The latest research into digital banking's future: Four key takeaways

By Alex Hammond | 17 February 2017

Earlier this month Juniper Research published a white paper titled Futureproofing Digital Banking 2017, in which it highlights its research data focused on the current state of the digital banking industry, and projects the future dependency of financial services on this growing market.

Here are the key takeaways from Juniper’s research:

The growth in digital banking is showing no signs of slowing down

It seems an obvious statement to make, but the trend in digital banking is only going in one direction, both in terms of consumer adoption rate and total value of the digital e-commerce market.

Ecommerce is booming, according to Juniper’s research in 2016 the value of the e-retail of physical goods was $1.89tn, and e-retail of digital goods (in the main e-tickets and subscriptions to digital entertainment e.g. Netflix) was $750bn. China is driving the growth of physical goods e-commerce, owning 35% of the market already, and the value of its physical goods sales are predicted to double those made in the U.S by 2021.

It is the U.S, on the other hand, that owns the market when it comes to digital goods sales. The value of this market in the U.S is projected by Juniper Research to grow to over $222bn by 2021, which will represent 23% of the global market.

One area of digital banking that is certainly projected to continue growing strongly is mobile banking. According to Juniper Research 2015 was the year that the number of people who had used a mobile device to conduct some form of banking purpose (either account management or payments) exceeded one billion, and according to Juniper Research this figure will reach $2bn in 2018, which is almost 38% of the population. Almost half of this figure will be people in the Far East and China.

Global mobile wallet spend nudged over the $1tn mark in 2016, and this is projected to increase by another $350m in 2017.

The cost of brick-and-mortar branches is pricing them out of banking’s future

Currently there is a significant percentage of customers who prefer interaction in-branch as opposed to contact via digital channels or over the phone. However, this percentage is expected to rapidly decrease, as the demographic of customers changes to a population that is more tech-conscious and banks switch focus to a ‘mobile first’ process, improving digital services as they do so.

We can already see the impact of these combined factors taking effect, before full mobilisation of mobile first strategies has begun. According to research conducted by the Bank of England in 2016, UK banks are seeing the number of customers seen in branch decrease by 10% a year, which is an even more significant figure when taking into consideration the fact that the cost of running brick-and-mortar branches can be as high as 30-40% of total costs for some banks.

One assertion made by the Juniper Research whitepaper that is therefore somewhat surprising is that the number of brick-and-mortar bank branches in emerging countries where digital banking adoption is thriving, most notably China and India, is actually increasing in step with the rate of digital banking and mobile wallet growth, seemingly in contrast to the theory that adoption of digital banking is the reciprocal of high street banking presence.

However, this anomaly can be explained by looking at the actual number of branches in the two countries, and more specifically the number of people they are unable to serve. In India the lack of a physical banking structure outside of major cities resulted in 70% of the adult population being completely unbanked in 2010. The number of brick-and-mortar branches has been increased to address this issue, with the figure falling to 52% in 2016.

This perhaps indicates that even with full adoption of digital banking financial services are not trending towards a scenario where there is no high street presence at all, but instead towards a market-determined presence where the cost of running the branches intersects with customer demand to use a diminishing and outdated service. Falling use stats from the UK and U.S, as well as the confirmed closure of banks on both sides of the pond, indicate that the current number of branches is well in excess of this critical number and will continue to fall in developed markets. In emerging markets it is the opposite which is true, so the number of branches will rise until this threshold is met, at which point digital adoption will continue to soar as the number of branches stagnates.

Investing in digital in becoming critical for financial services

So with all that said, it is of little surprise that Tier 1 banks are turning to digital solutions with an increasing sense of urgency, in order to fend off competition from challenger banks and traditional rivals intent on one-upping them on the digital market front line.

Which of course is great news for the fintech industry, the market currently being rich with buyers looking to get their hands on the best available digital products, whether that means partnering with or acquiring the leading providers.

In its whitepaper Juniper states that almost $14bn was invested in the fintech industry in 2015 through venture capitalism, and this hasn’t slowed down in the past 12 months. The Chinese fintech industry in particular is being pumped up with huge amounts of capital (in the last year investment in Chinese fintech overtook that of the U.S and is primed to see more of the same in 2017).

And of course banks themselves have set aside funds for digital transformation and the adoption of the mobile first approach. Amongst the banks highlighted by Juniper is Deutsche Bank, who have already announced that it will invest $750m in digital transformation by 2020. Spanish banking giant BBVA is also on the record pledging $1.2bn of investment into digital innovation, including the acquisition of 29.5% of UK challenger bank Atom for $68m, and UK bank Lloyds has confirmed that it will invest £1bn over the next three years in improving its digital banking capabilities.

Some banks are more ready for full digital adoption than others

In revealing its findings, Juniper Research has created its own ‘Readiness Index’ to rank how far down the road Tier 1 banks are in preparation for digital transformation. The score is a combination of Juniper’s own knowledge of each bank (compiled through meetings and interviews) and measurable factors including its value of investment.

These innovation scores then place each bank in one of five categories on the digital readiness scale; inception, established brand, focus, mature, and evolved.

None of the financial services researched were classified as evolved, but a number, including Bank of America, BBVA, JP Morgan Chase, RBS and HSBC were ranked at the upper end of the mature phase, described as: “Reaching final stages of objectives set out as per roadmap and evaluating new product and service strategies.”

In contrast United Bank for Africa, Standard Bank and SBI scored lowest on the Juniper Research Digital Readiness scale, ranking in the established brand category.

For Juniper Research’s full digital readiness rankings, and all other research statistics, refer to its Futureproofing Digital Banking 2017 whitepaper.

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