Delivering Return on Capital (ROC)Through Banking Innovation Date:   Friday , February 04, 2011 Innovation and Return on Capital (ROC) In a research report on the innovation strategy and practices of European banks, the European Financial Management Association defines innovation as “a new idea or method, which creates value for the customer or the company itself.” On another note, for a bank, ROC is arguably the most important measure of business value. Aside from being a key expectation of investors, a healthy ROC is usually a sign of efficiency, productivity and customer retention. ROC is indeed a proxy indicator of the value created by an innovation project. How Meaningful Innovation Can Strengthen ROC The realization of ROC and other secondary business drivers like efficiency and productivity, among others has become elusive on account of tough environmental conditions characterized by: l Slow recovery from the global financial crisis for banks running in the ‘normal’ business mode l Low customer confidence, resulting in lower retail business and investment l Accelerated change and stringency in regulatory requirements l Rapid escalation in the expectations of Gen-Next consumers Innovation, which revolutionized the face of banking in the past, now has a very important role to play in the alleviation of these issues. By accelerating product and service delivery, improving customer engagement, enabling quick adaptation to changing compliance mandates and fulfilling higher customer expectations, innovation can help banks meet these challenges and differentiate themselves to get through a phase of intense consolidation within the industry. It is not hard to see the salutary impact of innovation on ROC and drivers of business value. For instance, customer experience innovation improves retention; product innovation improves cross-sales and process innovation improves the efficiency and productivity of the bank as well as its customers. Small wonder that banks are increasingly looking to invest in innovation to not only survive in the short run, but emerge as leaders over the long term. Let’s take a closer look at how innovation can positively impact two key drivers of banking ROC: l Customer Delight l Channel Experience Innovation to Create Customer Delight Customer delight – a primary contributor to ROC and business value - helps banks acquire and retain customers. On the flip side, a bank needs a base of loyal customers that it can proceed to delight and ultimately convert into advocates. This sets in motion a cycle of higher profitability, because it is well understood that it is much more profitable to service existing customers than chase new ones. Innovation creates customer delight by improving product relevance and transparency, customer empowerment and choice, as well as banking reach, all of which make a great user experience. The following examples are amply illustrative: l Innovations in GPS based technology and RFID enable banks to pinpoint the current location and activity of their customers and leverage that knowledge to deliver context-relevant messages. l Innovation in analytics help banks understand their customers better and gain deeper insight into their needs. Armed with information about individual customers including their profile, preference, community and affiliation, banks propose targeted products and services to each, based on the current context of the customer. What’s more, this deeper understanding of customers can also be applied to a broader, holistic context to derive long term advantage by way of repeated right-sales, deeper customer engagement and advocacy. l Innovative personal financial tools make it possible for individuals to learn more about products and services of interest, at a pace and time of their liking. If these tools, which are usually available online, can also be made available to customers at points of purchase, that could further improve customer convenience and the bank’s cross-sell rate. l Agile and flexible systems support product innovation so that the right product, at the right price and in the right package can be offered to customers at the right time. Garanti Bank, Turkey offers Flexi Card, which permits customers to determine 10 parameters including interest rate, reward rate, card fee, campaigns, redemption type, and card design, is a good example of personalized product innovation. Thinking Out-of-Box with Channels Few bankers will contest the fact that the emergence of new age channels has often been deemed an overt expression of ‘definitive innovation’ in banking. Channel innovation has created immeasurable business value by improving productivity, lowering costs and enhancing the efficiency of channel infrastructure. For instance, several banks in the Finacle-EFMA survey reported using ATMs and self-service kiosks to deliver a wider range of auxiliary services, from bill payments to loans, even to those without a card. Bankinter improved its customer satisfaction ratings and online product sales by providing a video-call facility to Internet banking customers using which they could resolve queries, complete transactions and even close deals. Despite the success of banking channel innovation, there is much room for improvement in future initiatives. When channel innovation is deployed optimally, it can deliver scale, reach and business value at no additional cost. 1. Channels must be nonintrusive, yet within reach of customers when needed. Customer delight fades fast in the face of pushiness. 2. Different channels must be leveraged differently, in sync with the manner in which customers transact over each, and only relevant information or services must be delivered. For instance, banking services rendered over in-store display terminals must focus on providing basic account information and other communication that may be important within a shopping context; such terminals are not suitable for providing investment advice. Another example is that of the unbanked, whose requirements are very different from those of the affluent; it is important that alternate channels factor in these differences if they are to deliver an optimal experience to either segment. Equally, channels must offer a fallback option to users to seek human assistance at any time during the transaction. Hence, a rural ATM kiosk must be able to render voice-based assistance in the local language and non-branch channels must offer the comfort of voice or video chat with a bank employee so that their less tech-savvy users can simply speak to someone when required. Linked to the above point, banks must deploy channel intelligence to empower customers and thereby raise their financial decision making skills. Financial tools such as comparators and simulators can help customers understand the difference between competing products or the impact that a certain investment would have on their overall portfolio. This type of support is especially needed by older or less financially savvy users who might be acting independently for the first time. Knowledge about the channel behavior of different customer segments must also be used to reward them by way of higher reward points for non-branch transactions or higher interest rates for fixed deposits booked online. 3. User experience on alternate channels must be multi-channel enabled, that is, it must not vary drastically from one channel to another, and the information acquired by one must be ported seamlessly to the rest. For example, navigation in the mobile banking site must be consistent with that on the Internet pages, and it should be possible to complete an interrupted ATM transaction through the contact centre without having to start at the beginning. 4. Channel innovation cannot be purely technology driven; an innovative channel strategy is as necessary. Today, social media is a strong influence in any kind of decision making. People don’t take company sponsored communication about a product at face value; they seek their peers’ opinion instead. Since this applies to banking and financial services as well, banks can ill afford to ignore social media. By taking a creative approach to channel strategy, they can harness the power of this medium to their advantage. For that, they must enable their channel infrastructure to connect directly to various popular social platforms, so that customers can immediately follow up on an interesting new banking service that they’ve just come across by discussing it within their communities. The facility to obtain timely advice from peer groups while an idea is still “hot” will enable customers to decide faster, and in all likelihood, improve the banks’ chances of closing the deal. 5. Technological innovation must further improve channel automation and ensure that customers are confronted with the least amount of clutter. An application that immediately comes to mind is in the area of authentication. Innovative authentication measures such as voice recognition or fingerprinting can shorten the authentication process and eliminate the need for user names and passwords, which are susceptible to theft. Hence, going forward, authentication of an Internet banking user should be possible with a swipe on a fingerprint reader attached to a laptop, and a mobile banking user must be recognized by voice. This also increases the security aspects of the authentication process 6. Newer channels including mobile, TV, VOIP phones and kiosks can be further leveraged to create ubiquitous but unobtrusive reach. 7. Last but not least, channel innovation must also focus on making transactions absolutely secure through data encryption or the provision of multifactor and other sophisticated forms of authentication. Particular care must be taken to ensure that public channels such as in-store kiosks are not vulnerable to attack by fraudsters. The use of innovative biometric technology for customer identification is a further step in this direction. Summary Maximizing ROC is high on the agenda of banks. Several value-drivers such as efficiency, productivity and customer stickiness link back to ROC. Innovations that rejuvenate the channel experience and make for customer delight play a defining role in optimizing the drivers of business value. That said, to put in place a cohesive innovation strategy, is critical indeed. While laying down their vision for innovation, banks’ senior management must ensure ground-level support by way of, employee training and a collaborative partner network in addition to robust technology infrastructure. This is the way to innovation success – the kind that strengthens ROC and builds a sustainable differentiator for the business. Chandramouli Kundagrami,The author is Lead - Product Strategy, Finacle, Infosys Technologies