Profitable banking: How to digitise successfully

  • Posted on June 28, 2018
  • Estimated reading time 3 minutes

In my previous blog post, we saw how DBS Bank began to build digital into the corporate fabric, which is the most critical part of any digital transformation. Piyush Gupta (CEO since 2009) regards their digital transformation as pervasive, encompassing technology, a customer journey and a start-up culture. This is difficult to replicate and creates genuine competitive advantage. It pre-empts disruptors and disrupts incumbents. But does digital transformation make money?

DBS has a management system to drive this transformation and track financials. In a recent Economist article, Gupta talked about following the breadcrumbs, all the way … to shareholder returns. He said, “There’s really been a measurable and visible revenue impact. This comes from a reimagined customer experience that leads to customer stickiness and an increased share of the customer’s wallet. A customer doesn’t want a mortgage. He’s buying a house. A customer doesn’t want an auto loan. She’s buying a car. If the mortgage and the auto loan can be hidden in the house- and car-buying processes, you naturally get more business. The customer experience helps a lot.”

DBS divides customers into traditional (branch, call centre, etc.) and digital: digital customers are defined as having over 50% of their dealings with the bank remotely and they are re-qualified every 12 months. Digital customers:
Generate twice as much income per customer: S$600K vs S$1.3M
Have lower cost-income ratios: 55% vs 34%
Have higher ROE: 19% vs 27%

Digital customers are lower cost-to-acquire, lower unit cost-to-serve, higher income per customer year on year and consistently faster growth in income per customer. In Avanade's Digital Banking POV paper, we recommend five approaches for becoming a digital bank, including creating a digital workplace and acquiring and retaining digital customers.

In 2017, DBS digital customers contributed 60% of income and 68% of profit – they were 39% of the customer base. Interestingly, both the digital and offline customer groups cost S$1.1bn to maintain in 2017, but digital customers generated revenue of S$3.1bn versus S$2bn (offline). 

As mentioned above, the cost-income ratio for digital customers is 34% (versus 55% for offline) – a typical bank would be happy with 50%. Again, the ROE (return on equity) on digital customers is 27% - most banks are glad of double digits. “If you digitally engage people, they tend to do more” argues Gupta. DBS earns 3.4 times more income on mortgages from their digital segment compared to their offline customers and 2.6 times more on credit cards. Over the last three to four years, DBS’ share of life insurance policies has doubled from 16% to 32% in Singapore – level with OCBC (the market leader) - and their share of mortgages is now back over 30%.

In my blog series, I have shown how one bank has successfully transformed itself into a digital organisation. For DBS, the key lessons were around encompassing technology to become ‘digital to the core’, re-imagining the customer and employee journey and making the culture more entrepreneurial.

Does digital transformation bring success? Yes.

Key Takeaways:
‘Follow the breadcrumbs’ … all the way to the money. Track financials.
Hide the banking in the customer experience – focus on the customer’s aspirations
Segment digital customers and compare to ‘traditional’ groups on a variety of financial metrics, especially profit, cost-income ratio and ROE 
Transition customers to digital behaviour, wherever possible – it increases usage and income 

Learn how Avanade Advisory Services can help your company become a digital business and check our Top 10 tips for digital transformation.

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