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DIGITAL TRANSFORMATIONTWO ROADS TO DIGITAL TRANSFORMATION

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KEY TAKEAWAYS

• Provide perspective on what digital transformation is and how to achieve it

• Discuss the business models available for digitally transformed companies and how to get there

• CIOs

• CTOs

• CEO

• Heads of digital transformation

WHO SHOULD READ THIS DOCUMENT

DIGITAL TRANSFORMATION:

TWO ROADS TO DIGITAL TRANSFORMATION

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PROPRIETARYNOTE

01 ABSTRACT 05

02 A NEW BUSINESS MODEL 06

Digital transformation example: Buying a house

Which business model options are available?

07

09

03 CHANGING YOUR BUSINESS MODEL

11

The digital disruptor route

The “enabler” route

11

14

04 CONCLUSION 17

CONTENTS

Digital transformation is currently running

very-high on every executive’s agenda.

Beyond the hype and pretty apps, what

does it take to transform your business to

focus on customer experience? This paper

aims to provide an insight into the ultimate

goals of digital transformation, possible

routes to achieve them and the threats

existing businesses may face.

01 ABSTRACT

5

Everyone seems to be talking about digital

transformation these days. At first, it seems

like a simple concept: you build a few “apps”,

streamline a couple of internal processes,

create some marketing hype and suddenly

your business becomes digitally trans-

formed.

Most analysts would agree this is a fine first

step. It is not, however, what most analysts

would call “digital transformation”. The key

word here is transformation and it applies not

only to digitally enabling a few existing

processes & products, but to the entire

company’s business model. Digital

transformation is not about channels, it is

about business.

At first, this seems odd. Most companies

have a successful business model (otherwise

they would be out of business) and,

therefore, by digitally enabling their current

business they are potentially reaching more

customers, making them happier and

increasing their loyalty.

However, in most industries, and in financial

services in particular, digital transformation

is about how customer experience (CX) and

the “ownership” of the customer relationship

brings new players into the industry. As we

have seen in the music, travel and

transportation industries the disruptors are

not industry “insiders”, they are digital-only

businesses that control the customer

relationship and experience. Does Uber own

any taxis? Is Uber a transportation company?

The answer to both questions is NO.

6

02 A NEW BUSINESS MODEL

The first question to ask is why people buy

a house? They don’t certainly do it to get a

mortgage. They do it because they want to

improve their comfort, safety or status.

However, the products that banks sell to

customers are not houses, banks sell

mortgages, which is something that people

need, but they don’t actually want or

understand very well.

Now, if a digital disruptor (e.g. Uber) wants

to engage with customers buying houses,

you can be sure of one thing: they will not

be selling mortgages.

Figure 1 below presents three alternatives

for buying a house:

Digital transformation example: Buying a house

7

Everyone that has ever bought a house

with a mortgage knows how painful the

process is. You have to deal with multiple

players, from the realter, the bank, utilities,

movers, placing your current house in the

market and the public registration (for

buying and selling). If you consider the best

(simpler) available alternatives today, you

probably have a realter that has an

agreement with a bank and can provide

financing for the house you are looking for.

Even in this case, the customer experience

is poor, inconsistent, partial and lacks

overall accountability (no one owns the

overall process).

Now, imagine an e2e digital journey that

helps you select a house that is adequate

for your income and risk levels and location

preferences, acts as a mortgage broker and

offers the best options for your profile,

automates the full mortgage process,

recommends options to rent, or sell your

current house and actually helps you do it,

offers options for utilities available at your

house’s location and handles the contract,

performs the house’s registration

automatically and provides moving options

and their scheduling.

By now, it should be obvious what is the

difference between the three ways of

buying a house: the e2e journey provides a

party that is responsible for the customer

experience and caters that the journey’s

objectives (buying a house) are met.

8

The first business model option available is

for your company to become the “driver” or

digital disruptor for the customer

experience. Drivers are usually the ones

that capture the customer information,

register the customer and provide the e2e

customer experience. The driver’s business

model options are:

• Charge a fee to the customer for

handling the journey;

• Charge a fee to the bank, realter,

utilities, … for finding new customers for

them;

• Targeted third party ads (this is

fakebook’s & Google’s business model as

well);

• Sell data (or metadata) about customers

and customer intentions.

Notice that none of the above business

models is “providing a mortgage”. That does

not mean that if the driver is a bank you

cannot do it, but the mortgage in this

journey is just one of the steps. The

customer experience itself is about buying

a house.

Which business model options are available?

9

The second business model available is to

become an “enabler” for a customer

journey (a driver for Uber, an Artist for

Spotify, Paypal for AirBnB). The business

model here is to provide a service (via an

Open API) that can be integrated into an

e2e customer experience. Thus, a mortgage

service, a utility contract service, a list of

houses on the market service, a house

evaluation service, a risk service, must all

be combined together to provide the e2e

customer journey. The enabler’s business

model options are:

• A fee for each API call (risk, …);

• Getting more mortgages;

• Getting more utility contracts;

• …

However, since the driver owns the

customer, brand loyalty will be diminished

or non-existent, there will be more

competitors for fees and contracts and

your white-labelled services will face price-

-point competition leading to lower

operating margins. As we have seen with

Uber & co, drivers have the upper hand and

thus can impose terms & conditions to its

partners and providers, including deciding

one partner is no-longer required and start

including competitors as alternatives.

The “Buy a house” example is just one

amongst many. Journeys for “Buy a car”,

“Consolidate my credit”, “Create a new

business” and many more are also likely to

be made by digital disruptors.

10

11

03 CHANGING YOUR BUSINESS MODEL

This is the most challenging route and

requires the deepest change on existing

business models. It also has the highest

rewards but it is definitely not for

everyone.

Let’s go back to the “Buy a house” example

and this time take it from the perspective of

a Bank that currently provides paper-based

mortgages to its customers.

The digital disruptor route

In this scenario, the customer takes

independent steps: find a house, decide

what to do with the current house, get a

mortgage (in itself a long and cumbersome

process), register the house, …, contracting

utilities and moving in.

Current Status

12

In this new scenario, you will have enough

leverage to convince your customers that

you have the best CX around and you will

be partnering with the utility companies to

have their services availed to your

customers, while getting revenue from a

new business model that complements the

existing one.

Step 1

Automate your part. Create a digital

journey catering for the customer

experience for the bank’s role in the

process, while simplifying bureaucracy and

streamlining the flow. Include a “perk” by

going outside the Bank’s comfort zone

(house registration, utilities, ...).

This is important as it allows your

marketing to use it to present your

business as a digital disruptor and

simultaneously providing a way to

“capture” the customer.

The figure below illustrates the new status:

13

Congratulations!

You are now a digital disruptor.

Step 2

Using your newly found ability to establish

partnerships, find a real estate partner and

create the ability for the customer to select

a house, rent his/her current house,

evaluate risk, valuate current asset

portfolio vs income, valuate the best deals

against market and anything else you can

think of to facilitate the customer’s

experience.

The enabler route is all about streamlining

and cost cutting your existing business

capabilities and making them available in

the form of APIs to enable third-party’s

digital processes. In this case, the business

model is about creating a lean operation

that is able to provide the best “mortgage

service” API in the market with great

response times, low-cost, transparency,

ease of integration and support. This model

also requires establishing partnerships

with the right digital disruptors and doing

so at the right time. Enablers are API

providers.

14

The “enabler” route

Current Status

Current status is exactly the same as for

the Digital Disruptor scenario. You are one

of the multiple independent players the

customer needs to buy a house.

15

The digital enabler requirements are:

To become an enabler your business logic

and customer experience (CX) need to be

separated from the existing channels. Why?

Because enablers do not have channels.

They need to provide capabilities to digital

disruptors that do have channels.

You need to set up support for the

customer experience you aim to provide

and look for ways to make the existing

processes as paper-free and automated as

possible.

It is not incompatible for your existing

business to compete with the digital

disruptor’s. Therefore, your own channels

can also consume the logic, CX and

processes provided to third-parties. This is,

in fact, a great way to streamline your

existing business (cost savings, great

marketing, automation, customer

satisfaction).

Step 1

The first step is not dissimilar from the one

required for the Digital disruptor. Your

business needs to be automated and

streamlined as much as possible:

16

Step 2

At this stage you can choose to become a

pure “enabler” and ditch the existing non-

-digital business OR, more likely, to

combine your existing business with the

one of providing mortgage services to

third-parties. The key here is to be part of

the widest possible network of partners

that use your services for their customer

experiences. This is a volume business,

after all.

Digital transformation is an irreversible

step in our global evolution as a society. It

does not mean disruption in every business

area will happen tomorrow, but maybe in

two, five or ten years. The fact remains that

it will happen and it will not leave financial

services out. The stakes are just too high.

In fact, it is already happening, banks that

are enablers already exist (Solaris Bank, for

example) and Fintech’s that use them to

create new business models as well (like

Revolut). Another common mistake is to

think financial services are protected due

to regulation. Think again. Digital

disruptors are not necessarily financial

services companies and thus not playing by

the same rulebook.

This paper presents a simplified view of

possible future scenarios for digital

transformation over many years. The goal

is not to anticipate the future, but to

present a more disruptive perspective of

what the impacts of digital transformation

may be on the financial services industry,

similarly to what we have already seen in

other industries. The disintermediation of

long-time industry players is a direct

consequence of providing a better

customer experience focused on what

customers want/need and not on what

companies currently provide.

It is up to each individual business to

decide where it wants to be tomorrow.

04 CONCLUSION

17

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