This article is part of The Banker’s Special Report, A new era in retail digital sales for CEE banks, in association with Backbase.
While digital banking has been around for many years, there have been few catalysts to drive customers from central and eastern Europe (CEE) online in significant numbers. This all changed when the Covid-19 pandemic began.
The coronavirus outbreak forced bank branches to close under multiple lockdown conditions and social distancing measures. The pandemic also accelerated existing trends in banking and e-commerce, as more people moved their spending habits online.
Frictionless onboarding
While there has been an increase in demand for digital banking services among retail customers in recent years, not all have been particularly comfortable with moving important parts of their everyday life online. However, the Covid-19 pandemic forced more people to take to the web and embrace digital banking in a way they never had before. While a boon for many banks, this shift also created challenges around the digital onboarding of customers.
“If I may borrow terminology from aviation, there is [a thing called] ‘the point of no return’ when you are taking off,” says Sergiu Oprescu, general manager of international networks at Alpha Bank. “The pilot knows that if [they haven’t] been able to take off before the point of no return, there is a high probability of having a crash.
“I think the pandemic has brought the entire financial banking ecosystem beyond ‘the point of no return’ [in terms of digital adoption]. So, there is no other option at this moment than to take off in a digital way and provide a seamless service to our customers.”
According to Mr Oprescu, customers could be broadly said to come from two universes: digital natives and digital adopters. The challenge, he explains, is having an inclusive strategy that can cater to both types of customers and leaves no one behind.
Given the importance of the customer onboarding experience for building trust and creating a lasting first impression, it is extremely valuable for banks in CEE to deliver a frictionless journey. But banks are faced with two main challenges, according to Massimo Proverbio, chief IT, digital and innovation officer at Intesa Sanpaolo: regulatory compliance and security. “This can make the onboarding process very cumbersome,” he says.
Technology, such as facial recognition, has been key in helping Intesa Sanpaolo overcome these challenges. “We have been able to put together an onboarding process that is both smooth and compliant, which was a key factor during the pandemic,” adds Mr Proverbio.
“Client experience is driven much more by your daily experience when it comes to Amazon, Netflix and the iPhone,” says Peter Bosek, chief executive of Luminor Group. “These companies are changing the way clients expect us to be when they make contact with us.”
While one-click onboarding would be desirable for increasingly digital-savvy customers, a process that takes a “minimum of three clicks” in the current regulatory environment would signify progress, he adds.
Pierre-Alexandre Boulay, head of CEE and southern and eastern Europe at Backbase, which specialises in digital platform technology, says that being able to onboard digitally is no longer a “nice to have” and is instead “a matter of bank survival”. As onboarding processes become more streamlined, he adds, banks could see costs start to come down.
“Typically, it would cost €100 per customer [to onboard] in CEE,” says Mr Boulay. “With digital onboarding done effectively — hopefully in three to five clicks instead of 20–30 minutes — that could be reduced all the way to €10–20 per customer, which has a very tangible return on investment (ROI).”
Expanding share of wallet
Once a customer has been onboarded, there are still challenges for banks in CEE to overcome, such as up- and cross-selling of banking products in a digital world.
“Cross-selling is fundamental for the profitability of a bank,” says Mr Proverbio. “Often we see fintechs that have a fantastic product, but are not profitable in the end – and the key reason is the lack of cross-selling [ability].”
He also highlights the importance of data. “Data is fundamental because it’s the means through which you truly know your customer. And the better you are at collecting and managing the information, not just banking information, the better you are at delivering the customer proposition.”
But even though up- and cross-selling should be easy once customers have been digitally onboarded, given how much easier it is to collect data, Mr Boulay says some challenges persist. For example, if the ability to monitor customer behaviour is not available, then the opportunity for cross-selling reduces, he adds.
“There are two lessons that we have learned in banking, in terms of cross- and up-selling,” says Michal Plechawski, chief information officer at mBank. “First, is not to be too intrusive and try to convince the customer to [buy] what they don’t necessarily need at the moment.
“The second is to obtain clues about their behaviour, or understand the context from internal and external data, and only make a cross- or up-sell offer when we think that there is a high probability that the customer is in need of a specific product.”
Using this approach to selling products, says Mr Plechawski, has seen mBank’s conversion rates increase by around five times, and it has become much more efficient in marketing spend and client acquisition. It has also improved the Polish bank’s net promoter score, he adds.
While cross-selling is extremely important for a bank’s profitability, Mr Bosek cautions against thinking that the customer’s objective is to buy new products or services.
“We have to be careful in terms of advising our clients in the right way because, at least before the financial crisis, most parts of the industry spoke about flogging products to clients,” he says. “When it comes to digital banking, we have a huge opportunity because it’s much more about reading and understanding client behaviour and client data.
“It’s not enough to put our products on a ‘digital shelf’, for everyone to buy our products. That’s not how it works,” he adds.
Holistic view of the customer
As well as making life easier for homebound customers during the pandemic, digital banking has enabled a more holistic view of the customer in CEE and helped banks deliver hyper-personalised products and services to drive digital sales. But there are challenges that digital banks must overcome before they can create a true 360-degree view of the customer.
Mr Oprescu notes that while accessing more customer data can be used to drive sales, banks need to consider the regulatory requirements when it comes to using and managing that data. “Having complete customer data, and strong privacy controls over that data, will lead to a stellar and trusted relationship between the customer and the financial institution,” he says.
The application of the EU General Data Protection Regulation (GDPR) is an important consideration when using customer data. While banks are legally obliged to comply with GDPR, the transparency it enforces should be a core value when it comes to building trust, says Mr Bosek. “This piece of regulation is really taking the feelings of our clients into consideration, which is very good,” he says.
Managing customer data is extremely important, agrees Mr Boulay, and adds that consent management capabilities should be put in place during the onboarding process and within the platform for customers to choose how to share their data. On the technology side, to achieve this holistic customer view, banks need to break down silos and leverage a shared platform empowering both their employees and customers.
Future resiliency
Having an IT infrastructure that can drive digital sales is critical in this environment, so it is essential to keep investing in order to adapt quickly.
“The first thing to consider is the level of investment — you will have to spend a lot of money on this,” warns Mr Proverbio. “And it’s a journey, unfortunately, that never stops for us banks.”
He adds that Intesa Sanpaolo has designed an approach that incorporates digital and physical elements, using all the best technology. These include remote signature and other customer interaction tools, which are used by more than three million customers in CEE.
Alpha Bank is in the midst of its digital transformation programme, which includes the addition of new tools and increasing its usage of cloud and fintech solutions, says Mr Oprescu. However, the regulatory environment can sometimes act as a brake on the bank’s targets.
“More often than we like to admit, the regulatory framework moves at a linear pace, whereas bankers understand that [digital transformation] is an exponential curve,” he says.
Cloud adoption is one area that has drawn a lot of interest from regulators and is where banks have to tread carefully, according to Mr Plechawski. He believes a hybrid, public–private cloud solution is proving to be a better option for banks from a cost, speed and regulatory perspective, where some systems are in the public cloud and others stay on-premise.
“We are currently in a big programme of re-architecting our technology stack into this new hybrid cloud model,” he says. “We also got into regulatory difficulties because the public cloud was not trusted by our regulator until January 2020. In Poland, we are a bit behind in terms of public cloud adoption compared to our peers in the rest of Europe, but we are quickly catching up.”
There have been mixed results in cloud uptake, says Mr Boulay, with some banks failing to see a significant ROI. However, this could be down to how it is being used, with some banks simply “lifting and shifting” their IT systems without modernising them. Instead, they should be using the move to cloud in tandem with a wider digital transformation programme and incorporating new services that can help a bank evolve.
“Many of the biggest players that are highly profitable today in the tech space are platforms — they have a single platform for multiple distribution touchpoints,” he explains. “Facebook, for example, has an ecosystem of services, including Messenger, Instagram and WhatsApp, but they all sit on one platform.
“This platform helps Facebook drive engagement and drive adoption,” says Mr Boulay. “And then down the line, it started monetising that with advertising.”
Challenging the challengers
The increase in demand for digital banking and financial services among retail customers in CEE has opened up space for new entrants to emerge.
Mr Plechawski says that in Poland, many of mBank’s biggest competitors are neobanks, but its traditional competitors are also becoming more digitally engaged. He is less concerned by the entrance of ‘big tech’ into parts of the banking industry.
“From the big tech perspective, I don’t think financial services is an attractive market for them,” he explains. “They have much better margins in their native industries. It’s much better for them to invest and expand their current businesses, rather than go into such a complicated and regulated business as finance, with worse margins.”
Mr Bosek disagrees, arguing that neobanks are unlikely to pose a threat to established players in the banking industry, particularly as many of them are not making a profit. “I’m not very afraid of them,” he says. “I know N26 inside out and Revolut is also known in this region. They’ve developed very smart business models, but until now they haven’t been able to earn real money.
“It’s a much more challenging situation for the regulators. At a certain point in time, the regulator will find out how sustainable these business models are when they don’t earn money,” Mr Bosek says. “Fintechs can’t always rely on venture capital to fund their business model.” He believes that a bigger threat is coming from incumbent banks partnering with the big tech players, such as Google and Amazon.
Mr Oprescu agrees that the ability of incumbents in the retail banking space to partner with various fintech and big tech companies is going to help the banks to “compete and sometimes challenge the challengers”.
“Collaboration is something that we need to focus on,” he says. “Today, when we talk about customer-centricity, we are putting the customer in the middle of our products and services. But if we really want to be customer-centric, then we need to be able to put our customer in the middle of an ecosystem that we create for the benefit of that customer.”
To really challenge the challengers, according to Mr Boulay, incumbents will need to “copy and paste” from everyone around them. “They need to take the best from everyone,” he says. “Revolut may not be profitable right now, but the fundamental value that it provides to the end users is something to be appreciative of and try to emulate as an incumbent bank.”