The Digital channels activity score assesses the level of traffic and engagement over main digitalterritories (Web, Social media and Mobile apps). We applied this assessment on European retail banks, studying 47 European brands [1] in 5 countries: France, Germany, Italy, Spain and the UK – including:
The largest retail banks in terms of number of customers in each of the 5 countries,
Smaller digital banks including local or multi-country actors.
The studied panel also includes – for benchmarking purposes – 4 additional banks:
Polish Mbank identified as one of the most active European actor on digital channels,
3 US actors: a global one, a regional one and a digital one.
To achieve comparable results, all data has been weighted against the number of clients of eachbank as well as the share of population in each country with internet access.
In a context of revenue decrease and historically low interest rates, a strong usage of digitalchannels is crucial to survive disruption and stay competitive.
This article focuses on 3 data-backed observations:
Observation 1 – The average digital channels activity score per country is quite homogeneous.However, each country demonstrates a large dispersion of performance among banks andspecific patterns in term of digital channels preference.
Observation 2 – Pure digital challenger banks and traditional banks achieve comparableresults, with 1 challenger bank in each country, except UK, achieving better results than theirtraditional peer.
Observation 3 – Four groups of actors can be distinguished, characterized by the size of their client portfolio and the level of their digital channels activity. Among large banks, the ones with the most active digital channels demonstrate the highest revenue growth from 2015 to 2016.
Overall context of Retail banking activities in Europe
European economy is recovering and the GDP is growing across all countries; however, in 2016 the European retail banking revenues declined by 4% compared to 2015. The income of banks is under pressure in the current historically low interest rate environment, with net interest incomein decrease despite growth in loans and deposits.
The share of net interest income in the overall income has been stable for the past 5 years at a level of 67% (for UK: 80%), making revenue generation difficult for banks. Income per customer has decreased by 2.6%, with Spain (- 8.6%) and Italy (- 6.6%) showing the highest decline in this area.
With low income, banks are cornered to concentrate on cost cutting to improve their bottom line.Investing in digital opportunities is becoming the ever more popular option for the banks to achieve this goal. According to Bain, mobile banking interactions cost significantly less than interactions in branches: 10 cents per interaction vs 4 dollars.
For example, banks in the UK have fitted 536 branches with video banking facilities in 2016, an 23% increase in one year. Also, following closures in the previous year, the British banks are planning to close 762 branches in 2017. HSBC alone, claiming that the number of visits to their local branches has decreased by 40%, has already closed 222 local branches in 2016 and 321 (about a quarter of its network) over previous two years period. They are planning to move the interactions online.
In France, where it is less accepted to fire people and where the banks are expected to maintain the role of good corporate citizens by maintaining branches, the shift towards less branches has been slower than in other countries. Banks in France have eliminated only 3% of their branches since 2010, compared to 13% drop in the Euro zone and are under pressure by the investors to shrink branch networks and move towards digital channels. Major French banks reacted by announcing plans to reduce their number of branches. For instance, Société Générale announced in 2015 the closing of 20% of their branches by 2020. In the same trend, BNP Paribas closed 2-3% of their branches since 2012 and will continue to do so at least for the next 4 years.
But closing a branch is not risk-less. Customers of the branch, who still value their bank’s physical presence, will be inclined to move to a new bank. Closing branches may increase traditional bank churn rate and reduce their top line. For instance, of respondents in the Netherlands who experienced a nearby branch closure in the past year, 27% mentioned they switched banks or started using a competitor product when their branch was closed.
To reduce this risk, banks need to first replace branch-based relationships in a maximumpossible way by digital ones, before closing a branch.
In this context, “digital channel usage” is a key driver for banks’ revenue growth.
Observation 1 – The average digital channels activity score per country is quite homogeneous. However, each country demonstrates a large dispersion of performance among banks and specific patterns in term of digital channels preference.
The Digital channel activity score shows the activity performance on Web, Mobile apps andSocial media channels. The country score is the average score of selected banks in each country,weighted by the number of clients of each bank.
Overall, the average digital footprint score per country is quite homogeneous. The UK slightlyleads in terms of average score, which is mainly due to strong performance in the mobile appsarea.
However, each country demonstrates a large dispersion of performance among banks.
By analyzing for each country the percentage of the banks appearing in the list of Top, Mediumor Worst European performers, we have identified 3 patterns in terms of mix of performers:
Italy has the highest proportion of top performers but also one of the highest proportion of worst performers
UK, Italy and Spain have the more balanced mix of performance
France is characterized by a major proportion of Medium performers and a limited proportion of top performers
UK banks, leading in terms of the average score, appear often in the list of the worst European actors. For the banks planning a number of branch closures, it will be hard to move their operations online if they are not strong in the digital channels. Also, in a country with such strong average score as well as very strong traditional players like Barclays and Natwest, it is risky to be in the list of the worst performers, making these banks (example HSBC) vulnerable tolosing market share.
Specific patterns exist in terms of digital channels preference
In the UK, while the interactions through branches, online banking services and contact centers declined by 39%, 11% and 17% respectively from 2012 to 2017, the usage of mobile apps soared by 354% during this same period. In this ecosystem, it is not surprising that the UK has the best score also in the mobile apps area.
Mobile apps score is part of the overall digital channels analysis and is measured by level of satisfaction, client engagement and activity in stores. The UK’s leading position is mainly a result of strong customer satisfaction levels in the app stores (android and IOS) as well as the engagement levels of the customers (downloads and number of comments). The French banks are weak in both areas. The average satisfaction score in France is 3.3 versus the score of 4.2 in the UK. In order to confirm that there is no overall trend of French customers giving worse ratings than in the rest of the countries, we have performed analyses of 20 well-known apps andcompared average ratings by countries[2].
The client engagement level is also low for the French banks (8 vs 14 in the UK). Number ofdownloads, number of comments by the clients stays at a lower level than for the peers.
This gap in the mobile banking usage in France is likely the reason why we see so many new entrants with a mobile first product offering. Recently, a major telecom operator Orange entered the market with Orange bank and this is followed by the entry of Avantoo by Credit mutuel and the plans of entry by Eko created by Credit Agricole. International actors are also taking advantage of the weakness of the French banks in the mobile area. While British Revolute and German N26 are already present in the market for some time, the British Starling banks’ launch is also confirmed.
Regarding social networks, Germany has the lowest score. For instance, the usage of socialmedia to generate traffic is quite low in Germany.
German banks achieved the lowest average D-Rating social media score. One of the criteria which contributes to the D-Rating Social media score is what we call “visibility” and one of the main indicators of this criteria is the number of social media followers per customer. All Germanbanks, except N26 Germany, have a very low “visibility” score. The German average is 3 (2 without the impact of N26), against the average of 8 in all countries combined.
German banks’ scores in social networks might reflect the relative low penetration of social networks in the country (the number of monthly active social media users in Germany is 41% vs an average of 53% in the selected 5 European countries). But N26 and DKB demonstrate to all German banks studied that there is room for improvement.
Observation 2 – Pure digital challenger banks and traditional banks achieve comparable results, with 1 challenger bank in each country, except UK, achieving better results than their traditional peer.
Traditional banks are strongly established in their markets, having larger client base and marketshare than the newly emerging digital players. Selected digital banks have in average 1.5 million clients vs 10.8 million clients for traditional banks. How fast the digital banks will be able to growin order to compete with the traditional banks will also depend on how well they use the digital channels.
N26, in France and Germany has a better digital channels activity score than the best traditional performers in the countries: Credit Agricole and DKB. Imagine bank has a significantly better score than its peer Caixa bank in Spain, however Caixa bank owns Imagine bank which makes it that the 2 banks together have the best score in the Spanish market. Same is true for the 2 Italian banks: Fineco and Unicredit. Finecobank is the best performer in Italy directly followed byUnicredit and the 2 banks belong to the same group.
In the UK, the traditional banks are achieving good scores in terms of digital channels activity.Both Barclays and Natwest, two large UK retail banks are among leaders of digital channelsactivity score, with Barclays being the 6th best performer in our analysis.
Observation 3 – Four groups of actors can be distinguished, characterized by the size of their client portfolio and the level of their digital channels activity. Amongst large banks, the ones with the most active digital channels demonstrate the highest revenue growth from 2015 to 2016.
The following matrix shows the distribution of analyzed banks according to the size of theirclient portfolio and the level of their digital channels activity.
Resulting from this analysis, four groups of retail banks are identified:
1. Low-Impact Competitors – including Tesco bank and First Direct – are characterized by a small market share and a limited digital channels activity. These retail banks are not in a favourable position to have real impact on the market and to expect significant market share development. They need to increase digital channels activity to compete more aggressively among digital challengers.
2. Digital Challengers – including ImaginBank and N26 in Germany– are new entrants that areengaged in a rapid market penetration strategy by leveraging superior digital channels activity, with a particular focus on new digital territories: mobile apps and social media. A Digital Challenger fights for becoming a future Digital Leader.
3. Traditional Players – including Santander Spain and Commerzbank – historically earned a significant market share but did not engage strong activity on digital channels yet. Their digital gaps are more and more impactful and their market share is at-risk. Their existing customers are targeted by more digitally active players and they are in a weak position to attract millennials.
4. Active Leaders – including Barclays and Caixa bank – are well-established retail banks already engaged for delivering high level digital channels activity with the objective to protect their market share against new Digital Challengers and attract new millennial clients who are expecting new ways to interact with their bank.
In 2016, Active Leaders demonstrated a 3.5% higher average revenue growth compared to Traditional Players. Because of the acceleration of global economy digitalization, new customer demands and pressure for cost savings, we expect the 2017 digital channel activity score to be a leading indicator of retail banks revenue growth for 2017 and 2018.
[2] Apps include Spotify, Uber, Viber, Netflix, GoogleMaps, Shazam, Skype, Tinder, Kindle, CandyCrush, Youtube, Twitter, FB Messenger, Angry Birds, Subway Surfers, Pokemon Go, GoogleDocs,World of Tanks Blitz, Snapchat, Google Calendar
