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Very Few Banks Are Fully Committed To Digital Transformation Effort: Study

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In the last 3-4 years, global banks have been pouring over $1 trillion on IT. However, only a handful appear to be fully committed to a digital transformation. And only those that are digitally transforming are reaping the benefits, according to an Accenture study.

The report titled: Caterpillars, Butterflies, and Unicorns: Does Digital Leadership in Banking Really Matter?” — analyzed more than 160 of the largest retail and commercial banks in 21 countries to assess their level of digital maturity and determine if digital leadership is driving superior financial performance, including market valuation, profitability, top-line revenue growth and efficiency.

Among the key findings, 50% of banks are achieving higher profitability and returns on equity, driven by greater operating leverage, but they’re not achieving differential revenue growth — instead competing for high market share of revenue growth in a slow-growth revenue pool.

Few banks adopt a digital-first strategy

While digital maturity is associated with high market valuations and a better return on capital for these banks, only 12% appear to be fully committed to digital transformation and investing in a digital-first strategy; the other 38% are in the midst of transformation, but their digital strategies lack overall coherence. The remaining half (50%) have not made much visible progress in digital transformation at all and investors are showing a lack of confidence in their future prospects.

“Investors are signaling that they lack confidence in the future value of the traditional banking business model, with the industry languishing near the bottom on market valuation metrics like price-to-book and price-to-earnings,” said Julian Skan, a senior managing director and global Banking lead in Accenture Strategy.

“Our research shows that digital leadership drives superior economic performance, and that the gap between ‘the best’ and ‘the rest’ is widening at a pace that should concern banks struggling with digital transformation and overall competitiveness,” stated Skan.

Digitally focused banks reap rewards

The research analyzed where banks are on the digital maturity scale. They have looked at several factors. These include, public communication to the market about their digital journey. For instance through earnings call transcripts, news releases and stated investment budgets. Other factors include recognition of digital leadership by third-party industry analysts and observers.

The research identified the following three segments of digital maturity:

  1. Digital Focused: Only 12% global banks show full commitment to digital transformation. These banks are investing toward becoming digital-first banks. This is the only group with a price-to-book ratio above 1x.
  2. Digital Active: Approximately four in 10 banks (38%) are in the transformation phase. But most have not communicated a cohesive and compelling digital transformation strategy to the market. Digital efforts are resulting in higher return on equity, with the expectation of more to come.
  3. The Rest: The remaining 50% of banks have not made significant advancements in digital transformation. To improve their competitiveness, they should align and commit their strategies to digital transformation.

The report found that cost efficiency is the real change that drives digital investment,  rather than revenue growth. While “Digital Focused” banks are the most profitable and highly valued, they are achieving higher profitability through better operating leverage. They are also getting more out of every dollar of assets.

While these banks have the slowest revenue growth, they have constrained cost growth. This creates a gap of approximately 2 percentage points between revenue and cost growth every year over the last six years.

The Digital Active group has also created a gap between revenue and cost growth, of 1.3 percentage points. On the contrary, the banks in ‘the Rest’ segment created almost no operating leverage at all.

“Digital-focused banks have taken the first step in building a future-ready bank. But they need to pivot their focus from efficiency and move to growth. This will help them close the valuation gap with fintech and big tech competitors encroaching on the banking business,” said Alan McIntyre, a senior managing director at Accenture and head of its global Banking practice.

He added, “Digital-active banks have made significant progress in their journey. But need to focus on maintaining revenue growth while becoming more efficient and fully digital. To continue to win investor confidence and reap the rewards of digital investment, these banks would do well to focus on balance sheet. An example is using Open Banking to help acquire and manage customer relationships.”

Integrating IT with business

The research also found that the pivot toward digital will likely erode banks’ justification for fee income. It didn’t matter whether they are paying for advice or administrative work. Moving forward, it will be more important for banks to focus on generating income. They can do this by taking risks associated with running the balance sheet, including interest rate and credit.

Digital Focused and Digital Active banks will need to pivot back to a business model. In such case, the balance sheet is the critical driver of income growth. The banks can also create new fee income revenue streams beyond the boundaries of traditional banking.

Richard Lumb, group chief executive, Financial Services at Accenture, believes, even the most digitally focused banks have a big challenge ahead. “With traditional fee income getting squeezed, they will need to find ways to generate new revenue,” he said .

“To achieve stronger returns on their digital investments, banks will need to radically increase market-share based on pricing. They should also take additional risk on new revenue opportunities. They may also add services customers are willing to pay for in order to succeed in their digital transformation initiatives,” he summed up.

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