Banks' investments in digital transformation not yet delivering revenue growth: Accenture

Banks' investments in digital transformation not yet delivering revenue growth: Accenture
Photo Credit: Photo Credit: Reuters
21 Jun, 2019

The $1 trillion that traditional retail and commercial banks have invested globally over the past three years to transform their IT operations has not yet delivered the anticipated revenue growth, according to a report by Accenture. Only 12% of banks globally are fully committed to digital transformation, it added.

“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,” said Julian Skan, senior managing director and global Banking lead in Accenture Strategy.

The report is based on a survey done on over 160 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.

The report also said that half (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 a high market share of revenue growth in a slow-growth revenue pool.

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, it added.
Skan also said, “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.”

Banks are on the digital maturity scale by looking at several factors which include public communication to the market about their digital journey through earnings call transcripts, news releases and stated investment budgets; recognition of digital leadership by third-party industry analysts and observers; and Accenture’s subjective analysis based on its deep financial services experience, the report said.

“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 growth by, for example, using Open Banking to help acquire and manage customer relationships,” said Alan McIntyre,  senior managing director and head of its global Banking practice at Accenture.

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

Dublin, Ireland-based firm also said that digital focused and digital active banks will need to pivot back to a business model in which the balance sheet is the critical driver of income growth or create new fee income revenue streams beyond the boundaries of traditional banking.
“To achieve stronger returns on their digital investments, banks will need to radically increase market-share based on pricing, take additional risk on new revenue opportunities or add services customers are willing to pay for,” said Richard Lumb, group chief executive – financial services at Accenture.

Last month, consulting firm Accenture had reported that newer visual technologies such as extended reality (XR) pose new dangers to the wellbeing of individuals and society as a whole.

In April, the company had invited startups to apply for its annual FinTech Innovation Lab accelerator programme in the Asia Pacific region. It will help these growth-stage companies accelerate product and businesses development with mentorship from technology and financial institution, it added.