Opinion piece What can the UK learn about best practice from our European colleagues? By Simon Cadbury Director of Strategy & Innovation Intelligent Environments

Introduction The UK has a vibrant and innovative digital banking sector but it’s in the pack rather than leading. Across Europe, incumbents and upstarts alike continue to raise the bar when it comes to innovation. The vibrancy of the continent’s digital banking is evidenced by the Forrester 2015 Global Mobile Banking Functionality Benchmark; with five of the top ten places taken by European players. The top spot was taken by Spain’s CaixaBank and it was joined in the top ten by two banks from Poland and one from Turkey. One British bank made the top ten. What this indicates is that no one country is leading outright. The various demographic, regulatory and market conditions across European create a very different environment, for companies and their customers, in each country. The UK, which many argue is the heart of the European Financial Services industry, leads when it comes to online banking adoption. Germany also has high levels of online banking adoption but it’s combined with relatively low branch and mobile usage. Meanwhile in Spain, home to two of Europe’s most innovative banks, BBVA and CaixaBank, the population remain firmly wedded to their branches. In this paper we’ll explore what’s happening across Europe, why it’s happening and what UK financial institutions can learn from it.

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Areas of excellence The areas of excellence and innovation seen in banks across and beyond European are broad, covering everything from customer experience to social media. Here we highlight some of the most interesting and important developments.

Customer experience Delivering the best possible customer experience is central to the success of digital banking and across the continent banks are constantly refining their products, apps and websites. The bolder banks are starting to move beyond traditional ways of working and starting to tackle the more fundamental obstacles to full digitization. In Spain BBVA are taking on one of the last vestiges of paper-based banking with remote signatures; legal signatures that can be applied to digital bank documents from anywhere, via the bank’s mobile app or website. Poland’s mBank have made traditionally complicated products simple enough to fit into a ‘mobile first’ strategy - its one-click 30-second loan provides customers with near immediate access to funds via their smartphone, for example. And, after years of being the next big thing, biometrics is finally a viable option for authentication. In the UK, Barclays’ customers can authenticate themselves with finger vein recognition, NatWest and RBS customers via the iPhone’s Touch ID fingerprint sensor, and HSBC customers are rolling out voice authentication for all their 15 million retail customers. While digital-only bank Atom, plans to let customers choose how to login via one of three identity credentials (face, voice and passcode).

Branches Digital banking is changing physical branches across Europe too. In France BNP Paribas is stratifying its network into three layouts; Express, Advice and Projects. Each one is aimed at maximizing customer satisfaction in a different range of scenarios - from self-service in the Express branch to expert consultation in the Project. In a similar vein PKO, owner of a network of 2,000 branches across Poland, is pursuing an omni-channel strategy that will see the three story branches built in the 1960s and 70s replaced by two to three smaller branches. In part PKO is responding to relentless innovation by local competitor mBank who are pursuing a ‘Light Branch’ concept. The unapologetically digital Light Branches feature large movement and touch responsive screens, and are sited in high consumer traffic areas such as malls and modelled on boutiques rather than banks.

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Mobile Spain’s CaixaBank is so mobile-focused that it now has over 70 apps (available from its own app store: CaixaMóvil Store.) The bank also has a digital wallet integrated into its mobile banking app, which lets customers make contactless payments with their phones.

In Poland mBank is thinking big and pivoting to a modern ‘mobile first’ strategy. It makes their mobile app the preferred gateway to all their banking channels and, just possibly, an authenticated, encrypted and ‘sticky’ gateway that could be used in the future for everything from accessing government services to signing commercial contracts.

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Social Media When it comes to social media, it’s a German bank, Fidor, leading the way. It has built a community of about 250,000 users called the Fidor Smart Community. The bank invites prospects to ‘bank with friends’ and gives members financial rewards for giving and receiving knowledgeable financial advice, as well as evaluating and reviewing the financial products and services they’re interested in. Its current account offers tiered interest rates on credit balances based on the number of ‘likes’ Fidor receives on Facebook.

Payments With over 50 million cards issued, and Apple Pay already rolled out, the UK is leading the way in deploying contactless payments but it’s the Czechs and Poles using it the most. MasterCard reports that, in 2015, 77% of in-store transactions in the Czech Republic and 55% in Poland were contactless (although neither are subject to the £30 cap applicable in the UK). The UK is also leading in Europe on peer-to-peer payments (such as Paym and Barclays’s Pingit), in part thanks to its pioneering investment in Faster Payments, but adoption is nowhere near that of services seen in the developing world such as mPesa. P2P payments are also a feature of Blik, a Polish mobile payment system developed by PKO but then shared with its five largest competitors - Alior Bank, Bank Millennium, Bank Azchodni WBK, mBank and ING Bank – which makes it available to 80% of the market, avoiding fragmentation and establishing a de-facto standard.

Excellence outside Europe Outside of Europe. Australia, New Zealand, Canada and the USA stand out as hotbeds of digital banking innovation. In the US, where cheques remain stubbornly popular, USAA bank were the first to deliver remote cheque deposits via smartphones – a move since copied by US giants like Bank of America, Citibank, Chase and Wells Fargo. Australasia is pioneering lifestyle apps such as CommBank’s Property App, smartphone software that can help you find a home, work out if you can afford it and apply for a loan. And in New Zealand, WestPac have released an augmented reality app that superimposes 3D balances, transaction history, spend locations and other information onto your cards when you point your smartphone’s camera at it. The concept was the winner in the bank’s recent crowdsourced Global App Challenge competition.

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Broader lessons What drives innovation? Variations in demographics, competition, government regulation, access to talent and even luck can create different environments in which different levels and types of innovation are successful. Disruptive innovation can trigger a virtuous loop; if one bank innovates then competitors respond in kind. This can lead to different countries specialising in particular types of innovation. In other markets environmental factors play a bigger part. Recent challenger banks have struggled to grow beyond 100,000 customers and match the success of mBank. Jacek Iljin, mBank’s managing director of retail banking, attributes the bank’s success in part to the favourable conditions in the Polish market when it started in 2000; interest rates and margins were high and there were “a significant number of unbanked and under-banked individuals”. The technology of the time was advanced enough to provide digital banking but, according to Iljin, simple enough that “you could buy a banking system and have it up and running in 100 days”. Similar conditions exist today in Turkey and banks like ABank are looking to demographics to give them escape velocity; half the population is under 25, the average age is 21 and, according to ABank’s Ahmet Ertan Algan, they’re tech savvy and demanding innovation. Across Europe banks in mature markets are changing their culture to enhance their ability to innovate and take advantage of new opportunities with Spain in particular playing host to a variety of different strategies:

• BBVA has acquired Simple, taken a stake in Atom and is transforming itself into a ‘software company’. BBVA is on a journey that will increase the number of employees working on digital banking from 3% to 50% within five years. • Elsewhere CaixaBank have built an internal crowdsourcing platform, where employees can enact what the bank insists is their ‘desire’ and ‘responsibility’ to innovate. • Santander has created a dedicated corporate venture fund so that it can invest in a portfolio of start-ups.

Fintech insurgency When it comes to Fintech it seems that European eyes are trained on London and the disruptive potential of its start-ups. Technologies like blockchain and new regulations like PSD 2 are years from playing a significant role in retail banking but when they do they just might turn it upside down. Jakub Grzechnik, head of mobile and internet banking at PKO is deeply concerned that if they don’t move fast enough “We’ll be left with costs while the profitable areas are taken up by Fintech 5

providers.” His bank is betting on creating a customer experience that is good enough to stop customers looking elsewhere. Others meanwhile are looking to embrace the potential for disruption: Turkey’s ABank is “planning to open our systems to 3rd parties” whilst the UK’s Starling is planning to partner with Fintechs and integrate the best of their services into its own offerings, alongside its current accounts. Other early examples of bank/Fintech partnerships include:

• Peer-to-peer: Santander has partnered with Funding Circle • SME lending: BBVA has partnered with On Deck, and ING with Kabbage • Foreign Exchange: Virgin Money has partnered with World First, while Currency Cloud’s clients include Mediterranean Bank and Fidor Bank

Is innovation enough? The pace of change in digital technology is relentless and it’s easy to find competitors or peers who are piloting, prototyping or rolling out something you are not but an advantage in innovation does not always translate to a commercial advantage. Poland’s mBank is a successful digital bank and a multi-award-winning innovator but the much older, and more traditional PKO remains Poland’s favourite bank. PKO isn’t as agile or innovative as its smaller rival but it is, it seems, innovating enough even for a youthful and expanding market. PKO is an unashamed copier of good ideas, a strategy known as ‘fast follower’ that, according to Gregory Carpenter from the Kellogg School of Management can suit companies that are agile enough to do it and have deeper pockets than their upstart rivals:

“A lot of times pioneers are not very well funded … They create a competitive game … competitors enter quickly and, with more resources, are able to win the game that the pioneer has created.” Forrester say you should measure the success of every innovation from the outset using metrics such as sales through digital channels, development of new digitallyenhanced products and services, customer acquisition through digital channels, cost reduction, digital customer experience, and perception of the company as an innovator1.

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From “How to create an innovative culture in financial services” (April 21, 2015) by Oliwia Berdak

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Conclusion There are organisations pushing the envelope all over Europe but no one European market leads. Banks are watching each other (and increasingly watching technology companies outside of banking) for ideas and innovations. In today’s fast moving environments, the benefit of being a first mover is often short lived. The different environments in each market trigger different types of innovation so whilst there is plenty of inspiration to be had banks must be mindful of the conditions that made them possible – innovations do not always travel. More significant than any one innovation, product or feature though is the way that banks themselves are embracing digital. The only way for traditional banks to stay on top is to embed digital from the ground up. They need an organisational structure, culture, technological architecture and KPIs that embrace digital. Only then can they call themselves a truly digital business and, more importantly, be well positioned in a battle that is set to get only bloodier.

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About the Author Simon Cadbury, Director of Strategy & Innovation Intelligent Environments Simon is a product marketer and strategist with 18 years’ experience working for a range of major international brands. Simon’s role is to work with Intelligent Environments’ investors to set and deliver the company’s mid and long term strategy, as well as overall responsibility for the product development and management of Interact; the company’s core product offering. Simon joined in 2013 from Lloyds Banking Group where he was responsible for payment technology and also sat on the Credit Card divisions leadership team. Prior to this he worked on the launch of a number of firsts in new technology – the Blackberry (BT Cellnet), BT Openzone (BT Retail), 3G Live! (Vodafone Australia) and Sky HD (BSKYB).

About Intelligent Environments Intelligent Environments is an international provider of innovative mobile and online solutions for financial services providers. Our mission is to enable our clients to always stay close to their own customers. We do this through Interact®, our single software platform, which enables secure customer acquisition, engagement, transactions and servicing across any mobile and online channel and device. Today these are predominantly focused on smartphones, PCs and tablets. However Interact® will support other devices, if and when they become mainstream. We provide a more viable option to internally developed technology, enabling our clients with a fast route to market whilst providing the expertise to manage the complexity of multiple channels, devices and operating systems. Interact® is a continuously evolving technology that ensures our clients keep pace with the fast moving digital landscape. We are immensely proud of our achievements, in relation to our innovation, our thought leadership, our industry wide recognition, our demonstrable product differentiation, the diversity of our client base, and the calibre of our partners. For many years we have been the digital heart of a diverse range of financial services providers including Atom Bank, Generali Wealth Management, HRG, Ikano Retail Finance, Lloyds Banking Group and Think Money Group. For further information visit www.intelligentenvironments.com

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