Digital Banking inLatin America

Market Research

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INTRODUCTION

RESEARCH METHODOLOGY

SURVEY ANALYSIS AND FINDINGS

OMNICHANNEL PRIORITIES

BUDGET ALLOCATION

INTERNAL CONSIDERATIONS

BUSINESS INTELLIGENCE, BIG DATA, REAL TIME QUANTITATIVE ANALYSIS, USAGE METRICS AND CRM

CONCLUSION

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CONTENTS

Technisys presents in this exclusive report an overview of digital banking and omnichannel in Latin America. The study was conducted using the GMix program of Stanford University, with the participation of Virginia Woolworth and Amita Katragadda, MBA students of the university. For a month, we heard CIOs, directors and key executives of the largest institutions in Latin America. And you are one of them. Without your availability and time, it would not be possible to carry out a study of this depth of information. As a way to thank you, we would like to share the complete results at first- hand. We invite you to follow us at the forefront of banking technology.

Regards,

German Pugliese BassiCo-founder, CMO & Alliances

@germanpugliesebwww.linkedin.com/in/germanpugliesebassi

german@technisys.com

1. Introduction

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We have based our report on the information collected between August 26th and September 19th, 2014 through interviews conducted personally and over the phone. We have listened to senior IT and business executives from the main banks across Latin America to provide an overview of digital banking and omnichannel.

3.1 FOUR QUADRANGLE IDENTIFICATION

We classified each bank by its digital intensity as well as its intensity of transformation management. Digital intensity is defined as how advanced initiatives are within an organization, including operational processes and digital capabilities. Transformation management intensity refers to the senior executives’ capacity to drive change throughout an organization through a clear vision, cross-silo coordination, and a digital-ready culture. Descriptive characteristics of four organization types are as follows:

2. Research methodology

3. Survey analysis and findings

DIFFERENT LEVELS OF DIGITAL MATURITY

DIGITAL BRANDING DIGITAL LEADERS

LATE ADOPTERS CONSERVATIVES

TRANSFORMATION MANAGEMENT INTENSITY

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• Several advanced digital features such as social, mobile, exist and lie in silos.• No overarching vision.• Underdeveloped coordination.• Digital culture exists in silos.

• Strong overarching digital vision.• Good governance.• Many digital initiatives generating business value in measurable ways.• Strong digital culture.

• Management skeptical of the businessvalue of advanced digital technologies.• May be carrying out some experiments.• Immature digital culture.

• Overarching digital vision exists, but may be underdeveloped.• Few advanced digital features, but traditional capabilities may be present.• Strong governance across silos.• Taking active steps to build digital skills and culture.

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Digital Branding: These banks offer some advanced digital features including tablet banking applications or mobile payment capabilities. However, they in general lack coordination between the digital silo and the bank as a whole. Despite capable digital teams, senior management is still often hesitant to fully engage and transform the bank through digital products.

Digital Leaders: Digital Leaders’ banks offer advanced digital products in conjunction with an integrated digital architecture and culture infiltrating in all divisions of the bank. In these banks, management promotes digital innovation across the bank and offers the digital team the support and budget required to implement digital and omnichannel solutions.

Late Adopters: Late Adopters’ banks lack both a global digital vision within management as well as advanced digital banking products. They offer basic digital products such as Internet banking and mobile phone applications, but lack the more advanced capabilities of both the Digital Brandings and Digital Leaders.

Conservatives: Conservatives demonstrated a strong digital vision and recognition from management that digital banking is the way forward. However, these banks had not yet dedicated significant resources to digitalization and offer few advanced digital features.

Among the banks profiled, the largest group, 33%, fell into the category of Digital Branding, as you can see below:

DIGITALBRANDING

CONSERVATIVE

LATEADOPTER

DIGITALLEADER

33%

17%

22%

28%

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On average, we find that all banks are inherently multi channel – offering customer interaction through branches, ATMs, telephone banking (via call center), Internet banking, sms/java banking for simple mobile phones, social media, IVR, mobile apps and IVR. It appears from the data that applications for tablets are primarily an extended offering of the mobile app or the browser based Internet banking option.

The majority of banks recognize the importance of digital and omnichannel capabilities, yet both technological capacity to integrate channels (for Conservatives) and/or the development of an overarching unified digital vision for the bank (for Digital Branding banks) are obstacles that handicap two-thirds of the market in Latin America. It is of particular interest that the most common classification was Digital Branding, where digital capabilities exist, but the overarching vision and management support are lacking.

Frequently management recognizes the important of digitalization and therefore hires a digital department manager. However, this division is siloed and unable to penetrate the entire organization as is required to offer a holistic omnichannel experience. A common sentiment was that senior management was focused on top line growth, and that digitalization and omnichannel capabilities were viewed as drivers of cost efficiency, not top line growth. A shift in this mentality could have a significant effect on the commitment of senior management to digital channels.

Banks with a strong digital culture but only basic digital technology (i.e. conservatives) were notably smaller in size and/or serving a less technologically advanced population segment. These banks recognize the importance of digitalization but are hesitant to experiment with new technologies until proven efficient, preferring to piggyback off the developments of competitor banks. This may be due to budget constraints or other limitations.

3.3.1 No. of channels

CHANNELS OFFERED BY LATIN AMERICAN BANKS

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100%

80%

60%

40%

20%

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3.2 MARKET IMPLICATIONS

3.3CURRENT STATUS OF DIGITIZATION

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80%of banks place

Internet bankingin the top slot.

Specific outliers in the channel offerings that are worth mentioning are:

1. Non-banking correspondents (utilized by 24% of banks); 2. Pre-paid cards (offered by 44% of banks); 3. Kiosks – electronic and video (offered by 10% of banks); 4. Mobile Wallet (offered by 13% of banks); and5. Smart TV app (offered by two international banks operating in Latin America)

An outlier at the other end, offering very limited digital channels, would include one bank that only offers three channels — branches, Internet banking and telephone banking (via call center). This may be traced to two specific factors (inter-related) that affect the context of this bank: (a) limited Internet and mobile penetration in its country, and (b) digital offerings not being a priority for the management of the bank.

Our market research shows that 80% of the banks placed branches as amongst the most important channels for customer interaction and number of transactions. We do see that there is an increasing trend for digital channels with 67% of banks placing ATMs and 80% of banks placing Internet banking in the top slot. Only 20% of banks placed mobile apps in the top three channels (current) though they did acknowledge that this was going to become their most important channel going forward.

Interestingly, we understand that there is a declining trend in the telephone/call center channel. Only 20% of banks placed this in their frequently used channels. Potentially this may come from Internet/mobile banking offering a better user experience than the effort of communicating with the call center and this trend will perhaps decline further as digitalization increases for complex banking transactions.

Non-banking correspondents (NBCs) is also a noteworthy channel that is gaining importance, with last mile innovations focused on enabling digital connections to rural customers via NBCs. We have found that 24% of banks placed NBCs in their most popular channels for connecting with clients and driving business growth.

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Another important point to mention is that 75% of banks observed that they have followed a statistical trend of increasing customer engagement via the channels of Internet banking, mobile banking and ATMs. Some banks acknowledged that this statistical prediction is only through holistic observation and is not necessarily data driven. We note that banks are interested in effecting processes that allow for tracking the channel usage and related analytical metrics. Based on the interviews we understand that the information about digital usage is currently collected through surveys and not in built into the digital product itself. This results in a lot of data and subsequent analysis being lost. It is highly possible that the amount of actual digital usage could significant differ from the perceived usage, as ‘guess-timated’ by some of our interviewees.

We note that only 17% of banks have confirmed its ability to offer its clients complete flexibility in choosing their desired channel for any kind of transactions, while 83% of banks still rely on branches to complete complex banking transactions such as loans, though they do increasingly rely on digital channels for pre-sale processes.

We also see variance in what is considered “simple” transactions for digital platforms, with some banks struggling with enabling third party transfers or completing foreign exchange transactions from mobile/Internet banking channels. Another interesting transaction that is restricted by the channel is with respect to advances against payroll as offered by one bank, which is completed only through ATMs. In this particular case, the channel "limitation" is exclusively due to a legal restriction that does not offer this operation on other channels.

83%

75%of banks observedthat they havefollowed a statistical trend of increasing customerengagement via the channels ofInternet banking, mobile banking and ATMs.

With respect to marketing, we note that 41% of banks confirmed that they market their digital channel offerings extensively. Another 41% indicated that they market some channels through promotional activity (including raffles and spot deals) or incidentally to other banking products. However, 18% of banks said that they do not engage in any marketing of their digital offerings (incidentally the banks that also confirm that digital offerings are not priority of the management currently).

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of banks still relyon branchesto complete

complex bankingtransactions.

Only one bank confirmed that their engagement with digital clients is limited to the monthly bank statement. Most banks confirmed that they actively engage with their digital clients through social media and mass email communication (including of promotions and other marketing material). Some banks preferred a more personalized engagement through relationship officers or managers contacting the clients regularly via telephone or personal meetings.

In summary, only 28% of banks believe that their bank currently meets the needs of its digital customers while 61% say that they are actively investing now in order to get to an adequate level of preparedness. We note that 44% of the banks believe that full flexibility across all channels is a 5-year plan or longer, with only 33% of the banks confirming that customers are free to chose among channels today.

Most banks have focused their recent innovations in the realms of mobile applications and mobile wallet/payment options (including p2p wire transfers through WhatsApp or similar technologies), in addition to bettering the user experience in their Internet banking channel (such as facilitating electronic check deposits).

Interesting recent innovations from the banks include:a. Smart TV applications (for LG and Samsung); b. Social media for banking transactions (not just for feedback and engagement); c. Video chat kiosks; d. Payroll advances through ATMs; e. Partnering with other customer focused sectors, such as Disney, to build a culture of maximizing the customer’s user experience.

3.3.2 Recent innovations

THEY CAN ALREADYDO IT NOW

WHEN DO YOU BELIEVE YOUR CLIENTS WILL BE ABLE TO ACCESS YOUR SERVICES IN ANY DEVICE THEY WANT?

WE INTEND TO DO IT OVER THE NEXT 5 OR MORE YEARS

WE ARE WORKING ONTHAT IN THE SHORT TERM

33%

45%

22%

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61%say that they are activelyinvestingnow in order to get to an adequate level of preparedness.

3.3.3 Drivers for digital strategy

We note that a big challenge for the banks is that they are ahead of the digital curve when it comes to their customers but not necessarily on par when it comes to reviewing the realms of technological possibilities. Based on our research, 36% of banks confirmed that they faced challenges in getting customers to adopt digital channels for banking transactions (save for the handful of early adopters) because of distrust, “custom”, or, established norms being slow to change.

Additionally, 47% of the banks reference the challenge for digital channels to the lack of Internet/mobile penetration in their respective geography. Also, 47% of the banks identified the source of the challenge in digital adoption is the lack of awareness.

Another important find is that 90% of the banks indicated that their current digital capability has been driven by the need to stay abreast with global best practices, remain competitive in the market and acquire new digitally savvy customer groups (especially younger clients).

In summary, we note that while customer experience is at the core of the banks’ digital vision, the strategy is primarily a ‘push’ to client rather than a ‘pull’ from the customers. We also note that only 22% of the banks felt that their digital presence enhanced their brand image. This, together with the push factor may, to some extent, explain why digital products are on low priority for the senior management of the non-Digital Leaders’ banks.

It has been found that 73% of the banks confirmed that they were not testing any new disruptive or new technologies including smart TV or wearable computing devices.

The technology initiatives of these banks appear to be focused on increments and improvements to their existing digital channels. However 27% of the banks did confirm that they were testing new technologies such as wearable computing devices, jive or smart TVs.

For the 5-year horizon, 72% of banks believed that their clients will demand not having to go to branches, and 78% believed that there will be a clear and specific demand for omnichannel services. This places a core focus of the technology team to prioritize reducing the kinds of transactions that cannot be completed remotely through digital channels, thereby allowing anywhere anytime access. Also 50% of banks also expect customers to require managers to act like consultants (and not as transaction personnel) and social media integration.

3.4WHAT’S NEXT

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27%of the banks did confirm that they were testing newtechnologies suchas wearablecomputing devices, jive or smart TVs.

72%of banks believed

that their clients willdemand not havingto go to branches.

We see an interesting mix of target segments driving the banks’ digital strategy. Our research shows that 43% of the banks see young and digitally agile customers as their target. However, 21% of the banks are focused on the smaller retail accounts of the lower and middle class population, including the currently unbanked section of society. Also, 40% of the banks said they specifically look for innovations for last mile access in rural locations. The “uber–Digital Leaders” banks however cater to different segments by developing different products to meet different needs.

Banks placed highest priority on business intelligence (80%), analytics (64%), multi channel applications (67%) and mobile development (80%) as the priorities for their IT investments in 2015. Some banks that were in the middle of integration pursuant to recent M&A activity however placed most of their IT investment into integration.

Our report shows that 71% of banks also placed not rapidly adapting to technological changes and not addressing the needs of generation Y (35%) as the main threats to the bank, while 47% of the banks believed digital payment competitors to be a big challenge to banks.

Having said that, 50% of these banks place themselves as average or behind the market today on digital initiatives and so are looking at some real and imminent threats facing them.

WHAT DO YOU CONSIDER THE MAIN THREATS TO THE BANK NOWADAYS?

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3.5TARGET SEGMENTS

3.6IT PRIORITIESFOR 2015

3.7THREATS AND FEARS

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64% analytics

67% multi channelapplications

80% mobiledevelopment

There is almost universal understanding (89% of banks profiled) that omnichannel implies “having a unified and consistent user experience that makes the customer journey similar in each channel.”

Additionally, 72% of banks identify omnichannel capabilities as “keeping a business process alive any time in any channel so the customer can initiate a transaction in one channel”. The survey results suggest a highly customer-centric understanding of omnichannel.

4. Omnichannel priorities

Few banks view omnichannel as having an integrated database of products and customers (22%) and even fewer understand omnichannel as having a CRM system in place (11%). This customer-centric focus is not unwarranted, yet it is nonetheless notable that banks focus on the UX benefit in each transaction rather than potential improvement through data analytics to the holistic customer experience. Similarly, the benefits of omnichannel seem to be understood primarily as improving user experience resulting in higher customer interaction.

The most commonly cited challenge in adopting omnichannel capabilities was cultural in nature, with half of the banks indicating internal cooperation and initiative a substantial barrier. The greatest impediment to omnichannel implementation, although technical in nature, is not technology, but people. A third of the banks did note that the technical integration of channels is a challenge in digitalization, and a quarter cited the rapid evolution of technology as an impeding the implementation of a holistic omnichannel approach.

The vast majority of banks do not believe they are currently investing enough in omnichannel solutions (94%), but plan to invest in the coming years. Over half believe their bank will invest in the next five years.

4.1LEVEL OF UNDERSTANDING

4.2CHALLENGES IN IMPLEMENTING OMNICHANNEL

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We note that only 33% of the banks have a strong digital culture spread throughout the company, 28% are still convincing the old guard, and 25% of the banks show some promise with strong silos of digital advocates who are working towards spreading it through the bank.

6. Internal considerations

SPREAD THROUGHOUT THE COMPANY

NOT OUR FOCUS

DIGITAL CULTURE IN THE BANK IS...

STRUGGLING TO CONVINCETHE OLD GUARD

STRONG IN SOME SILOS

33%

28%

33%

6%

We note that 38% of the banks have a budget allocation of less than US$ 25 Million for IT, 31% invest between US$ 50-100 Million and only 19% invest over US$ 100 Million as part of their IT budget for the year. This tie in with the human resources allocated to digital initiatives within the bank. Half of the banks have less than 20 people engaged on developing digital products (not including call center employees), and only one bank engages more than 500 personnel in developing digital products.

In terms of allocation, we find that 69% of banks spend over a quarter of their IT budget on maintaining and running the existing digital offerings of the bank, while 25% spend more than a quarter for development in order to comply with regulatory and legal requirements. Approximately half of the banks confirmed that they invested more than 25% of their budget on disruptive technology, and some Digital Leaders and “uber-Digital Leaders” banks however have dedicated budgets for R&D.

We note that only 13% confirmed investing at least 25% of the IT budget on omnichannel capabilities (not necessarily seen to be a disruptive technology in itself), although it is listed as a “top priority” for over 69%. This may be as a result of priorities for the IT team being set by more immediate demands rather than longer-term vision.

5. Budget allocation

of banks spendover a quarterof their IT budgeton maintainingand running theexisting digital offerings of the bank.

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69%

We found that most senior IT employees find convincing the internal teams their biggest challenge.

Needless to say, the most innovative and Digital Leaders of the banks (in terms of digital offerings, budget and vision) are those with a tech inclined C-suite. The buy-in from the senior management seems to pivot on whether the digital product can demonstrate business growth, through new customer acquisition or higher sales. A majority of the banks surveyed currently have a bottoms up approach to digital vision where the time lost in convincing the senior management moves digitalization from innovation/disruption to about “catching-up” with competition.

Another takeaway from our interviews is that most banks do not actively engage in building a digital culture across the banks, leaving the internal adoption to a more organic time-based result. Having said that, one of the researched banks mentioned that all middle managers received iPADs for Christmas to build a holistic digital culture and promote adoption of digital initiatives within the bank.

In this, we tend to agree with the McKinsey report that: “No amount of technology will help if you don’t address the people issues driven by digital. Success requires more than rethinking technology; it requires rethinking the organizational model, too, especially when it comes to skills, structure, incentives, and performance management.”

Buzz words aside, we find that digital products that provide for business intelligence and the power of big data (including real time quantitative analysis) seem to capture the attention and imagination of our interviewees. Most interviewees see this as a source of revenue growth and acknowledge that their current systems are unfortunetely a work-in-progress on these fronts.

We note that 75% of the banks have no specific data on how efficient omnichannel technologies are. Only half of the banks have or are developing the capability to track the profitability impact of their digital initiatives. Many banks collect information about digital products through customer surveys at branches (which, in themselves, are subject to severe selection bias since it identifies only those customers who make trips to the branches) or through online feedback via social media (typically comprising complaints). The banks also acknowledged that whilst their systems could source information if required, there were currently no analytical or statistical efforts being undertaken to translate data to business intelligence. Only 17% of the banks could give us very specific data of the transaction break up by digital channels and only 33% of the banks believed that they could process customer feedback on digital banking services through an efficient system.

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7. Business intelligence, big data, real time quantitative analysis, usage metrics and CRM

The study shows that banks face major challenges to keep up with the changing digital behavior of their customers. The majority of Latin American institutions are still proliferating silos, and the channels are treated in an independent manner without a real omnichannel offer. Digital culture is still the biggest obstacle for institutions to give a wider step towards their next banking experience to reach the Digital Leader level.

8. Conclusion

We note that a whopping 80% of the banks confirmed that “business intelligence” investments were amongst their most important IT investments in 2015 (alongside mobile applications and systems (also 80%). We also understand from the executives that we spoke with that banks understand the key to exponential growth in the future is not through physical branches and that investments would need to be directed elsewhere.

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Technisys is the omnichannel digital banking company. It offers technology solutions that allow banks to stand out through their customer experience, increase their sales and dramatically reduce their time-to-market when it comes to launching new financial services. Technisys culture lies on its innovation, its human capital talent and its vision of the future. The digital age represents an unprecedented growth opportunity for the financial service providers, and Technisys helps its customers to differentiate and capitalize it.

TEAM

GMix Program, from Stanford UniversityVirginia Woolworth, MBA candidateAmita Katragadda, MBA candidate

TECHNISYSGerman Pugliese Bassi

Co-founder, CMO & Alliances

Débora FortesMarketing & Communications Manager

Daniela CarranzaHead of Marketing Customer Relations

Ana Maria FedericoMarketing Analyst

Ana BrambillaHead of Content

Mariana GonçalvesHead of Event & Activities