The digital edge

Updated: Nov 10 2012, 08:03am hrs
Ease of access to the internet is changing consumer behaviour in India. The country already has 122 million internet users (the third-largest digital population worldwide) and growing. Among them, over 27 million are digital high-value consumers who represent a disproportionately high volume of internet useover 9 hours online a week. These customers account for nearly one-third of the overall household savings pool of all online users, influencing the growth of digital financial services in India.

By 2015, the user base is likely to touch 350 million, thanks to cheaper technology and increased investment in 3G and 4G infrastructure. Digital high-value consumers will number nearly 70 million. They will drive up the opportunities for financial institutions, whose revenue pool will likely grow at 20-30% CAGR$60 billion to $70 billion by 2020. This is twice as fast as financial institutions overall revenue pools, and estimated to account for approximately 20% of incremental growth until 2020. FIs cannot, however, expect to satisfy changing customer preferences through simply adjusting existing business and service models. They can only create value and increase operating profits through innovation and change.

Less than 0.5% of internet users searching for financial services actually progress online through the various stages of research, product selection, purchase and online activation. Three factors drive customer drop-offs: poor virtual experience, lack of a differentiated product proposition, and customers security concerns. Recognising and addressing these challenges can help FIs to better serve online customers and capture the digital opportunity.

For success in the digital environment, FIs need to adopt one of three strategic postures:

A digital, client-centric model: FIs offer primarily branch-based banking but also open up direct channels to sell to and serve customers, capturing a higher market-share in the tech-savvy segment, enabling more cross-selling, improving productivity, and all at a lower cost-to-serve. This is a powerful strategy for large incumbent FIs and has the potential to increase operating profits per targeted customer by 50-70% over the next 5 years.

Digital-centric multi-channel model: FIs offer low-cost comprehensive service through digital processes to fill the service gaps of competitors and drive customer acquisition. This model delivers a high quality, multi-channel experience for customers and could be an ideal posture for more sophisticated FIs.

FI 2.0 model: This market-shaping strategy requires FIs to target offerings heavily through mobile and online channels. They must constantly innovate, enabling digitised payments and even going beyond financial services to capture customers. It is a suitable posture for nimble FIs and other attackers in the market.

The rapid pace of change in the digital world creates small windows of big opportunities. FIs must act fast to gain an edge, especially in the face of new technologies and competition. The change agenda covers three goals:

Initiating internal change: Banks, insurance companies and asset management companies must rethink various aspects of their structure and operations (e.g., in order to make digital a core part of its growth strategy, a top American bank has revamped its organisation structure so that the CIO reports directly to the CEO, and is also a core part of framing the banks strategy).

Shaping the financial services ecosystem: FIs can work with regulators and policymaking bodies to create a more digital-conducive environment where, for instance, financial players enjoy fewer risks and lower costs (e.g., in Turkey, regulatory authorities promote secure digital transactions to encourage greater use of online services).

Collaborating for empowering partnerships: Working with multiple external bodies (e.g.,technology companies) can help FIs unlock the power of big data, improve their business model and operations and acquire better technology.

FIs must adapt their entire way of doing business to cater to the growing number of digitally savvy, high-value consumers. Organisations that respond to the changing preferences of these customers will enjoy the benefits of the immense digital opportunity.

This is extracted from McKinsey & Companys November 2012 report, The digital edge: New opportunities in financial services