing and especially insurance insurance is very symmetrical think about life insurance to convince you to buy life insurance i need to explain to you that you have to die which typically is not a good conversation therefore you see in this tension that we also need to resolve when we think of the extreme digitization the gap between the pull and push mechanism and therefore how to evolve from the concept of a data-driven bank which um corresponds better to lower symmetry of information to the concept of data enabling a client which is more relevant at the moment we position products and solutions that are part of the push economy into the full mechanism of digital to get you a better explanation of this one i would like to share this which is an interview that jeff bezos gave it to 60 minutes in the late 1990s now the question of the journalists was is digital a new distribution channel of products so you ask yourself is digital a new distribution channel of financial products well jeff bezos said no it is not and to me this interview is very relevant because in the 90s i was helping my brother while i was a banker to build the amazon of italy don't laugh we wanted to sell the best of italy that is fashion food furniture and also travel and you guess what we saw nothing that was a fiasco but it was a very learning experience for me and when i watched this interview on television i realized among the many mistakes i made that there was one which was super important there is so many fintech and banks wanted to go digital making as well in the recent years so basically when the journalist asked jeff bezos what is amazon at the time amazon was only selling books jeff said amazon is not the distribution channel of books on the internet and he said let me explain to you why it is not he basically told this story that the publishers were sending him letters complaining that he did not understand marketing because he was allowing the users of amazon to put on the web positive and negative reviews so the book publishers were telling him to publish only the positive reviews because they said it is marketing we would sell more but jeff bezos said i'm not a distribution channel of the publishers the same is a bank a distribution channel of the manufacturers those making the investment funds the products like certificates or the bonds he said my clients are not the manufacturers my clients are the users and he said my role is basically to build the trust by putting positive and negative reviews they create transparency on what the product might be in the very end because client side that go to a bookstore they can touch the book and they get that feeling but when they start buying on amazon they can't so transparency with data would enable them to trust therefore as they are on boarded they can also move and then he said only after i enable the customers to do something i can use different analytics in order to improve the relationship so you see it is very important that also banks understand that the while data is foundational and data data-driven banking is key there's something that needs to be taught carefully and implemented before and is the concept of data enabling client to win on digital otherwise extreme digitization which is needed might lead some clients behind and that's why i'm coming up with this concept that we're looking at this warner from the first perspective we're looking at this reflection well we basically need to make sure that we build client trust with data and transparency to precede data-driven banking with the concept of the data enabled client we share the three key takeaways the fact that uncertainty is there the fact that banks is to transform end-to-end the fact that data enabled client and is to precede data-driven banking we discussed why uncertainty is the new normal and we said that the post pandemic gives us a three important lesson learned which are also good for banks openness transparency and advisory and going we basically discussed the digital business model which started as the inversion of the bank business model before the postpandemic environment which is accelerated by the covenant in a break and the inversion of the business model basically is that banks are not in a more efficient mechanism of the transmission of the monetary policy and they will have to become center of competence in front of their customers and we therefore try to understand now how this business model transformation looks like in terms of the definition of the bank of the future so i want to refer here to an interesting research paper that was recently published in july 2020 by the research center of the european central bank the title is financial intermediation and technology what's sold and what's new basically the authors of this paper identify the value of banking and their competitive advantage in this sentence that superior information and communication enable financial intermediaries to accept market power now we have these two word information and communication information is about core core banking these symmetrical products payment them and borrowing is the adverse election banking trying to make sure that they can give credit to the best client for the highest price communication instead is about the interface the relationship the asymmetrical products like wealth management and insurance where the human relationship is important in order to compensate for the symmetry of information so basically you see that there has to be a corresponding technical transformation to the transformation of the revenue of banks going from core to interface because the revenues are shifting from interest rate margins to intermediation margins because the mechanism of generation of banks revenues that goes from adverse election to the assimilator of information because the cost needs to shift and now they are primarily focused on maintenance of core banking but they need to be capable of supporting analog and digital interfaces and therefore there's a sheet of opportunity from more cost efficiency into building new customer relationship now as you understand that if you go down from current interface you get to the two concept of contextual banking and bundle banking contextual banking means inserting banks into non-banking relationships it is easier to start from very symmetrical products like payment that can facilitate or optimize the seamless experience on the uber application bundle banking instead is an attempt of building trusted advisory or new merchant banking they basically are a banking relationship but are augmented by data tearing down the internal and external silos in order to provide a more added value for the customers these two strategies of the bank of the future contextual banking and bundle banking will converge anytime soon with the holistic data fusion and the ecosystem interaction because clients need to be equally informed when they operate for a financial relationship or for a non-financial relationship so you will see the emergence of platform of platforms now as this is the real tension that involves business models and banking architectures you can also represent these on this virtual cube there is this three axis on one side the shift from products whose margins are going down therefore volumes may be insufficient to clients paying for that relationship is like the amazon prime you will not pay amazon prime if you can buy only books you need to have way more on that relationship so you need to bundle the bank to give that client relationship more value on the other side you have the shift from transactions volume to services which is value and that can only happen with new business model so ai at scale will enable you to infuse into this client relationship more substantiated information new business models will enable you to define revenue mechanisms that comply with services and transactions and at the same time you see the banks are shifting from branches lifted up to open banking and therefore you need consistent i've removed the cloud architectures to make sure that everything can be connected because needs to be interoperable and interdependent in a way that generates agile value to be readdressed as markets being very uncertain change the focus on business model or the focus on key segments of client continuously and that's where banks will have to compete going forward with extreme digitization of financial services i can represent on this slide something that i believe is relevant and i touched upon before which is the journey even beyond the digital on the x-axis you have the iq that is the intelligence quotient this is the addition of the reinvented product by sheffer and sophie on the y-axis and you see the eq that is the experience quotient now on the x you have the traditional distribution of products then the data driven banking data driven distribution and then you have the intelligent engagement when data enabling client precedes everything because you can have more and more on digital in a way that people are enabled to be self-directed on the y-axis where you have user experience you have two things two big containers output economy and outcome economy output economy means bmw wants to sell 1 million cars next year outcome means bmw wants to mobilize 2 million customers with cash sharing in 2021. in banking that means a bank wants to sell output economy 1 million of asset under management of a new fund outcome economy the bank once had 50 000 of its customers to achieve their financial goals now you see that as we create more value we need to move from data distribution and data driven distribution towards intelligent engagement and we also need to move from product centricity output economy into outcome economy which is typical of ecosystems and that's where you see that the most traditional banks are those that typically are product center and traditional distribution quite a few banks thought that digital was a distribution channel of their products with better marketing driven by data but jeff bezos told us that it has to be different and that's where you see that the most interesting banks are now conceiving their strategy in two different directions bundle banking and contextual banking bundled banking is more typical of the western water the mature economism you see basically the strategy of ubs goldman sachs morgan stanley the italian limited within which is a new bank it is still based on a business model a new relationship but they're now attempting to shift out of human into the digitalization of that relationship and contextual banking instead means embedding into user ecosystem is more typical of asia-pacific and in some cases also latam given the opportunities for financial inclusion you have interesting examples of dbs ecosystems you know from the sbi in india you only need one which is basically larger than amazon for some products to be sold online you see bank of baroda which is also another interesting example for farmers pin gun which is an insurance insurance company in china that created a good doctor example basically people can find the doctor on the ecosystem platform but then pingan uses data in order to enable the human insurers agent to provide better services to the final customer or sbdb which is also attempting to create new concepts of ecosystem banking so now this is where banks needs to transform to stay relevant through the extreme digitization but they need to make sure that they understand how to tear down the data pillars inside and outside inside is bundling the bank onto digital experience it does not differentiate between credit payment investing and insuring externally means contextualizing themselves into third-party ecosystems or building those ecosystems everything needs to be transparent because transparency is key for a good functioning of platform economies and it is important that this creates a mechanism that continuously add value to people generating awareness helping them to achieve what they want to achieve in life being that a financial goal or a new financial goal and that's when you will see the evolution of platforms and banking platforms in a way that they really start blurring the borders between banking and non-banking and this is a concept of the holistic data fusion that i want to share with you you would have omni users which is the final consumers and then you have how many businesses and corporate because you see maybe the bank wants to generate an sme type of solution but ultimately smes also needs to serve their final customers so it's always important to understand how data plays 360 across the final users across the businesses and the corporate and of course what banks needs to be capable of creating is a nominally intelligent connection that continuously goes around the transformation of uncertain businesses in an uncertain world to personalize the offers to call back the offers where they're not needed in a sense continuously innovated to make sure that they stay relevant in front of the clients not as distribution channel of products but providers of compelling solutions that really generate value for the final users which leads us into the end of this presentation and to conclude i want to share with you the evidence from our latest c-suite study build the trust advantage we interviewed 1460x in banking and financial markets of which almost 200 are ceos cmos and ceos large number of cios almost 450 and then we have chief human race office humor she chief human resource officers now these uh very recent work and you can ask the ibm colleagues to refer to to get more insights is divided into three chapters the customers how to win the trust economy the enterprises how to build the human tech partnership and the ecosystems how to share data in the platform era i just want to reveal three key elements the report is much broader than what i can share with you today first of all the customers we identified that among these larger panoply of banks that we scrutinized the worldwide the torchbearers which is a handful of 20 a bit more few that are those
which are more innovating or tending towards a further innovation and we asked that these c-level executives which would be the priorities to win in the trust economy now number one the first one that they have identified is to prove transparency to earn back trust by learning to use data in a way that customers view as fair second earn reciprocity to give your customers something that they value in return for their data and therefore demonstrate accountability double clicking on the data understanding that data is a strategic asset is not just a tactical operation resource and being capable of future proofing the strategy crafting scenarios in an uncertain world involving data to increase personalization and engagement what about enterprises how to build the human tech partnership well we tried to understand basically how data could play a game in terms of enabling people to work differently in order to create new solutions and here we see that the torch bearers say that 75 percent among them they do believe that data needs to be freely shared across functional business areas only 17 percent of the aspirationals the lower tier of the banks compared the torch better are moving in that direction which means that 341 percent more intensity the torch bearers have compared to the aspirationals in the understanding the data needs to be open inside the organization as well as outside to create a new collaboration among people business energy to generate new business value and what about ecosystems how to share data in the platform era where here is where we also need to do a bit more like 37 percent of the torch bearers are slowly opening up data sharing in ecosystems while only 19 of the aspirationals and i believe that going forward these numbers should certainly increase as we explained before the tension towards contextual banking and bundle banking will increase to help the bank face an uncertain word with the digitization of relationships i thank you very much for the time we dedicated for this presentation this is the qr code that will bring you to my linkedin profile please engage me on social media to continue this conversation and you can also download from the ibv website the latest version of this paper that we discussed today essentials for the postpandemi bank why extreme digitization is a must for financial services thank you
