Banking Technology & Allied Topics

Exhibit 1 We collected over 40 key institutional know-your-customer benchmark metrics along with qualitative feedback. Know-your-customer benchmark maturity score, scale 1–5 Industry top quartile Peer average 1 2345 Outcomes Quality and risk effectiveness Client experience Enablers Processes and procedures Advanced analytics Data management Technology enablement Organization and talent management The biggest differences between top and bottom players are in quality and risk effectiveness, data management, and technological capabilities Source: McKinsey KYC Benchmark Survey Those differences manifested themselves in a risk effectiveness but also create a better number of key metrics. For example, banks that customer experience that improves retention streamlined processes and reduced the number (Exhibit 2). Moreover, banks can leverage KYC- of hand-offs saw significant benefits in risk program data in many other areas of the business. effectiveness (reducing by 61 percent the number For example, when a bank performs a historical of cases the second line of defense returned to the activity review during the KYC process and learns first line of defense), customer experience (lowered that a customer is starting to transact in a new the response time to requests for information by country or a new and legitimate area of business, 17 percent), and productivity (reduced the average the bank has an opportunity to offer new products time to complete a case by 38 percent). or services to that customer. Banks that increased end-to-end KYC-process We worked with one bank that, by refining its risk- automation by 20 percent saw a triple benefit based policies and improving data sharing across effect. They increased their quality-assurance the enterprise, reduced the number of times it scores by 13 percent on an absolute basis, had to contact customers during KYC-process improved their customer experience by reducing updates by around 40 percent while speeding the number of customer outreaches per case by the case-turnaround time by around 15 percent. 18 percent, and they enhanced productivity by Also, the bank changed its policy to update KYC increasing the number of cases processed per information on low-risk customers only when certain month by 48 percent. trigger events occurred, rather than conducting the updates based on a set calendar schedule, The lesson here is that banks that improve resulting in a reduction in operating costs of around their KYC processes not only realize significant 20 percent. business value by lowering costs and improving Five actions to build next-generation know-your-customer capabilities 3

Exhibit 2 Organizations that get the key areas right can generate significant business value. Risk effectiveness Client experience Productivity/efficiency Revenue Employee experience 40–60%+ 10–30% 20–50%+ 5–10% 10–15% reduction in the point increase increase in know- revenue increase through reduction 2LOD to 1LOD in customer satisfaction your-customer cases avoidance of business in attrition processed per month losses and new return rate score (CSAT) business opportunities 10–20%+ 20–40%+ 30–50% increase in reduction in number reduction in end-to-end quality assurance of administrative onboarding time client touchpoints (time to revenue) score 20–30%+ reduction in number of days for client RFI Five ingredients for unlocking KYC- requirements. Employ a customer-service team program impact with global and local KYC knowledge to support that portal. While the rewards associated with next-generation KYC processes are real and significant, the — Apply data and KYC-program-risk analytics. Put big question for banks is how to organize in place a disciplined data-management practice themselves to make advanced KYC programs that leverages automatic and dynamic data a reality. As part of our benchmarking work, we feeds from external and internal sources. Use identified five ingredients (which include both that data to conduct advanced KYC-program- technological and human elements) for unlocking risk analytics for a competitive advantage. impact and driving next-generation institutional KYC-program capabilities: — Pursue intelligent process, case, and policy automation. Automate case management, — Use risk-driven design and customer-risk workflows, and policy management to improve management. Focus on customer-risk capacity so that teams can focus on true value- assessments for driving policy development adding activities, such as customer- and process design to achieve a more risk assessment. precise, holistic, and near-real-time view of customer risk. — Create a center of excellence. Build a center of excellence with robust performance — Digitize and optimize the customer experience. management that uses balanced scorecards Digitize institutional customer journeys via a and accounting for the customer experience self-service customer portal that tailors the 4 Five actions to build next-generation know-your-customer capabilities

in every step of the process (for example, by We worked with a global bank that, over the including customer-experience metrics as previous few years, had grown its KYC-team size by part of the analysts’ scorecards). Establish 50 percent and invested heavily in KYC technology dedicated KYC-program career paths and and data. Yet, the bank lacked a digital rules engine, optimize location and resourcing strategies. had limited automation in the due-diligence process, had limited end-to-end workflows, and lacked Banks need to master all five of these areas—and a customer-facing portal for the KYC program. they cannot rely on technology alone to do so. In response, the bank decided to put the five They need to build a holistic set of technological ingredients we listed into practice. After a detailed and nontechnological capabilities for each of the assessment of the bank’s current state and industry five ingredients (Exhibit 3). Many quick wins and insights, we identified the following: significant changes, such as defining clear roles and responsibilities across stakeholders, resetting — operational initiatives for more robust risk-based policy, streamlining risk processes, and performance management (such as simplifying requirements, are achievable using standardized huddle boards and more frequent nontechnological levers. feedback loops and coaching sessions), talent management (such as strong career paths), and process efficiencies Exhibit 3 There are a set of key capabilities for each of the five ingredients for unlocking KYC-program impact. Risk-driven design Intelligent case, workflow, and policy automation • Risk-based policy developed based on enterprise-wide • Case management, which can be used to help guide risk assessments and risk appetite statements human operators as they engage with multiple • Risk-driven process streamlining to reduce touchpoints with an entity throughout the KYC process • Task automation, such as leveraging robotic process unnecessary handoffs and processes (eg, sample automation to automate manual work (eg, automatically checking to focus on riskiest cases) pull in existing client’s information to the KYC cases) • Next-generation risk management to leverage perpetual • Dynamic client profile with embedded user checklist know-your-customer (KYC) capabilities to manage to resolve KYC discrepancies (eg, change in ownership, bank’s risks dynamically through a (near) real-time adverse media) client-risk dashboard • Dynamic rules/requirements engine, which can determine precise data and document requirements Digitized and optimized client experience to drive intelligent process and timely policy updates • Digitized client portal, which can offer capabilities for • Process insights providing analytics and process- mining insights around key activities such as average clients to self-serve KYC requests (eg, e-signature, touch time for completing a particular task upload documents digitally, view KYC case statuses) • Simplify KYC requirements and use client-friendly Center of excellence language to avoid confusion • Performance management that introduces Data management and risk analytics transparency in individual analyst’s performance, • Data management to feed in required internal and clearly rewards the right behaviors, and improves analyst’s performance with actionable coaching external data through API and non-API sources to store • Risk center of excellence that offers dedicated KYC in system of record career paths across anti–money laundering and KYC • Document management enabled by cognitive search • Outsourcing and partner ecosystem to optimize for efficient indexing, storage, and retrieval of required location- and sourcing-strategy and reduce cost while documents maintaining or improving quality • Intelligent screening enabled by AI-driven entity resolution to reduce false positives in the onboarding and continuous-screening processes Five actions to build next-generation know-your-customer capabilities 5

— considerations for building the best operating A few key lessons from this customer engagement: model across the key stakeholders, including a improving a KYC program is not just about new senior position that would be accountable technological upgrades, all stakeholders must for the end-to-end KYC process be aligned on the operating model, and there are lots of process-redesign opportunities. We also — “no regret” technology and data capabilities, learned that banks need to identify the most critical including an end-to-end workflow, cognitive technological areas (for example, case management, and intelligent search, and dynamic rules workflows, and a policy rules engine) and tackle engine to reduce manual work, increase those first. Another big takeaway was that by process effectiveness, and improve the digitizing the customer experience, relationship analyst experience managers can focus on the moments that matter instead of chasing documents. — initiatives to address customer experience, including embedding customer-experience Next steps for improving the metrics in individual- and team-performance KYC process management, launching a customer-experience survey dedicated to the KYC program, and Building a next-generation KYC program will implementing a customer portal to digitize take a serious commitment of time and resources customer support from an organization. But banks that get the KYC process right can look forward to extracting We helped the bank prioritize the initiatives to enormous value across a wide spectrum: cost, risk develop a detailed three-year transformation effectiveness, revenue, customer experience, and plan, and we estimate that the efforts will reduce employee experience. Indeed, by implementing the number of cases requiring customer outreach a next-generation KYC program, knowing the by 20 percent. Even when customer outreach is customer can become second nature—a part needed, we estimate the number of requests will of the business DNA. In that state, customer- decline to one or two, from five. Also, by streamlining risk management, customer experience, and and automating processes from end to end, we profitability are no longer at odds but can occur expect that the bank’s operations teams will efficiently and effectively in unison to drive increase their capacity by 30 to 35 percent. superior and complementary outcomes. Adrian Murphy and Siggy Seibold are both partners in McKinsey’s New York office, where Scott Werner is a senior expert; Allison Shi is an associate partner in the Southern California office. Designed by McKinsey Global Publishing Copyright © 2021 McKinsey & Company. All rights reserved. 6 Five actions to build next-generation know-your-customer capabilities

Financial Services Practice Disrupting the disruptors: Business building for banks Although banks face intense pressure from new entrants in financial services, they have an edge in resources they can use to rapidly launch their own digital businesses. by Rohit Bhapkar, Ido Segev, Chris Smith, and Zac Townsend © Jorg Greuel/Getty Images April 2021

Today’s economic and competitive challenges are banking, wealth management, payments, and making the status quo untenable for the banking a range of specialist services. Some banks have industry. The macroeconomic slump associated with already taken up the challenge and shown it the COVID-19 pandemic continues to pressure the can work (see sidebar “Early wins show the potential industry’s bottom line, with little expectation of a of business building”). turnaround anytime soon. The competitive landscape, meanwhile, is becoming more challenging as Business building as digital technology lowers barriers to entry. With competitive advantage fintechs attracting millions of new customers, incumbents face a need for bold action that is Banks that prioritize business building tend to out­ becoming more urgent by the day. perform their peers (Exhibit 1). According to a recent McKinsey survey, 65 percent of financial­services A potential way forward for banks is to disrupt the businesses that made business building a top­five disruptors. Large banks have the capital, resources, priority saw revenue growth above that of their and expertise to turn the tables on new entrants and competitors.1 Indeed, over a seven­year period, launch digital attackers of their own in consumer organizations that launched four or more businesses Early wins show the potential of business building Marcus by Goldman Sachs YONO by State Bank of India digibank, powered by DBS Bank India Objective: Goldman Sachs decided to Objective: State Bank of India (SBI) Objective: With few consumers in India use its legal bank entity to create a retail launched YONO—a mobile banking before the launch, DBS had the bank aimed at Main Street users. By application—with the idea that customers opportunity to become the first digital offering savings and lending services would need only one application to do bank in a country where mobile to retail consumers, Marcus helps all their transactions: banking, shopping, penetration was high but access to Goldman Sachs diversify its revenue lifestyle, and investment. banking services was limited. and funding sources. Segment focus: Full SBI customer base, Segment focus: Mass consumer Segment focus: Digital mass­affluent with focus on convenience Strategic rationale: DBS built a fully Strategic rationale: With no existing Strategic rationale: YONO was part of digital platform that significantly retailing offering, Goldman Sachs was able SBI’s digital transformation and its effort to reduced its cost to serve and could be to build a completely digital bank with create a platform for customer ownership. deployed in multiple regions. new tech infrastructure while leveraging its regulatory experience, tech Results: Over 30 million users and Results: 3.5 million digital­ capabilities, and brand. 100 e­commerce partners banking customers Results: Over five million customers and $1.2 billion revenue in 2020 1 See also Shaun Collins, Ralf Dreischmeier, Ari Libarikian, and Upasana Unni, “Why business building is the new priority for growth,” McKinsey Quarterly, December 10, 2020, McKinsey.com. 2 Disrupting the disruptors: Business building for banks

Exhibit 1 100 A majority of financial-services companies that prioritized new-business building grew above market rates. Financial-services companies with revenue growth above market rate, by strategic priority, 2017–19,1 % 0 20 40 60 80 New-business building New-business building is not a top-5 priority is a top-5 priority (n = 68) (n = 53) 49 65 1Question: From 2017 to 2019, how did your organization’s rate of revenue growth compare with that of its primary competitors? Source: McKinsey Global Survey on business building, August 2020 were more than twice as likely as businesses that to new markets, products, and technology but often launched three or fewer to see an average return of comes with a hefty price tag and the perennial more than five times.2 challenge of integration. Bolt­on deals are easier to handle but rarely have as much potential to Companies that develop business­building “muscle”— change the game. and are thus more likely to outperform the market— proceed on the idea that change, whether intended Of the four options, building a new digital business is or not, catalyzes value creation. Over the coming increasingly seen as an effective way to grow, decade, that presumption may play to their favor. because of proof points in the market and the ability Amid prolific digital innovation and the pandemic’s to launch digital businesses more easily than impact on consumer behaviors, change is ever before. Through a stand­alone vehicle, banks accelerating. Disruptors may not have developed can extend their product offerings, engage new their business models with the idea of a lockdown in customers, attract deposits, and create oppor­ mind, but they are ideally positioned to serve tunities for talent identification and development customers whose behaviors are changing as a result that might get overlooked in an established of the pandemic. organization. These benefits should enable the new business to pursue growth opportunities faster New-business building may be than the incumbent. Indeed, the new business should the best way to grow benefit from the parent’s talent, funds, market insight, intellectual property, data, and other assets— Low interest rates, the impacts of customer derisking, all deployed in an environment designed to tougher banking regulation in many countries, and jump­start growth. We’ve already seen a variety other headwinds are forcing banks to rethink their of offerings globally, such as the following: long­term trajectories. If business expansion is a priority, the main options are large­scale M&A, digital — “neo­banks” with integrated digital offerings transformation of the core business, bolt­on for banking, private wealth management, and deals, or new­business building. All have pros and beyond—some focused on mass­market cons. Large­scale M&A offers speedy access segments and others on private wealth offerings 2 McKinsey Global Survey on business building, August 2020. 3 Disrupting the disruptors: Business building for banks

— vertical offerings in healthcare, housing, mobility, acquisition, manage costs, and apply the right talent or e­commerce with seamless payments and operating models. Alongside those funda­ enablement and embedded lending mentals, an important differentiator between new businesses that generate early momentum and — white­label or cobranded point­of­sale or “buy those that struggle is the ability to leverage the now, pay later” offerings strengths of an incumbent in a start­up environment. Balancing incumbency and innovation may — a digital­first merchant­acquiring business for not sound complicated, but more companies get it medium­size enterprises that have too much wrong—by measures such as shared culture, talent, scale for fintechs and resources—than succeed. — an ecosystem serving small and medium­size Why banks should act now businesses with a bank account linked to services including accounting, invoicing, and bill Even before the pandemic, digital business models payments provided through a one­stop shop were in the ascendance, with banks and their digital challengers creating new customer interfaces, — digital­asset or crypto­payments networks streamlining customer journeys, and modernizing or exchanges middle and back offices. Indeed, in many segments, banks are starting to look more like their tech — cross­bank utilities or other shared digital cousins, which are making waves of their own in infrastructure (for example, a know­your­ financial services, particularly in Asia. And customer utility) according to our recent survey, half of all financial­ services companies currently rank business building — a white­label banking­as­a­service API as a top­three priority, an 18­percentage­point platform to enable embedded finance for increase compared with a similar survey conducted large corporations two years ago (Exhibit 2). To get off to a flying start, banks need to get the As customer demands and behaviors shift, five key pricing and offering right, develop a distinctive value benefits that some companies already recognize are proposition, monetize quickly, focus on customer Exhibit 2 Half of all financial-services companies report business building as being a current top-three priority. Financial-services companies with new-business building as a top-three strategic priority or higher,1 % 2017–19 32 +18 Aug 2020 50 percentage points 100% 1Question: From 2017 to 2019, how important was building new businesses compared with other strategic priorities at your organization? How important is it currently? Excludes responses for “Don’t know” and is scaled to 100%. Includes responses “A top three priority” and “The top priority”; n = 130. Source: McKinsey Global Survey on business building, August 2020 4 Disrupting the disruptors: Business building for banks

adding motivation and urgency to bank business­ easy applications, and faster decisions. building aspirations: Increasingly, loans and payments are tied to specific digital journeys, with financial 1. Combat fintech competition. The need to act institutions finding opportunities to create value now is intensified by the success of fintechs. through the customer journey, informed by Approximately 40 percent of consumers leverage advanced analytics and personalization. a fintech platform for daily financial activities, and more than 90 percent of those who do so are 5. Access a new source of funding. For most satisfied with their experience, McKinsey financial institutions, the cost of capital has risen research shows. This finding holds across general over recent years, amid higher regulatory and banking, payments, lending, and wealth operational costs and lower returns on equity. management. In addition, fintechs now command Banks are thus seeking alternative sources consumer trust on a par with that of banks. of funding. New digital businesses can be an Indeed, many fintechs have become stronger effective way to raise funds, through new during the crisis, amid the shift to digital­ segment offerings such as a small­business first channels. proposition or a digital product for lower­income or lower­credit customer segments that 2. Tap into innovation. Many banks are stuck with have historically been difficult to reach through clunky legacy data and IT architecture. However, branches or other legacy channels. stagnant ROEs call for trimming the cost base, of which IT represents a significant portion. Successful business builders develop A new business can open the door to lighter­ strategies tailored to their strengths weight, packaged solutions. A greenfield launch would also spark innovation, attract new The strategic target of a new build should be nothing talent, accelerate time to market, and facilitate less than radical disruption. Banks should aim automation of processes and use of not only to expand their own core offerings but also cloud solutions. to create a unique combination of products and functionality that will disrupt the market. 3. Defend the franchise and grow faster. In light of the challenges to profitability likely in store for Successful new launches come with a clear sense banking,3 forward­thinking banks are already of mission and direction, as well as a road map exploring alternative sources of growth. With an to profitability (see sidebar “Successful business eye on competitors that have launched new builders are realistic about the journey”). One businesses, these banks are taking to heart the regional digital attacker in Asia targeted merchant maxim “If you can’t beat them, join them.” acquiring and developed a network with more than 700,000 merchants. In just four months, it 4. Ramp up lending and payments. Digital created a product with the capacity to process technology unlocks opportunities in both lending payments through QR codes at the point­of­sale and payments. Both spaces are seeing trans­ systems of the two main merchant acquirers in formative change, reflecting shifting customer the region and to transfer money between personal demand for new products (for example, point­ accounts. In another case, an incumbent bank of­sale financing and “buy now, pay later” terms), launched a state­of­the­art digital solution in 3 “Global Banking Annual Review 2020: A test of resilience,” December 9, 2020, McKinsey.com. 5 Disrupting the disruptors: Business building for banks

Successful business builders are realistic about the journey Our experience in working with banks shows that necessary level of investment. For example, among alongside a clear strategy, what banks need for success banks we surveyed, ideation to launch has taken in launching digital businesses is a set of common an average of 15 months, and the average number of experiences related to scope, timeline, and the day­one employees has been 30 (Exhibit). Exhibit Successful business builders share common experiences with scope, timeline, and level of investment. Typical digital-bank building process among surveyed financial-services companies 15 18 >$20M 30 55% average number average number investment average number share of new business of months from of months from prior to of employees heads sourced from idea to launch launch to breakeven at launch existing business core breakeven1 1According to 83% of respondents. Source: McKinsey Global Survey on business building, September 2020 just ten months. In China, a leading global bank Key questions for business- launched a digital­hybrid business that focuses building planning on financial planning and uses social media to connect with customers. A midsize Asian bank, Before embarking on creation of a new business, meanwhile, launched an ecosystem of services executive teams must think carefully about their for the digital­savvy mass and mass­affluent strategic positioning, their operational and market segment, aimed at making it easier for customers challenges, and the mechanics of building and to manage their financial lives. After 24 months then managing a new business while maintaining of operations, the bank had achieved 2.5 million the core. Following are three key topics for Android downloads and 750,000 customers. consideration (Exhibit 3): Whatever the idea, the strategic common denomi­ 1. Do we have a clear business proposition? Is nator should be a laser­like focus on creating a there a strategic rationale for launching the differentiated proposition that solves problems. This digital bank? What is our competitive advantage? will achieve the vital goal of making life easier for Do we have strengths in areas like innovation, customers, so it is more likely to achieve a durable customer segmentation, product and pricing advantage in the marketplace. strategy, or customer value proposition? 6 Disrupting the disruptors: Business building for banks

Exhibit 3 Leaders should consider issues across three broad areas before building a business. Business proposition Distribution Operating model and Strategic rationale for launching the Partnership strategy (eg, telcos, tech/digital capabilities digital bank and degree of innovation service industries) Tech architecture and vendor/ partnership strategy (eg, build vs buy) Customer segmentation and unmet- Customer-acquisition strategy needs assessment (eg, mass, affluent) (eg, direct web, contact center) Organization structure, hiring plan, and near-term action plan to mobilize Product and pricing strategy Servicing channel (eg, web only, the organization (eg, savings, wealth) omnichannel) Regulatory posture (eg, separate Articulation of the differentiated Branding and marketing strategy, charter and governance model customer value proposition (eg, cost, including go-to-market launch between existing assets and the experience, service) and hooks new company) Extent of incumbent advantage (eg, access to large customer base) 2. Is our distribution strategy robust? What are The banking industry has been digitizing incre­ the options for distribution? Have we considered mentally for some time now, but only a handful a partnership strategy in the telco or service of banks have yet turned digitization into a strategic industries? How strong are we by measures such advantage. Building a new digital business from as customer acquisition, servicing channels, scratch is a way to accelerate this process. However, and branding and marketing? to do it right, banks must excel on multiple fronts, combining the strengths of an incumbent with the 3. Can we scale our tech/digital capabilities and agility of a start­up. They also need a unique idea, adopt a flexible operating model? What is our a top­notch team, and a clear path to profitability. tech architecture and vendor or partnership None of this is easy. However, banks that make the strategy? What are our delivery resources and grade are likely to boost group performance and, staffing plan? Have we specified our organi­ potentially, create a star of the future. zational structure, governance, and hiring or reskilling approach? Rohit Bhapkar is a senior partner in McKinsey’s Toronto office and leads digital business building in North America, Ido Segev is a partner in the Boston office, Chris Smith is a partner in the London office, and Zac Townsend is an associate partner in the Austin office. The authors wish to thank Avani Kaushik and Matthew Rubin for their contributions to this article. Designed by Global Editorial Services Copyright © 2021 McKinsey & Company. All rights reserved. Disrupting the disruptors: Business building for banks 7

11/24/21, 3:25 PM Digital Banking: Banking on digital: Fintech faces strong barriers as it ventures out of manicured urban landscapes - The Ec… Banking on digital: Fintech faces strong barriers as it ventures out of manicured urban landscapes Synopsis The wavering internet connection, with frequent time-outs and pocket drops, doesn’t inspire a lot of faith and confidence amongst the consumers, especially those in the tier-2 and beyond. iStock Digitalisation has been one of the key pillars of India’s emergence as one amongst the leading economies across the globe. Digital transactions now claim 98.5% of the total volume of non-cash payments. Furthermore, the tech-led acceleration is transforming the financial landscape in India, with even the Kirana stores being amped up with technology. According to Statista , in June 2021, providers of unified payments interfaces The changing times warrant the private and the public (UPI) in India recorded a total of 2.8 billion digital payment transactions worth players to join forces and together work towards over five trillion Indian rupees. This was an increase compared to May 2021. deepening the infrastructure and awareness required for Out of the 2.8 billion transactions, PhonePe had a share of 46 percent digitalisation. and GooglePay a share of 35 percent. It was the seventh month in a row that PhonePe topped the list after it had passed GooglePay in December 2020 for the first time. Third big player is Paytm with a share of nearly 12 percent. In this graph it shows how Unified Payment Interface (UPI) usage across India in June 2021 performed by these platforms showcasing the strength of digital payment in India in the second wave. (Source – Statista 2021) However, it is still a little too early to completely bank on the digital. Digital-only banking and financial services will struggle as they venture out of the perfectly manicured urban landscapes. The sector overlooks several strong impediments, chiefly gaps in connectivity, low trust, and a greater threshold to breakthrough existing habits and patterns. https://economictimes.indiatimes.com/small-biz/money/banking-on-digital-fintech-faces-strong-barriers-as-it-ventures-out-of-manicured-urban-lan… 1/3

11/24/21, 3:25 PM Digital Banking: Banking on digital: Fintech faces strong barriers as it ventures out of manicured urban landscapes - The Ec… Digital players must be equipped to brave the barriers The wavering internet connection, with frequent time-outs and pocket drops, doesn’t inspire a lot of faith and confidence amongst the consumers, especially those in the tier-2 and beyond. The telecom sector is reeling under pressure, given the strenuous price war and growing demands amidst the COVID times. Thus, it lacks the wherewithal to truly invest in building a robust infrastructure required to meet the demands. Furthermore, awareness of digital payments is still a challenge for Indian merchants, who are not used to giving away goods and not receiving hard cash up front. A payment confirmation or an SMS alone isn’t enough. Since most of this communication is in English, given the lower literacy level, the entire process is considered foreign and still struggles to gain prominence in the tier-2 and beyond sectors of India. Also, the cumbersome dispute management process doesn’t help to relieve the woes of merchants. The involvement of multiple stakeholders causes unnecessary delays. Besides, in certain cases, the fine print stipulates the merchants to absorb the disputed funds, hence further pushing them away from adopting digital payments. Other issues like the increasing number of cyber hacking and scams, domination of feature phones in certain parts of the country, etc. stand as a major pitfall in the ubiquity of digital payments. Igniting the FinTech Innovation (Source Times of India) When have challenges ever curbed the sparks of innovation? If anything, FinTech innovators are inspired to utilise the tech-led acceleration in solving the challenges. Several FinTech players have taken it upon themselves to transform the way consumers transact, building full- stack APIs and platforms to enable the businesses of ‘Bharat’ to go digital. These players are looking at the digital gaps endured by India’s hinterlands and are helping smaller merchants to deploy digital products with ease. Leveraging the latest advancements, the solutions have 256-bit encryption in-built, thus easing the woes faced by smaller merchants. Furthermore, the full-stack services enable merchants to have the complete plethora https://economictimes.indiatimes.com/small-biz/money/banking-on-digital-fintech-faces-strong-barriers-as-it-ventures-out-of-manicured-urban-lan… 2/3

11/24/21, 3:25 PM Digital Banking: Banking on digital: Fintech faces strong barriers as it ventures out of manicured urban landscapes - The Ec… of digital payments at their disposal. The changing times, furthermore, warrant the private and the public players to join forces and together work towards deepening the infrastructure and awareness required for digitalisation. It was a welcome move when the RBI announced that PSOs (Payment System Operators) are expected to introduce Online Dispute Resolution (ODR) in a phased manner. Promoting tech-based redressal mechanisms ensures swift action and minimal manual intervention, and thus, would certainly ease the woes of smaller merchants. Regulators may perhaps look at redefining the quality standards or issuing stringent penalties if the existing standards are not met. The Government may further offer clear directives and incentives for the promotion of digital services. The RBI has taken several measures for fostering innovation in the financial landscape, including the plans of setting up an Innovation Hub and accepting 6 proposals under the Regulatory Sandbox initiative. More such measures and favourable policies, with time, would encourage a diverse range of private sector players to come up with innovative solutions that not only mitigate the challenges but also further create a robust infrastructure for digital payments. Through favourable policies and incentives, the government can help the nation overcome the fissures and create a truly digital economy, at par with its global counterparts. (The writer is CEO and Founder FidyPay) https://economictimes.indiatimes.com/small-biz/money/banking-on-digital-fintech-faces-strong-barriers-as-it-ventures-out-of-manicured-urban-lan… 3/3

Global Banking & Securities CBDC and stablecoins: Early coexistence on an uncertain road With the rapid rise in circulation of stablecoins over the past couple of years, central banks have stepped up efforts to explore their own stable digital currencies. by Ian De Bode, Matt Higginson, and Marc Niederkorn © Sunyixun/Getty Images October 2021

Cryptocurrency has been touted for its potential (blockchain-based) ledger for transaction to usher in a new era of financial inclusion and execution and record keeping, and by creating a simplified financial services infrastructure globally. (now) widely traded currency outside the control To date, however, its high profile has derived more of any sovereign monetary authority. Thousands of from its status as a potential store of value than as similar decentralized cryptocurrencies now exist, a means of financial exchange. That disconnect is collectively generating billions of dollars in global now evolving rapidly with both monetary authorities transaction volume every day. and private institutions issuing stabilized cryptocurrencies as viable, mainstream payments Although the aggregate market value of such vehicles. cryptocurrencies now exceeds $2 trillion, extreme price volatility, strong price correlation to Bitcoin, The European Central Bank announced recently it and often slow transaction confirmation times was progressing its ‘digital euro’ project into a more have impeded their utility as a practical means of detailed investigation phase.¹ More than four-fifths value exchange. Stablecoins aim to address these of the world’s central banks are similarly engaged shortcomings by pegging their value to a unit of in pilots or other central bank digital currency underlying asset, often issued on faster blockchains, (CBDC) activities.² Concurrently, multiple private, and backing the coins wholly or partially with stabilized cryptocurrencies—commonly known state-issued tender (such as the dollar, pound, as stablecoins—have emerged outside of state- or euro), highly liquid reserves (like government sponsored channels, as part of efforts designed to treasuries), or commodities such as precious metals. enhance liquidity and simplify settlement across Collectively, nearly $3 trillion in stablecoins such as the growing crypto ecosystem. Tether and USDC were transacted in the first half of 2021 (Exhibit 1). Although the endgame of this extensive activity that spans agile fintechs, deep-pocketed incumbents, With the rapid rise in circulation of stablecoins and (mostly government-appointed) central over the past couple of years, central banks have banks remains far from certain, the potential for stepped up efforts to explore their own stable significant disruption of established financial digital currencies (Exhibit 2). Some efforts to processes is clear. Against this backdrop we offer a create CBDCs have been born out of reservations fact-based primer on the universe of collateralized about the impact of privately issued stablecoins on cryptocurrency, an overview of several possible financial stability and traditional monetary policy, future scenarios including potential benefits and and with the goal of improving access to central obstacles, and near-term actions that participants bank money for private citizens, creating greater in today’s financial ecosystem may consider in order financial inclusion and reducing payments friction. to position themselves. Various public statements indicate that central The digital currency landscape banks envision CBDCs as more than simply a digital-native version of traditional notes and The basic notion of a digital currency (replacing coins. Beyond addressing the challenge of greater the need for paper notes and coins as a means financial inclusion, some governments view CBDCs of exchange with computer-based money-like as programmable money—vehicles for monetary assets) dates back more than a quarter of a century. and social policy that could restrict their use to basic Early efforts at creating digital cash—such as necessities, specific locations, or defined periods DigiCash (1989) and e-gold (1996)—were issued of time. by central agencies. The emergence of Bitcoin in 2009 dramatically altered this model in two Implementing such functionality will be a complex important ways: by establishing a decentralized and multilayered undertaking. Meanwhile, central 1 “Eurosystem launches digital euro project,” press release, European Central Bank, July 2021, ecb.europa.eu. 2Codruta Boar and Andreas Wehrli, Ready, steady, go? Results of the third BIS survey on central bank digital currency, Bank for International Settlements, BIS Papers, number 114, January 2021, bis.org. 2 CBDC and stablecoins: Early coexistence on an uncertain road

Exhibit 1 The rise in circulation of stablecoins has closely tracked the volume of cryptocurrencies traded on exchanges over the past three years. Cryptocurrency volume On-chain volume of stablecoins¹ Stablecoins volume $ billion Cryptocurrency exchange volume $ billion 3000 800 2500 700 2000 600 1500 500 1000 400 500 300 0 Aug-17 Jan-18 200 100 0 Jan-19 Jan-20 Jan-21 1Volume of stablecoins exchanged represents all transactions recorded on the relevant blockchains. These volumes are distinct from the volume of crypto traded on exchanges, some of which may be transacted between accounts off-chain. Source: Theblockcrypto.com Exhibit 2 The proportion of central banks actively engaged in CBDC work is growing. Share of respondents conducting work on CBDCs, % 90 2018 2019 2020 80 70 60 50 40 30 20 10 0 2017 Source: Codruta Boar and Andreas Wehrli, “Ready, steady, go? – Results of the third BIS survey on central bank digital currency,” Bank for International Settlements, January 2021, bis.org. CBDC and stablecoins: Early coexistence on an uncertain road 3

banks face the challenge of introducing a timely By comparison, stablecoins such as the dollar- CBDC model at least on par with digital offerings denominated USDC are issued across multiple of private-sector innovators in order to establish public, permissionless blockchains. Any individual credibility with such efforts and achieve adoption. can operate a node of an issuing blockchain such While existing electronic payment systems are as Ethereum, Stellar, or Solana; and anyone can considered by some to be expensive, inefficient, transfer stablecoins between pseudonymous and at times difficult to access,³ emerging privately wallets around the world. While most exchanges issued stablecoin alternatives could raise concerns today require users to complete thorough Know over the potential for large private entities to Your Customer (KYC) identity checks, no central aggregate—and monetize—large sets of behavioral registry for users or single ledger for tracking data on private citizens. ownership of stablecoins currently exists, potentially complicating identity considerations. Potential future scenarios: Coexistence Many see the current development of CBDCs or primacy? as a response to the challenge private-sector stablecoins could pose to central bank prerogatives, It is too early to confidently forecast the trajectory and as evidence of the desire of institutions and endgame for CBDCs and stablecoins, given the to address long-term goals such as payment multitude of unresolved design factors still in play. systems efficiency and financial inclusion. Cash For instance, will central banks focus first on retail usage in many countries continues to dwindle, or wholesale use cases, and emphasize domestic while the cost to maintain its infrastructure does or cross-border applications? And how rapidly will not. Similarly, many countries’ existing electronic national agencies pursue regulation of stablecoins payment systems are relatively inefficient to prior to issuing their own CBDCs? operate and often not instantaneous or 24/7. Perhaps most importantly, proper deployment of To begin to understand some of the potential a regulated digital currency accessible through scenarios, we need to appreciate the variety and mobile devices without the need for a formal bank applications of CBDCs and stablecoins. There account could potentially enhance payments is no single CBDC issuance model, but rather a security and efficiency (ensuring transaction finality continuum of approaches being piloted in various through distributed consensus with private key countries. One design aspect hinges on the cryptography), while satisfying central banks’ goal entity holding CBDC accounts. For instance, the of increasing financial inclusion and advancing the account-based model being implemented in the public good. Eastern Caribbean involves consumers holding deposit accounts directly with the central bank. At By contrast private stablecoins have flourished, the opposite end of the spectrum, China’s CBDC perhaps in part through being unencumbered by pilot relies on private-sector banks to distribute such an expansive mission. They’ve delivered value and maintain eCNY (digital yuan) accounts for their as a source of liquidity in the crypto ecosystem, customers. The ECB approach under consideration often providing a “safe haven” for investors involves licensed financial institutions each during times of heightened volatility by obviating operating a permissioned node of the blockchain the need to enlist a regulated venue to convert network as a conduit for distribution of a digital cryptocurrency holdings back into fiat deposits. euro. In a potential fourth model popular within the Indeed, the emergence and growth of supply of the crypto community but not yet fully trialed by central prominent stablecoin Tether first coincided with the banks, fiat currency would be issued as anonymous rapid increase in cryptocurrency transaction volume fungible tokens (true digital cash) to protect the privacy of the user. 3“From the payments revolution to the reinvention of money,” speech by Fabio Panetta, Member of the Executive Board of the ECB, at the Deutsche Bundesbank conference on the “Future of Payments in Europe,” Frankfurt, November 27, 2020. 4 CBDC and stablecoins: Early coexistence on an uncertain road

on exchanges in late 2017, many of which did not providing sufficient convenience—or at minimum, a have fiat licenses. compelling vision—to create similar long-term value. Stablecoins are typically collateralized by The current state of financial infrastructure in a professionally audited reserves of fiat currency given country will play a key role in determining the or short-term securities. They play a role today speed and extent of adoption of CBDCs, stablecoins, not just as “crypto reserves” but also as a source or non-stabilized cryptocurrencies. Those of liquidity across decentralized finance (DeFi) with limited present-day capabilities are prime exchanges. Stablecoins, unlike the proposed candidates for a “leapfrog” event, similar to the rapid design of CBDCs, which are generally issued on emergence of M-Pesa as a payments vehicle in sub- private ledgers, can engage with smart contracts Saharan Africa⁵ or Alipay in China.⁶ In developed on public permissionless networks that enable economies with existing real-time payments rails, decentralized financial services. Significantly, they the near-term incremental benefits of reduced provide a medium for the instantaneous movement (even instantaneous) settlement time from CBDCs of value between exchanges and digital wallets, may be somewhat muted if financial institutions often to take advantage of short-lived arbitrage are reluctant to invest in the necessary additional opportunities, to settle bilateral over-the-counter infrastructure. In these instances, distinct benefits (OTC) trades or to execute cross-border payments. of stablecoins (such as their ability to engage with This utility as a vehicle for payments is demonstrated smart contracts) may prove to be a more compelling by the more than $1 trillion in stablecoin transaction and defensible use case over the longer term, volumes per quarter in 2021 (although this remains a depending on the exact CBDC implementation. fraction of traditional payment volumes cleared) and may grow to play an important role in the future of Residents of countries with sovereign currencies digital commerce ecosystems. lacking historical stability have been among the most active adopters of cryptocurrencies Although a solid case can be made for the as a means of exchange, especially where they coexistence of stablecoins and CBDCs (providing are perceived as less risky than the available separate services such as DeFi services and alternatives. Along with the potential for digital liquidity provisioning, and direct access to central currencies to foster financial inclusion for citizens bank money, respectively), plausible scenarios could lacking access to traditional banking services also lead to the long-term preeminence of either (utilizing a universal digital wallet instead of a instrument. Some regulatory bodies have already traditional fiat account), such an environment could expressed concern over substantial value flows serve as an indicator for a market primed for a settling via private stablecoins, implying potential potential leapfrog event (for example, the national actions to manage or curtail their use.⁴ Equally, full acceptance of Bitcoin in El Salvador⁷). digitization of sovereign currencies could facilitate easier global trade flows. Given the notable Ultimately the fate of CBDCs and stablecoins may proliferation of stablecoins over the past 12 months, be decided by the significant forces of regulation however, private-sector networks have gained and adoption. While CBDCs will be issued under “first mover” advantage, increasing expectations the auspices of central banks, stablecoins are for central banks to deliver timely solutions potentially subject to regulatory oversight from 4 Paul Vigna, “Risks of Crypto Stablecoins Attract Attention of Yellen, Fed and SEC,” Wall Street Journal, July 17, 2021, wsj.com; Tory Newmyer, “SEC’s Gensler likens stablecoins to ‘poker chips’ amid call for tougher crypto regulation,” The Washington Post, September 21, 2021, washingtonpost.com. 5 Daniel Runde, “M-Pesa and the rise of the global mobile money market,” Forbes, August 12, 2015, forbes.com. 6 Aaron Klein, “China’s Digital Payments Revolution,” Brookings, April 2020, brookings.edu. 7 Santiago Pérez and Caitlin Ostroff, “El Salvador becomes first country to adopt Bitcoin as national currency,” Wall Street Journal, September 7, 2021, wsj.com. 8 “G20 confirm their support for the FATF as the global standard-setter to prevent money laundering, terrorist financing and proliferation financing,” Financial Action Task Force, April 7, 2021, fatf-gafi.org. CBDC and stablecoins: Early coexistence on an uncertain road 5

multiple agencies, depending on their classification determined by geography (for example, central as assets, securities, or even money-market funds. banks such as China’s exerting greater influence Under scrutiny from the Financial Action Task Force, through direct control of monetary policy), by such regulation may be extended across borders.⁸ market incumbency among private institutions (for While it is too early to predict the impact of greater example, e-commerce or social media giants in regulation on stablecoins, innovation continues the United States with potential to migrate some apace with the likely emergence of many more (and user transactions to stablecoins), or by sector (for newer) varieties in coming years. In contrast, early example, use-based loyalty stablecoins). efforts to issue CBDCs have been met with only moderate adoption. For example, the equivalent Although the market is far too nascent to confidently of just over $40 million in Chinese digital Yuan has predict outcomes, constituents from all corners of thus far been distributed by lottery, and the People’s the payments ecosystem can take valuable steps to Bank of China has reported around 70 million position themselves for the inevitable changes on transactions since the launch of its limited multicity the horizon—regardless of the form such changes pilot in January 2021.⁹ While this represents a solid take: proof of concept, it compares with over two billion monthly active users reported by China’s largest — Providers of financial services infrastructure digital technology payment providers WeChat Pay should continually monitor the suitability of their and Alipay. design choices for future interoperability with digital currencies. For example, participation in Preparatory moves for an uncertain account-based CBDCs will likely involve direct landscape interaction with a permissioned node, while supporting stablecoins may require wallets Clearly these technological considerations, with cross-chain access. In particular, it may regulatory actions, and market dynamics carry be important to consider how these choices major systemic implications for banking and the support high-potential business cases (such payments industry. Sheer regulation is highly as instant disbursements), post-trade investor unlikely to suppress the demand for digital services, and rapid cross-border remittances. currencies, and innovators will continue to push the envelope by developing new uses and distribution — Retail banks, merchants, and payment models satisfying both demand and legislative service providers might consider the level of requirements. Similarly, the results of initial pilots infrastructure investment likely needed for and ongoing research of CBDCs will help shape their successful implementation of CBDCs and evolution and potential adoption. multiple stablecoin networks. Many retail banks already face extensive payments modernization It seems likely that the recent growth in circulation requirements in the coming years—tackling and transaction volume of stablecoins will infrastructure for digital currencies represents continue, at least as long as the overall size of an additional demand on limited development the cryptocurrency market continues to expand. capacity. Incorporating all such efforts into Similarly, digital-currency activities by central banks an integrated road map, reflecting potential are too widespread for current pilot efforts not to be synergies and possible triage, should promote extended. Will a two-tiered system of CBDCs and long-term efficiency and avoid duplication of stablecoins be sustainable over time? What are the effort. macroeconomic and geopolitical implications of the various scenarios? — The impact of CBDCs on private-sector banks likely depends on the speed of their adoption. Most likely there will be some form of coexistence. Specifically, if adoption of CBDCs were to Within this continuum we may see flavors happen relatively quickly, the flow of funds 9 Wolfie Zhao, “China publishes first e-CNY whitepaper, confirming smart contract programmability,” The Block, July 16, 2021, theblockcrypto. 6 CBDC and stablecoins: Early coexistence on an uncertain road

into bank deposits would be diverted, at least markets, although such limits are being built into temporarily, into digital cash, thereby limiting the some CBDC designs. ability of banks to lend and generate fee income with such deposits. Accordingly, it would seem — The task for government, central banks, and in the interest of private-sector banks for the regulators is somewhat more straightforward: introduction of CBDCs to be slower and more to some extent, their decisions will dictate the carefully orchestrated, potentially with initial moves of other parties, although any traction transaction limits. demonstrated by in-market stablecoin solutions will necessarily factor into central bankers’ — Chief risk and financial officers will benefit from approaches. We expect many will seek to assess evaluating the broad impact of digital currencies the impact of private currencies on the efficacy on bank liquidity and capital requirements of monetary policy (for instance, via value flows) given potential policy changes. They could and fiscal policy (for example, via government monitor potential increases in funding costs, the disbursements), tailoring regulatory and possibility of further erosion of payments profit supervisory changes accordingly. They will want margins (for example, given CBDC’s potential as to balance countervailing factors: extensive a frictionless “free” cash replacement), and even regulation could serve essentially to prevent safeguards against potential “digital bank runs”— stablecoin use, whereas measured approaches many of the existing “circuit breakers” that may create a safer environment in which such afford some protection for traders and investors currencies could flourish. currently do not exist in the 24/7 cryptocurrency Learning from China’s CBDC pilot The most advanced market application of CBDC to date has been the People’s Bank of China’s (PBoC) multicity pilot of its digital version of RMB, called eCNY. ¹ From late 2019 the PBoC began to pilot test eCNY in Shenzhen, Suzhou, Xiongan, and Chengdu, initially through app and wallet-based payments. The pilot gradually expanded to Shanghai, Hainan, Xian, Qingdao, and Dalian. As of June 2021, the pilot test included over 20 million personal wallets, more than 3.5 million merchant wallets, and aggregate throughput of more than 34 billion RMB ($5.2 billion). Initial focus has been on cash replacement for payment scenarios covering trans- portation, shopping, and government services. Financial inclusion is a key use case targeted to drive end-user adoption. A bank account will not be a prerequisite for consumer use of eCNY, unless a user desires to replenish a digital wallet. eCNY will carry the same legal status as cash; the PBoC will distribute the digital currency to six authorized state-owned banks, which will circulate it to consumers. Consum- ers are able to download and deploy a digital wallet from these banks without holding an account with them. Potential benefits include mitigated KYC risk and reduced compliance cost related to transaction monitoring and reporting, given eCNY’s “controlled anonymity” (only central banks will have full access to trading data). Enhanced technical under- writing capabilities are also anticipated, creating competitive differentiation for participating banks. As a social benefit, the digital currency is expected to streamline the distribution of targeted subsidies. CBDC and stablecoins: Early coexistence on an uncertain road 7

Concurrently, the PBoC has been testing cross-border payments witheCNY in Hong Kong, in a joint effort with the Hong Kong Monetary Authority. Considering the more than $500 billion of import/export trade between Hong Kong SAR and the Chinese Mainland, the combined impact of cross-border eCNY and eHKD being piloted could meaningfully impact existing financial markets and operators via lower transaction costs, more efficient (real-time) settlement, and support for product innovations such as smart contracts. Although no timelines for formal launch have been announced, plans are proceeding to feature eCNY capabilities at the 2022 Beijing Winter Olympics. 1 Formerly Digital Currency Electronic Payment or DC/EP. — Investors in highly popular and speculative emerge as a global currency? To what extent will cryptocurrencies—and their issuers—should citizens resist the full traceability of payments? And anticipate the impact of CBDCs on their assets. to what extent will citizens be comfortable The emergence of any single central-bank obtaining familiar banking services—such as high- solution and related regulation could deter yield deposits, collateralized lending, working private-sector innovation and hinder the growth capital, and payments services (all available in DeFi of crypto ecosystems, potentially unsettling today)—without reliance on a traditional bank? investors in an asset class driven so much by And finally, how quickly will we see innovation sentiment. in blockchain protocols (e.g., proof of stake) that dramatically reduces their environmental Most of all, the co-evolution of stablecoins and impact? CBDCs will directly impact society. While the future is not yet clear, certain behaviors could well signal We expect answers to many of these questions to the direction of this evolution: to what extent will become clearer over the next few years as both physical cash still be used—and accepted—in stablecoins and CBDCs become more widely society? In what medium of value will employees and available, and the payments industry confronts bills be paid? Through what means will commerce perhaps the biggest disruption in its history. While be conducted, particularly if digital currencies the use cases of CBDCs and stablecoins are still issued on public distributed ledgers lower the cost emerging, it is not too early to prepare for such of hosting accounts and speed payment delivery, disruption. and to what extent could a single digital currency Ian De Bode is an associate partner in McKinsey’s San Francisco office, Matt Higginson is a partner in the Boston office, and Marc Niederkorn is a partner in the Luxembourg office. Copyright © 2021 McKinsey & Company. All rights reserved. 8 CBDC and stablecoins: Early coexistence on an uncertain road

Global Banking Practice Building the AI bank of the future May 2021 © Getty Images

Global Banking Practice Building the AI bank of the future To thrive in the AI-powered digital age, banks will need an AI-and-analytics capability stack that delivers intelligent, personalized solutions and distinctive experiences at scale in real time. May 2021

Contents 4 AI bank of the future: Can banks meet the AI challenge? Artificial intelligence technologies are increasingly integral to the world we live in, and banks need to deploy these technologies at scale to remain relevant. Success requires a holistic transformation spanning multiple layers of the organization. 18 Reimagining customer engagement for the AI bank of the future Banks can meet rising customer expectations by applying AI to offer intelligent propositions and smart servicing that can seamlessly embed in partner ecosystems. 29 AI-powered decision making for the bank of the future Banks are already strengthening customer relationships and lowering costs by using artificial intelligence to guide customer engagement. Success requires that capability stacks include the right decisioning elements. 41 Beyond digital transformations: Modernizing core technology for the AI bank of the future For artificial intelligence to deliver value across the organization, banks need core technology that is scalable, resilient, and adaptable. Building that requires changes in six key areas. 52 Platform operating model for the AI bank of the future Technology alone cannot define a successful AI bank; the AI bank of the future also needs an operating model that brings together the right talent, culture, and organizational design.

Introduction Banking is at a pivotal moment. Technology leaders recognize that the economies of scale disruption and consumer shifts are laying the basis afforded to organizations that efficiently deploy AI for a new S-curve for banking business models, technologies will compel incumbents to strengthen and the COVID-19 pandemic has accelerated customer engagement each day with distinctive these trends. Building upon this momentum, experiences and superior value propositions. This the advancement of artificial-intelligence (AI) value begins with intelligent, highly personalized technologies within financial services offers banks offers and extends to smart services, streamlined the potential to increase revenue at lower cost by omnichannel journeys, and seamless embedding engaging and serving customers in radically new of trusted bank functionality within partner ways, using a new business model we call “the AI ecosystems. From the customer’s point of view, bank of the future.” The articles collected here these are key features of an AI bank. outline key milestones on a path we believe can lead banks to deeper customer relationships, expanded The building blocks of an AI bank market share, and stronger financial performance. Our goal in this compendium is to give banking The opportunity for a new business model comes as leaders an end-to-end view of an AI bank’s full stack banks face daunting challenges on multiple fronts. capabilities and examine how these capabilities In capital markets, many banks trade at a 50 percent cut across four layers: engagement, AI-powered discount to book, and approximately three-quarters decision making, core technology and data of banks globally earn returns on equity that do not infrastructure, and a platform-based operating cover their cost of equity.¹ Traditional banks also model. face diverse competitive threats from neobanks and nonbank challengers. Leading financial institutions In our first article, “AI-bank of the future: Can banks are already leveraging AI for split-second loan meet the challenge?” we take a closer look at the approvals, biometric authentication, and virtual trends and challenges leading banks to take an assistants, to name just a few examples. Fintech AI-first approach as they define their core value and other digital-commerce innovators are steadily proposition. We continue by considering a day in the disintermediating banks from crucial aspects of life of a retail consumer and small-business owner customer relationships, and large tech companies transacting with an AI bank. Then we summarize the are incorporating payments and, in some cases, requirements for each layer of the AI-and-analytics lending capabilities to attract more users with capability stack. an ever-broader range of services. Further, as customers conduct a growing share of their daily The second article, “Reimagining customer transactions through digital channels, they are engagement for the AI bank of the future,” examines becoming accustomed to the ease, speed, and the capabilities that enable a bank to provide personalized service offered by digital natives, and customers with intelligent offers, personalized their expectations of banks are rising. solutions, and smart servicing within omnichannel journeys across bank-owned platforms and partner To compete and thrive in this challenging ecosystems. environment, traditional banks will need to build a new value proposition founded upon leading-edge In our third article, “AI-powered decision making for AI-and-analytics capabilities. They must become the bank of the future,” we examine how machine- “AI first” in their strategy and operations. Many bank learning models can significantly enhance customer 1 “A test of resilience: Banking through the crisis, and beyond,” Global Banking Annual Review, December 2020, McKinsey.com. 2 Building the AI bank of the future

experiences and bank productivity, and we outline Once bank leaders have established their AI-first the steps banks can follow to build the architecture vision, they will need to chart a road map detailing required to generate real-time analytical insights and the discrete steps for modernizing enterprise translate them into messages addressing precise technology and streamlining the end-to-end stack. customer needs. Joint business-technology owners of customer- facing solutions should assess the potential of The fourth article, “Beyond digital transformations: emerging technologies to meet precise customer Modernizing core technology for the AI bank of needs and prioritize technology initiatives with the the future,” discusses the key elements required greatest potential impact on customer experience for the backbone of the capability stack, including and value for the bank. We also recommend that automated cloud provisioning and an API and banks consider leveraging partnerships for non- streaming architecture to enable continuous, differentiating capabilities while devoting capital secure data exchange between the centralized data resources to in-house development of capabilities infrastructure and the decisioning and engagement that set the bank apart from the competition. layers. Building the AI bank of the future will allow As we discuss in our final article, “Platform operating institutions to innovate faster, compete with digital model for the AI bank of the future,” deploying these natives in building deeper customer relationships AI-and-analytics capabilities efficiently at scale at scale, and achieve sustainable increases in requires cross-functional business-technology profits and valuations in this new age. We hope platforms comprising agile teams and new the following articles will help banks establish their technology talent. vision and craft a road map for the journey. Starting the journey To get started on the transformation, bank leaders should formulate the organization’s strategic goals for the AI-enabled digital age and evaluate how AI technologies can support these goals. Renny Thomas Senior Partner McKinsey & Company Building the AI bank of the future 3

Global Banking & Securities AI bank of the future: Can banks meet the AI challenge? Artificial intelligence technologies are increasingly integral to the world we live in, and banks need to deploy these technologies at scale to remain relevant. Success requires a holistic transformation spanning multiple layers of the organization. by Suparna Biswas, Brant Carson, Violet Chung, Shwaitang Singh, and Renny Thomas September 2020 © Getty Images 4

In 2016, AlphaGo, a machine, defeated 18-time 3. What obstacles prevent banks from deploying world champion Lee Sedol at the game of AI capabilities at scale? Go, a complex board game requiring intuition, imagination, and strategic thinking—abilities 4. How can banks transform to become AI first? long considered distinctly human. Since then, artificial intelligence (AI) technologies have 1. Why must banks become AI first? advanced even further,¹ and their transformative impact is increasingly evident across Over several decades, banks have continually industries. AI-powered machines are tailoring adapted the latest technology innovations to recommendations of digital content to individual redefine how customers interact with them. Banks tastes and preferences, designing clothing introduced ATMs in the 1960s and electronic, lines for fashion retailers, and even beginning to card-based payments in the ’70s. The 2000s saw surpass experienced doctors in detecting signs of broad adoption of 24/7 online banking, followed cancer. For global banking, McKinsey estimates by the spread of mobile-based “banking on the go” that AI technologies could potentially deliver up to in the 2010s. $1 trillion of additional value each year.² Few would disagree that we’re now in the Many banks, however, have struggled to move AI-powered digital age, facilitated by falling costs from experimentation around select use cases to for data storage and processing, increasing scaling AI technologies across the organization. access and connectivity for all, and rapid Reasons include the lack of a clear strategy for AI, advances in AI technologies. These technologies an inflexible and investment-starved technology can lead to higher automation and, when deployed core, fragmented data assets, and outmoded after controlling for risks, can often improve upon operating models that hamper collaboration human decision making in terms of both speed between business and technology teams. What and accuracy. The potential for value creation is more, several trends in digital engagement is one of the largest across industries, as AI can have accelerated during the COVID-19 pandemic, potentially unlock $1 trillion of incremental value and big-tech companies are looking to enter for banks, annually (Exhibit 1). financial services as the next adjacency. To compete successfully and thrive, incumbent Across more than 25 use cases,³ AI technologies banks must become “AI-first” institutions, can help boost revenues through increased adopting AI technologies as the foundation for personalization of services to customers (and new value propositions and distinctive customer employees); lower costs through efficiencies experiences. generated by higher automation, reduced errors rates, and better resource utilization; and uncover In this article, we propose answers to four new and previously unrealized opportunities questions that can help leaders articulate a clear based on an improved ability to process and vision and develop a road map for becoming an generate insights from vast troves of data. AI-first bank: More broadly, disruptive AI technologies can 1. Why must banks become AI first? dramatically improve banks’ ability to achieve four key outcomes: higher profits, at-scale 2. What might the AI bank of the future look like? personalization, distinctive omnichannel 1 AI can be defined as the ability of a machine to perform cognitive functions associated with human minds (e.g., perceiving, reasoning, learning, and problem solving). It includes various capabilities, such as machine learning, facial recognition, computer vision, smart robotics, virtual agents, and autonomous vehicles. See “Global AI Survey: AI proves its worth, but few scale impact,” November 2019, McKinsey.com. 2 “The executive’s AI playbook,” McKinsey.com. 3 For an interactive view, visit: www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/the-executives-ai- playbook?page=industries/banking/ 5 AI bank of the future: Can banks meet the AI challenge?

Exhibit 1 Potential annual value of AI and analytics for global banking could reach as high as $1 trillion. Total potential annual value, $ billion Traditional AI 1,022.4 (15.4% of sales) Advanced AI and analytics 660.9 361.5 % of value driven by advanced AI, by function 100 50 Risk: 372.9 Finance and IT: 8.0 Other operations: $2.4 B 288.6 84.3 0.0 8.0 0.0 2.4 Marketing and sales: 624.8 363.8 261.1 HR: 14.2 8.6 5.7 0 Source: \"The executive's AI playbook,\" McKinsey.com. (See \"Banking,\" under \"Value & Assess.\") experiences, and rapid innovation cycles. Banks As consumers increase their use of digital that fail to make AI central to their core strategy banking services, they grow to expect more, and operations—what we refer to as becoming particularly when compared to the standards “AI-first”—will risk being overtaken by competition they are accustomed to from leading consumer- and deserted by their customers. This risk is internet companies. Meanwhile, these digital further accentuated by four current trends: experience leaders continuously raise the bar on personalization, to the point where they — Rising customer expectations as adoption sometimes anticipate customer needs before of digital banking increases. In the first few the customer is aware of them, and offer highly- months of the COVID-19 pandemic, use of tailored services at the right time, through the online and mobile banking channels across right channel. countries has increased by an estimated 20 to 50 percent and is expected to continue at — Leading financial institutions’ use of advanced this higher level once the pandemic subsides. AI technologies is steadily increasing. Nearly Across diverse global markets, between 15 and 60 percent of financial-services sector 45 percent of consumers expect to cut back respondents in McKinsey’s Global AI Survey on branch visits following the end of the crisis.⁴ report⁵ that their companies have embedded 4 John Euart, Nuno Ferreira, Jonathan Gordon, Ajay Gupta, Atakan Hilal, Olivia White, “A global view of financial life during COVID-19—an update,” July 2020, McKinsey.com. 5 Arif Cam, Michael Chui, Bryce Hall, “Global AI Survey: AI proves its worth, but few scale impact,” November 2019, McKinsey.com. AI bank of the future: Can banks meet the AI challenge? 6

at least one AI capability. The most commonly but also to book a cab, order food, schedule used AI technologies are: robotic process a massage, play games, send money to a automation (36 percent) for structured contact, and access a personal line of credit. operational tasks; virtual assistants or Similarly, across countries, nonbanking conversational interfaces (32 percent ) for businesses and “super apps” are embedding customer service divisions; and machine financial services and products in their learning techniques (25 percent) to detect journeys, delivering compelling experiences fraud and support underwriting and risk for customers, and disrupting traditional management. While for many financial services methods for discovering banking products and firms, the use of AI is episodic and focused on services. As a result, banks will need to rethink specific use cases, an increasing number of how they participate in digital ecosystems, banking leaders are taking a comprehensive and use AI to harness the full power of data approach to deploying advanced AI, and available from these new sources. embedding it across the full lifecycle, from the front- to the back-office (Exhibit 2). — Technology giants are entering financial services as the next adjacency to their — Digital ecosystems are disintermediating core business models. Globally, leading traditional financial services. By enabling technology giants have built extraordinary access to a diverse set of services through market advantages: a large and engaged a common access point, digital ecosystems customer network; troves of data, enabling a have transformed the way consumers discover, robust and increasingly precise understanding evaluate, and purchase goods and services. of individual customers; natural strengths For example, WeChat users in China can use in developing and scaling innovative the same app not only to exchange messages, technologies (including AI); and access to Exhibit 2 Banks are expanding their use of AI technologies to improve customer eexxppeerriieenncceessaannddbabcakc-kof-foicffie cperopcreoscseess.ses. Front office Back office Smile-to-pay facial scanning Micro-expression analysis Biometrics (voice, video, Machine learning to detect print) to authenticate and fraud patterns, to initiate transaction with virtual loan officers authorize cybersecurity attacks Conversational bots for Humanoid robots in branches Machine vision and natural- Real-time transaction basic servicing requests to serve customers language processing to scan analysis for risk monitoring and process documents 7 AI bank of the future: Can banks meet the AI challenge?

low-cost capital. In the past, tech giants have digital era, the AI-first bank will offer propositions aggressively entered into adjacent businesses and experiences that are intelligent (that in search of new revenue streams and to is, recommending actions, anticipating and keep customers engaged with a fresh stream automating key decisions or tasks), personalized of offerings. Big-tech players have already (that is, relevant and timely, and based on a gained a foothold in financial services in select detailed understanding of customers’ past domains (especially in payments and, in some behavior and context), and truly omnichannel cases, lending and insurance), and they may (seamlessly spanning the physical and online soon look to press their advantages to deepen contexts across multiple devices, and delivering their presence and build greater scale. a consistent experience) and that blend banking capabilities with relevant products and services 2. What might the AI bank of the beyond banking. Exhibit 3 illustrates how such a future look like? bank could engage a retail customer throughout the day. Exhibit 4 shows an example of the banking To meet customers’ rising expectations and experience of a small-business owner or the beat competitive threats in the AI-powered treasurer of a medium-size enterprise. Exhibit 3 How AI transforms banking for a retail customer. Name: Anya Age: 28 years Occupation: Working professional Anya receives App offers money- integrated portfolio management and view and a set of Anya uses smile- savings solutions, actions with the Seamless to-pay to Analytics- prioritizes card Aggregated potential to integration with nonbanking apps initiate payment backed payments overview of daily augment returns personalized offers activities Bank app Facial recognition Anya gets 2% off Personalized Anya receives Savings and recognizes Anya's for frictionless end-of-day investment recom- spending patterns payment on health money-management solutions mendations and suggests insurance overview of her coffee at nearby premiums based activities, with cafes on her gym augmented reality, activity and and reminders to sleep habits pay bills Intelligent Personalized Omnichannel Banking and beyond banking AI bank of the future: Can banks meet the AI challenge? 8

Exhibit 4 How AI transforms banking for a small- or medium-size-enterprise customer. Name: Dany Age: 36 years Occupation: Treasurer of a small manufacturing unit Dany answers short questionnaire; app scans his facial An AI-powered virtual adviser movements Dany is assisted resolves queries Firm is credited in sourcing and Dany seeks professional advice with funds after selecting the Beyond- on a lending offer banking support Customized application Seamless right vendors services lending solutions approval inventory and receiv- and partners ables management Bank is integrated Micro-expression App suggests SME platform to Dany gets prefilled Serviced by an AI- with client analysis to review loan items to reorder, source suppliers business tax documents to powered virtual applications gives visual reports and buyers review and management adviser on receivables approve; files with systems management a single click Dany gets loan Dany receives offer based on customized company projected solutions for cash flows invoice discounting, factoring, etc. Intelligent Personalized Omnichannel Banking and beyond banking Internally, the AI-first institution will be optimized The AI-first bank of the future will also enjoy for operational efficiency through extreme the speed and agility that today characterize automation of manual tasks (a “zero-ops” mindset) digital-native companies. It will innovate and the replacement or augmentation of human rapidly, launching new features in days or decisions by advanced diagnostic engines in weeks instead of months. It will collaborate diverse areas of bank operations. These gains extensively with partners to deliver new in operational performance will flow from broad value propositions integrated seamlessly application of traditional and leading-edge AI across journeys, technology platforms, and technologies, such as machine learning and data sets. facial recognition, to analyze large and complex reserves of customer data in (near) real time. 9 AI bank of the future: Can banks meet the AI challenge?

3. What obstacles prevent banks from cases. Without a centralized data backbone, it is deploying AI capabilities at scale? practically impossible to analyze the relevant data and generate an intelligent recommendation or Incumbent banks face two sets of objectives, offer at the right moment. If data constitute the which on first glance appear to be at odds. On bank’s fundamental raw material, the data must be the one hand, banks need to achieve the speed, governed and made available securely in a manner agility, and flexibility innate to a fintech. On the that enables analysis of data from internal and other, they must continue managing the scale, external sources at scale for millions of customers, security standards, and regulatory requirements in (near) real time, at the “point of decision” across of a traditional financial-services enterprise. the organization. Lastly, for various analytics and advanced-AI models to scale, organizations need Despite billions of dollars spent on change- a robust set of tools and standardized processes the-bank technology initiatives each year, few to build, test, deploy, and monitor models, in a banks have succeeded in diffusing and scaling repeatable and “industrial” way. AI technologies throughout the organization. Among the obstacles hampering banks’ efforts, Banks’ traditional operating models further the most common is the lack of a clear strategy impede their efforts to meet the need for for AI.⁶ Two additional challenges for many continuous innovation. Most traditional banks banks are, first, a weak core technology and data are organized around distinct business lines, backbone and, second, an outmoded operating with centralized technology and analytics model and talent strategy. teams structured as cost centers. Business owners define goals unilaterally, and alignment Built for stability, banks’ core technology with the enterprise’s technology and analytics systems have performed well, particularly in strategy (where it exists) is often weak or supporting traditional payments and lending inadequate. Siloed working teams and “waterfall” operations. However, banks must resolve implementation processes invariably lead several weaknesses inherent to legacy systems to delays, cost overruns, and suboptimal before they can deploy AI technologies at scale performance. Additionally, organizations lack (Exhibit 5). First and foremost, these systems a test-and-learn mindset and robust feedback often lack the capacity and flexibility required loops that promote rapid experimentation and to support the variable computing requirements, iterative improvement. Often unsatisfied with the data-processing needs, and real-time analysis performance of past projects and experiments, that closed-loop AI applications require.⁷ Core business executives tend to rely on third-party systems are also difficult to change, and their technology providers for critical functionalities, maintenance requires significant resources. starving capabilities and talent that should ideally What is more, many banks’ data reserves are be developed in-house to ensure competitive fragmented across multiple silos (separate differentiation. business and technology teams), and analytics efforts are focused narrowly on stand-alone use 6 Michael Chui, Sankalp Malhotra, “AI adoption advances, but foundational barriers remain,” November 2018, McKinsey.com. 7 “Closed loop” refers to the fact that the models’ intelligence is applied to incoming data in near real time, which in turn refines the content presented to the user in near real time. AI bank of the future: Can banks meet the AI challenge? 10

Exhibit 5 Investments in core tech are critical to meet increasing demands for ssccaalalabbiliiltiyty, ,flflexeixbiibliitliyt,ya,nadndspsepede.ed. Cloud Data API Challenges How cloud computing can help Core/legacy systems can’t scale sufficiently Enables higher scalability, resilience of services and (eg, 150+ transactions/second) platforms through virtualization of infrastructure Significant time, effort, and team sizes Reduces IT overhead, enables automation of several required to maintain infrastructure infrastructure-management tasks, and allows development teams to “self-serve” Long time required to provision environments for development and testing (eg, 40+ days in Enables faster time to market; dramatically reduces time by some cases) providing managed services (e., setting up new environments in minutes vs days) Challenges How best-in-class data management can help High error rates; poor refresh rates; lack of Ensures high degree of accuracy and single source of truth golden source of truth in a cost-effective manner Hard to access in a timely fashion for various Enables timely and role-appropriate access for various use use cases cases (eg, regulatory, business intelligence at scale, advanced analytics and machine learning, exploratory) Data trapped in silos across multiple units and hard to integrate with external sources Enables a 360-degree view across the organization to enable generation of deeper insights by decision-making algorithms and models Challenges How APIs can help Longer time to market, limited reusability of Promote reusability and accelerate development by enabling code and software across internal teams access to granular services (internal and external) Hard to partner or collaborate with external Reduce complexity and enable faster collaboration with partners; long time to integrate external partners Suboptimal user experience—hard to stitch Enhance customer experience by enabling timely access to data and services across multiple functional data and services across different teams; faster time to market siloes for an integrated proposition due to limited coordination, cross-team testing 1Application programming interface. 11 AI bank of the future: Can banks meet the AI challenge?

4. How can banks transform to First, banks will need to move beyond highly become AI-first? standardized products to create integrated propositions that target “jobs to be done.”⁸ This To overcome the challenges that limit requires embedding personalization decisions organization-wide deployment of AI (what to offer, when to offer, which channel technologies, banks must take a holistic to offer) in the core customer journeys and approach. To become AI-first, banks must invest designing value propositions that go beyond the in transforming capabilities across all four layers core banking product and include intelligence of the integrated capability stack (Exhibit 6): the that automates decisions and activities on engagement layer, the AI-powered decisioning behalf of the customer. Further, banks should layer, the core technology and data layer, and the strive to integrate relevant non-banking operating model. products and services that, together with the core banking product, comprehensively address As we will explain, when these interdependent the customer end need. An illustration of the layers work in unison, they enable a bank to “jobs-to-be-done” approach can be seen in the provide customers with distinctive omnichannel way fintech Tally helps customers grapple with experiences, support at-scale personalization, the challenge of managing multiple credit cards. and drive the rapid innovation cycles critical The fintech’s customers can solve several pain to remaining competitive in today’s world. points—including decisions about which card to Each layer has a unique role to play—under- pay first (tailored to the forecast of their monthly investment in a single layer creates a weak link income and expenses), when to pay, and how that can cripple the entire enterprise. much to pay (minimum balance versus retiring principal)—a complex set of tasks that are often The following paragraphs explore some of the not done well by customers themselves. changes banks will need to undertake in each layer of this capability stack. The second necessary shift is to embed customer journeys seamlessly in partner Layer 1: Reimagining the customer ecosystems and platforms, so that banks engagement layer engage customers at the point of end use and Increasingly, customers expect their bank to be in the process take advantage of partners’ present in their end-use journeys, know their data and channel platform to increase higher context and needs no matter where they interact engagement and usage. ICICI Bank in India with the bank, and to enable a frictionless embedded basic banking services on WhatsApp experience. Numerous banking activities (a popular messaging platform in India) and (e.g., payments, certain types of lending) are scaled up to one million users within three becoming invisible, as journeys often begin and months of launch.⁹ In a world where consumers end on interfaces beyond the bank’s proprietary and businesses rely increasingly on digital platforms. For the bank to be ubiquitous in ecosystems, banks should decide on the customers’ lives, solving latent and emerging posture they would like to adopt across multiple needs while delivering intuitive omnichannel ecosystems—that is, to build, orchestrate, or experiences, banks will need to reimagine how partner—and adapt the capabilities of their they engage with customers and undertake engagement layer accordingly. several key shifts. 8 Clayton M. Christensen, Taddy Hall, Karen Dillon and David S. Duncan, “Know your customers ‘jobs to be done,” Harvard Business Review, 12 September 2016, hbr.org. 9 “ICICI Bank crosses 1 million users on WhatsApp platform,” Live Mint, July 7, 2020, livemint.com. AI bank of the future: Can banks meet the AI challenge?

Exhibit 6 To become an AI-first institution, a bank must streamline its capability stack for value creation. AI bank of the future Profitability Personalization Omnichannel Speed and at scale experience innovation Reimagined Intelligent products, Within-bank channels and Beyond-bank channels engagement tools, experiences for customers and journeys (eg, web, apps, and journeys (eg, Smart service and operations employees mobile, smart devices, ecosystems, partners, 4 1 branches, Internet of Things) distributors) 23 5 Digital marketing AI-powered 6 Customer Credit Monitoring Retention Servicing decision acquisition decision and and cross- and making Advanced making analytics collections selling, engagement upselling 7 Natural- Voice- Virtual Facial Block- Behav- AI capabilities language script agents, Computer recog- chain process- analysis bots vision nition Robotics ioral analytics ing A. Tech-forward strategy (in-house build of differential capabilities vs buying offerings; in-house talent plan) Core 8 B. Data C. Modern D. Intelligent E. Hollow- F. Cyber- technology manage- API archi- infrastructure ing the security and data Core technology ment for tecture (AI operations core (core and and data AI world command, moderniza- control hybrid cloud tion) tiers setup, etc) 9 A. Autonomous business + tech teams Operating Platform operating B. Agile way C. Remote D. Modern talent E. Culture and model model of working collaboration strategy (hiring, capabilities reskilling) 10 Value capture 13 AI bank of the future: Can banks meet the AI challenge?

Third, banks will need to redesign overall and stronger risk management (e.g., earlier customer experiences and specific journeys for detection of likelihood of default and omnichannel interaction. This involves allowing fraudulent activities). customers to move across multiple modes (e.g., web, mobile app, branch, call center, smart To establish a robust AI-powered decision devices) seamlessly within a single journey layer, banks will need to shift from attempting and retaining and continuously updating the to develop specific use cases and point latest context of interaction. Leading consumer solutions to an enterprise-wide road map for internet companies with offline-to-online deploying advanced-analytics (AA)/machine- business models have reshaped customer learning (ML) models across entire business expectations on this dimension. Some banks domains. As an illustration, in the domain of are pushing ahead in the design of omnichannel unsecured consumer lending alone, more journeys, but most will need to catch up. than 20 decisions across the life cycle can be automated.¹¹ To enable at-scale development Reimagining the engagement layer of the of decision models, banks need to make the AI bank will require a clear strategy on how development process repeatable and thus to engage customers through channels capable of delivering solutions effectively and owned by non-bank partners. Banks will on-time. In addition to strong collaboration need to adopt a design-thinking lens as they between business teams and analytics build experiences within and beyond the talent, this requires robust tools for model bank’s platform, engineering engagement development, efficient processes (e.g., for interfaces for flexibility to enable tailoring and re-using code across projects), and diffusion personalization for customers, reengineering of knowledge (e.g., repositories) across teams. back-end processes, and ensuring that data- Beyond the at-scale development of decision capture funnels (e.g., clickstream) are granularly models across domains, the road map should embedded in the bank’s engagement layer. All also include plans to embed AI in business- of this aims to provide a granular understanding as-usual process. Often underestimated, of journeys and enable continuous this effort requires rewiring the business improvement.10 processes in which these AA/AI models will be embedded; making AI decisioning “explainable” Layer 2: Building the AI-powered decision- to end-users; and a change-management plan making layer that addresses employee mindset shifts and Delivering personalized messages and skills gaps. To foster continuous improvement decisions to millions of users and thousands beyond the first deployment, banks also of employees, in (near) real time across the full need to establish infrastructure (e.g., data spectrum of engagement channels, will require measurement) and processes (e.g., periodic the bank to develop an at-scale AI-powered reviews of performance, risk management of AI decision-making layer. Across domains within models) for feedback loops to flourish. the bank, AI techniques can either fully replace or augment human judgment to produce Additionally, banks will need to augment significantly better outcomes (e.g., higher homegrown AI models, with fast-evolving accuracy and speed), enhanced experience capabilities (e.g., natural-language processing, for customers (e.g., more personalized computer-vision techniques, AI agents interaction and offerings), actionable insights and bots, augmented or virtual reality) in for employees (e.g., which customer to contact their core business processes. Many of first with next-best-action recommendations), these leading-edge capabilities have the 10Jennifer Kilian, Hugo Sarrazin, and Hyo Yeon, “Building a design-driven culture,” September 2015, McKinsey.com. 14 11 Renny Thomas, Vinayak HV, Raphael Bick, and Shwaitang Singh, “Ten lessons for building a winning retail and small-business digital lending franchise,” November 2019, McKinsey.com. AI bank of the future: Can banks meet the AI challenge?

potential to bring a paradigm shift in customer technology backbone, starved of the investments experience and/or operational efficiency. While needed for modernization, can dramatically many banks may lack both the talent and the reduce the effectiveness of the decision-making requisite investment appetite to develop these and engagement layers. technologies themselves, they need at minimum to be able to procure and integrate these The core-technology-and-data layer has six key emerging capabilities from specialist providers elements (Exhibit 7): at rapid speed through an architecture enabled by an application programming interface (API), — Tech-forward strategy. Banks should have promote continuous experimentation with these a unified technology strategy that is tightly technologies in sandbox environments to test and aligned to business strategy and outlines refine applications and evaluate potential risks, strategic choices on which elements, skill and subsequently decide which technologies to sets, and talent the bank will keep in-house deploy at scale. and those it will source through partnerships or vendor relationships. In addition, the To deliver these decisions and capabilities and to tech strategy needs to articulate how each engage customers across the full life cycle, from component of the target architecture will both acquisition to upsell and cross-sell to retention support the bank’s vision to be an AI-first and win-back, banks will need to establish institution and interact with each layer of the enterprise-wide digital marketing machinery. This capability stack. machinery is critical for translating decisions and insights generated in the decision-making layer — Data management for the AI-enabled world. into a set of coordinated interventions delivered The bank’s data management must ensure through the bank’s engagement layer. This data liquidity—that is, the ability to access, machinery has several critical elements, which ingest, and manipulate the data that serve as include: the foundation for all insights and decisions generated in the decision-making layer. — Data-ingestion pipelines that capture a range Data liquidity increases with the removal of of data from multiple sources both within the functional silos and allows multiple divisions bank (e.g., clickstream data from apps) and to operate off the same data, with increased beyond (e.g., third-party partnerships with coordination. The data value chain begins with telco providers) seamless sourcing of data from all relevant internal systems and external platforms. This — Data platforms that aggregate, develop, and includes ingesting data into a lake, cleaning maintain a 360-degree view of customers and and labeling the data required for diverse use enable AA/ML models to run and execute in cases (e.g., regulatory reporting, business near real time intelligence at scale, AA/ML diagnostics), segregating incoming data (from both existing — Campaign platforms that track past actions and prospective customers) to be made and coordinate forward-looking interventions available for immediate analysis from data to across the range of channels in the be cleaned and labeled for future analysis. engagement layer Furthermore, as banks design and build their centralized data-management infrastructure, Layer 3: Strengthening the core technology and they should develop additional controls and data infrastructure monitoring tools to ensure data security, Deploying AI capabilities across the organization privacy, and regulatory compliance—for requires a scalable, resilient, and adaptable set example, timely and role-appropriate access of core-technology components. A weak core- across the organization for various use cases. 15 AI bank of the future: Can banks meet the AI challenge?

Exhibit 7 The core-technology-and-data layer accommodates increasing use of the cloud and reduction of legacy technology. Capabilities Our perspective Tech-forward strategy Build differentiating capabilities in-house by augmenting the internal skill base; carefully weigh options to buy, build, or compose modular architecture through best-of-breed solutions Data management for AI world Upgrade data management and underlying architecture to support machine-learning use cases at scale by leveraging cloud, streaming data, and real-time analytics Modern API architecture Leverage modern cloud-native tooling to enable a scalable API platform supporting complex orchestrations while creating experience-enhancing integrations across the ecosystem Intelligent infrastructure Implement infrastructure as code across on-premises and cloud environments; increase platform resiliency by adopting AIOps to support deep diagnostics, auto- recoverability, and auto-scale Hollowing the core Distribute transaction processing across the enterprise stack; selectively identify components that can be externalized to drive broader reuse, standardization, and efficiency Implement robust cybersecurity in the hybrid infrastructure; secure data and Cybersecurity and control tiers applications through zero-trust design principles and centralized command-and- control centers 1Application programming interface. — Modern API architecture. APIs are the — Intelligent infrastructure. As companies connective tissue enabling controlled access in diverse industries increase the share of to services, products, and data, both within workload handled on public and private the bank and beyond. Within the bank, APIs cloud infrastructure, there is ample evidence reduce the need for silos, increase reusability that cloud-based platforms allow for the of technology assets, and promote flexibility higher scalability and resilience crucial to an in the technology architecture. Beyond the AI-first strategy.13 Additionally, cloud-based bank, APIs accelerate the ability to partner infrastructure reduces costs for IT maintenance externally, unlock new business opportunities, and enables self-serve models for development and enhance customer experiences. While teams, which enable rapid innovation cycles by APIs can unlock significant value, it is critical to providing managed services (e.g., setting up new start by defining where they are to be used and environments in minutes instead of days). establish centralized governance to support their development and curation.¹² ¹² Renny Thomas, Vinayak HV, Raphael Bick, and Shwaitang Singh, “Ten lessons for building a winning retail and small-business digital lending franchise,” November 2019, McKinsey.com. ¹³ Arul Elumalai and Roger Roberts, “Unlocking business acceleration in a hybrid cloud world,” August 2019, McKinsey.com. AI bank of the future: Can banks meet the AI challenge? 16

Layer 4: Transitioning to the platform operating The journey to becoming an AI-first bank entails model transforming capabilities across all four layers The AI-first bank of the future will need a new of the capability stack. Ignoring challenges or operating model for the organization, so it can underinvesting in any layer will ripple through all, achieve the requisite agility and speed and resulting in a sub-optimal stack that is incapable unleash value across the other layers. While of delivering enterprise goals. most banks are transitioning their technology platforms and assets to become more modular A practical way to get started is to evaluate and flexible, working teams within the bank how the bank’s strategic goals (e.g., growth, continue to operate in functional silos under profitability, customer engagement, innovation) suboptimal collaboration models and often lack can be materially enabled by the range of AI alignment of goals and priorities. technologies—and dovetailing AI goals with the strategic goals of the bank. Once this alignment The platform operating model envisions cross- is in place, bank leaders should conduct a functional business-and-technology teams comprehensive diagnostic of the bank’s starting organized as a series of platforms within the bank. position across the four layers, to identify areas Each platform team controls their own assets that need key shifts, additional investments (e.g., technology solutions, data, infrastructure), and new talent. They can then translate these budgets, key performance indicators, and insights into a transformation roadmap that spans talent. In return, the team delivers a family of business, technology, and analytics teams. products or services either to end customers of the bank or to other platforms within the bank. Equally important is the design of an execution In the target state, the bank could end up with approach that is tailored to the organization. To three archetypes of platform teams. Business ensure sustainability of change, we recommend platforms are customer- or partner-facing teams a two-track approach that balances short-term dedicated to achieving business outcomes in projects that deliver business value every quarter areas such as consumer lending, corporate with an iterative build of long-term institutional lending, and transaction banking. Enterprise capabilities. Furthermore, depending on their platforms deliver specialized capabilities and/ market position, size, and aspirations, banks need or shared services to establish standardization not build all capabilities themselves. They might throughout the organization in areas such as elect to keep differentiating core capabilities collections, payment utilities, human resources, in-house and acquire non-differentiating and finance. And enabling platforms enable the capabilities from technology vendors and enterprise and business platforms to deliver partners, including AI specialists. cross-cutting technical functionalities such as cybersecurity and cloud architecture. By integrating business and technology in For many banks, ensuring adoption of AI jointly owned platforms run by cross-functional technologies across the enterprise is no longer teams, banks can break up organizational silos, a choice, but a strategic imperative. Envisioning increasing agility and speed and improving the and building the bank’s capabilities holistically alignment of goals and priorities across the across the four layers will be critical to success. enterprise. Suparna Biswas is a partner, Shwaitang Singh is an associate partner, and Renny Thomas is a senior partner, all in McKinsey’s Mumbai office. Brant Carson is a partner in the Sydney office, and Violet Chung is a partner in the Hong Kong office. The authors would like to thank Milan Mitra, Anushi Shah, Arihant Kothari, and Yihong Wu for their contributions to this article. 17 AI bank of the future: Can banks meet the AI challenge?

Global Banking & Securities Reimagining customer engagement for the AI bank of the future Banks can meet rising customer expectations by applying AI to offer intelligent propositions and smart servicing that can seamlessly embed in partner ecosystems. by Violet Chung, Malcolm Gomes, Sailee Rane, Shwaitang Singh, and Renny Thomas October 2020 © Getty Images 18

From instantaneous translation to The value of reimagined customer conversational interfaces, artificial-intelligence engagement (AI) technologies are making ever more evident impacts on our lives. This is particularly true in In recent years, many financial institutions the financial-services sector, where challengers have devoted significant capital to digital-and- are already launching disruptive AI-powered analytics transformations, aiming to improve innovations. To remain competitive, incumbent customer journeys across mobile and web banks must become “AI first” in vision and channels. Despite these big investments, most execution, and as discussed in the previous banks still lag well behind consumer-tech article, this means transforming the full companies in their efforts to engage customers capability stack, including the engagement layer, with superior service and experiences. AI-powered decision making, core technology The prevailing models for bank customer and data infrastructure, and operating model. acquisition and service delivery are beset by If fully integrated, these capabilities can missed cues: incumbents often fail to recognize strengthen engagement significantly, supporting and decipher the signals customers leave customers’ financial activities across diverse behind in their digital journeys. online and physical contexts with intelligent, highly personalized solutions delivered through Across sectors, however, leaders in delivering an interface that is intuitive, seamless, and fast. positive experiences are not just making These are the baseline expectations for an their journeys easy to access and use but AI bank. also personalizing core journeys to match an individual’s present context, direction of In this article, we examine how banks can take movement, and aspiration. an AI-first approach to reimagining customer engagement. We focus on three elements with Creating a superior experience can generate potential to give the bank a decisive competitive significant value. A McKinsey survey of US edge: retail banking customers found that at the banks with the highest degree of reported 1. The value of re-imagined customer customer satisfaction, deposits grew 84 engagement: By reimagining customer percent faster than at the banks with the lowest engagement, banks can unlock new value satisfaction ratings (Exhibit 1). through better efficiency, expanded market access, and greater customer lifetime value. Superior experiences are not only a proven foundation for growth but also a crucial means 2. Key elements of the re-imagined engagement of countering threats from new attackers. In layer: The combination of intelligent propositions, particular, three trends make it imperative for seamless embedding within partner ecosystems, banks to improve customer engagement: and smart servicing and experiences underpins an overall experience that sets the AI bank apart 1. Rising customer expectations. Accustomed from traditional incumbents. to the service standards set by consumer internet companies, today’s customers 3. Integrated supporting capabilities: As banks have come to expect the same degree of rethink and rebuild their engagement capabilities, consistency, convenience, and personalization they need to leverage critical enablers, each from their financial-services institutions. For of which cuts across all four layers of the example, Netflix has been able to raise the capability stack. bar in customer experience by doing well on three crucial attributes: consistency of 19 Reimagining customer engagement for the AI bank of the future

Exhibit 1 US retail banks with high customer satisfaction typically grow deposits faster. Real differences in customer satisfaction Leaders in customer satisfaction grow faster CSAT (Percent of customers rating 9 or 10) Deposit CAGR (2014-17) Top 65 +84% quartile 55 5.9 49 3rd 39 3.2 quartile 2nd quartile Bottom quartile -26 pp Top Bottom quartile quartile CSAT CSAT 1Percentage of respondents that selected a 9 or 10 on a 10-point customer satisfaction scale. Question: “We would like to understand your experience with [product] with (Bank). Overall, how satisfied or dissatisfied are you with [product] with [Bank]?” Banks were ranked based on average satisfaction scores and then divided into quartiles. Customer satisfaction score. Source: McKinsey 2018 Retail Banking Customer Experience Benchmark Survey experience across channels (mobile app, laptop, providing access to financial products within their TV), convenient access to a vast reserve of nonbanking ecosystems. Messaging app WeChat content with a single click, and recommendations allows users in China to make a payment within finely tailored to each profile within a single the chat window. Google has partnered with eight account. Improving websites and online portals US banks to offer cobranded accounts that will be for a seamless experience is one of the top three mobile first and focus on creating an intuitive user areas where customers desire support from experience and new ways to manage money with banks.¹ Innovation leaders are already executing financial insights and budgeting tools.² transactions and loan approvals and resolving service inquiries in near real time. Beyond access, nonbank innovators are also disintermediating parts of the value chain that 2. Disintermediation. Nonbank providers are were once considered core capabilities of financial disintermediating banks from the most valuable institutions, including underwriting. Indian agtech services, leaving less profitable links in the value company Cropin uses advanced analytics and chain to traditional banks. Big-tech companies are machine learning to analyze historical data on 1John Euart, Nuno Ferreira, Jonathan Gordon, Ajay Gupta, Atakan Hilal, and Olivia White, “Financial life during the COVID-19 pandemic—an update,” July 2020, McKinsey.com. 2 “Google to offer co-branded cards with 8 US banks” August 3, 2020, Finextra.com. Reimagining customer engagement for the AI bank of the future 20

crop performance, weather patterns, land usage, If reimagined customer engagement is properly and more to develop underwriting models that aligned with the other layers of the AI-and- predict a customer’s creditworthiness much more analytics capability stack, it can strengthen accurately than traditional risk models. a bank’s competitive position and financial performance by increasing efficiency, access 3. Increasingly human-like formats. and scale, and customer lifetime value (Exhibit 2). Conversational interfaces are becoming the new standard for customer engagement. With Key elements of the AI-first approximately one third of adult Americans engagement layer owning a smart speaker,³ voice commands are gaining traction, and adoption of both voice and For banks, successfully integrating core video interfaces will likely expand as in-person personalization elements across the range interactions continue to decline. Several banks of touchpoints with customers will be critical have already launched voice-activated assistants, to deliver a superior experience and better including Bank of America with Erica and ICICI outcomes. The reimagined engagement layer bank in India with iPal. should provide the AI bank with a deeper and 3 Bret Kinsella, “Nearly 90 million U.S. adults have smart speakers, adoption now exceeds one-third of consumers,” April 28, 2020, voicebot.ai. Exhibit 2 With an AI-first approach to customer engagement, banks have the opportunity to reap gains in crucial areas. Access to newer, previously untapped customer segments Higher speed to reach critical scale Increased access and scale Reduced cost of acquisition Key Stronger activation and usage of (more cross-sell, partner existing products platform-led growth) metrics Higher engagement (eg, monthly Lower cost to serve (less or Higher impacted Higher usage), satisfaction (eg, NPS, “zero” operations) lower TAT ) and reduced churn customer Lower risk (better data, early Higher cross-sell of new products warnings, proactive nudging) efficiency lifetime value 1Net promoter score. Turn around time. Source: McKinsey analysis 21 Reimagining customer engagement for the AI bank of the future

more accurate understanding of each customer’s Intelligent propositions context, behavior, needs, and preferences. This To craft and deliver intelligent propositions, understanding, in turn, enables the bank to banks must take an entirely new approach to craft an intelligent, personalized offering. To innovation. First and foremost, they need to support this, banks need to analyze customer free themselves from a product-centric view, data in real time and embed analytical outcomes where they develop new products and features within customer journeys for fast execution and “push” them to customers through product of customer transaction requests and service bundles and discounted pricing. Instead, they queries, enabling instant fulfilment. These should adopt a customer-centric view, which two objectives should guide the design of the starts with understanding customer needs. engagement layer, which comprises three pillars: Achieving this close alignment between bank Intelligent propositions, seamless embedding capabilities and customer needs requires time within partner ecosystems, and smart service and capital to develop a realistic, evidence- and experiences (Exhibit 3). based understanding of actual customers’ Exhibit 3 A reimagined engagement layer uses AI and advanced analytics and comprises 3 key elements. UUnnddeerrssttaannddiinngg ccuussttoommeerrss Needs Behaviors Context Preferences Anticipate Products purchased online, Life stage, upcoming Preferred channels, customer needs parts of purchase journey events, sources of best time to that are digital, preferred income, occupation, etc contact, etc platforms Embedding analytical outcomes within journeys 1 Reimagined 3 engagement layer Intelligent Smart propositions 2 servicing facilitated that can Seamless by fast, anticipate embedding simple, and and address intuitive customers within interactions needs and partner preferences ecosystems Reimagining customer engagement for the AI bank of the future 22

time-critical needs. The capability to gauge and show the proportion of monthly expense in customers’ expressed needs and anticipate a particular category (e.g., dining out or fuel) in latent needs in real time requires that AI and comparison with the previous month’s spending. analytics capabilities be integrated with diverse core systems and delivery platforms across the — Planning for life goals. Finally, by integrating enterprise. systems across the enterprise, banks can analyze relevant data to generate a comprehensive Customer propositions can no longer be static view of a customer’s total inflows and outflows and one-size-fits-all—they should be intelligent and offer advice for balancing daily and annual and tailored, and go beyond banking to address spending with wealth-building goals. Wealthfront, customer needs that may involve both banking a digital wealth-management tool, proposes an and non-banking products and services. investment plan to customers based on their answers to a few questions. The process allows Across diverse markets, recent innovations customers to define their goals in practical terms, in messaging and financial-management such as learning how much to invest to buy a tools are already helping customers simplify home in five years, take a year off to travel next banking activities and improve their financial year, or retire at 40. Chinese wealth-management position—for example, with fee-reduction fintech Snowball offers a cross-platform app with recommendations, budgeting tools, savings and a Twitter-like feature that enables investors to liquidity management, and planning tools to help exchange investment ideas. customers achieve their life goals. — Debt simplification: Some fintech companies — Fee reduction recommendations. Rapid are helping customers who grapple with the analysis of transaction history enables banks challenge of managing multiple credit cards. For to inform individual customers about their example, Fintech Tally helps solve a number of potential to reduce fees. The mobile app pain points, and decisions such as which card Empower highlights duplicate services and to pay first (based on a forecast of their monthly high bills and suggests possible actions, such income and expenses), when to pay, and how as reducing the number of subscriptions or much to pay (minimum balance vs. retiring negotiating for more competitive mobile- principal), while optimizing their credit scores. phone fees, and recommends options for reducing bank fees. (E.g., “You can potentially Embedding in partner ecosystems reduce your telephone bill by 30 percent. We As banks design and offer intelligent propositions can negotiate with your service provider on they need to make them accessible not only on their your behalf and get you a better plan.”) own platforms but also in other ecosystems that their customers are part of. McKinsey research has — Budgeting tools. Budgeting tools can help identified 12 distinct ecosystems that have begun customers improve financial discipline. Acorns, to form around end-to-end customer needs within for example, allows people to set budgets and distinct service domains. We estimate that these sends them alerts to help them stay on track integrated networks will generate approximately (“You have spent 75 percent of your dining limit $60 trillion in global annual revenues by 2025.⁴ this week”). It also delivers reminders based on past transactions (“You paid your credit card Just a few years ago, the most prominent examples bill on the 10th last month. Would you like to were tech giants such as Alibaba, Baidu, and pay now?”). Wally and Spendee automatically WeChat in China, and Amazon, Facebook, and allocate expenses to different categories Google in the United States. In the past two 4 Venkat Atluri, Miklós Dietz, and Nicolaus Henke, “Competing in a world of sectors without borders,” July, 2017, McKinsey.com. 23 Reimagining customer engagement for the AI bank of the future

years, however, both traditional companies and banking and nonbanking needs. It has more tech start-ups have contributed to significant than 100 merchants embedded in the online expansion of ecosystem activity globally. Well- marketplace, enabling customers to complete established banks have led the formation of diverse tasks, such as ordering groceries and digital ecosystems, often in one of five areas: B2C booking tickets, through a single app. commerce, housing, B2B services, transportation, and wealth and protection. Examples include How to move forward. The gradual shift of RBC’s Ownr, a digital solution for entrepreneurs commercial activity toward digital ecosystems launching a business, and DBS’s digital has far-reaching implications for practically marketplace for automobiles, electricity, housing, every sector of the economy, and each financial- and travel. services organization should build a detailed strategy for competing in these new contexts.⁵ Ecosystem strategies. Financial institutions can At present, however, only a few banks have leverage their own and/or partner ecosystems to successfully tapped the potential of ecosystems create value in diverse ways, including increased to create value. To avoid common pitfalls access, higher efficiencies, and stronger and maximize the value of their ecosystem offerings: partnerships, banks need a clear ecosystem strategy, end-to-end integration of internal — Increased access and scale. By embedding capabilities, and ways of working that are their services within ecosystems, banks have compatible with technology partners’ methods. the potential to access customer segments beyond their traditional footprint and to scale Banks need a clear understanding of their new solutions rapidly. For example, BBVA’s strengths, local context, and current customers, Valora, a real estate and mortgage advisory which they should use to select an ecosystem platform, is an important channel for customer strategy that fits the organization’s ambition and acquisition. market position. These are top priorities for the board and should not be left entirely to the chief — Higher efficiencies. Participation in one or digital officer. several ecosystems typically leads to lower customer acquisition costs, lower cost to serve, End-to-end integration of internal capabilities and better credit risk management. In China, is necessary to support real-time analytics and for example, co-lending ecosystem partners messaging. From the collection and processing rely on advanced diagnostic models to analyze of customer data to accurate customer-profile ecosystem data to monitor potential changes analysis, banks must upgrade their technology in borrowers’ risk profiles and to manage early- architecture and analytical capabilities. Further, stage collection in case of default. as discussed in the following section, they should establish a consolidated, enterprise-wide — New value propositions. Deniz Bank has platform for managing customer data. They launched Deniz Den, a platform for agricultural should also establish robust links with partner consulting and financial services, supporting ecosystems to support instantaneous data farmers with timely information about exchange. agricultural best practices and advice on small- business finance and investments. Organizational culture and processes also matter. The bank should work in a way that — More convenience. In India, SBI has launched matches the way technology partners work. YONO, designed as a one-stop solution to This typically entails changes in organizational meet a broad range of a retail customers’ mindset and culture. One approach is to organize 5 Joydeep Sengupta, Vinayak HV, Violet Chung, et al., “The ecosystem playbook: Winning in a world of ecosystems,” April 2019, McKinsey.com. Reimagining customer engagement for the AI bank of the future 24

a team of top talent from multiple departments Banks that leverage AI and analytics to deliver that speak the language of the tech partners, smart servicing and superior experiences stand work at a compatible speed, and are empowered to increase customer satisfaction and loyalty. to make and implement decisions swiftly. Research shows that the stronger the experience Another key area is performance measurement. and the more satisfied the customer, the more likely Traditionally, a bank’s key performance indicators it is that the bank will generate higher revenue: (KPIs) focus on growth and profitability. The a more satisfied customer typically accounts core KPI for internet companies, by contrast, is for approximately 2.4 times more revenue than user experience. If partners are not aligned in a neutral customer.⁶ What is more, we have evaluating progress toward agreed-upon goals, seen that companies scoring high on a scale of tension can arise and diminish the impact of the customer satisfaction tend to generate higher total collaboration. shareholder returns than lower-scoring companies do (Exhibit 4). Smart servicing and experiences The third pillar of the reimagined engagement Along with the significant impact of customers’ layer is smart servicing facilitated by fast, overall experience, customers’ expectations simple, and intuitive interactions with customers. also influence their level of satisfaction—and, by 6 Peter Kriss, “The Value of Customer Experience—Quantified,” August 1, 2014, HBR.org. Exhibit 4 Companies with higher customer satisfaction tend to generate higher returns. Change in total returns to shareholders (TRS) for companies with high, moderate, and low net promoter scores (NPS) Annualized growth in total shareholder returns, % NPS performance groupings 450 High Moderate Low 400 39 66 29 38 –9–+28 350 300 2014 2015 2016 2017 2018 2019 250 200 150 100 50 0 2008 2009 2010 2011 2012 2013 1To create this chart we gathered data on TRS for ~150 publicly traded companies. Using 2017 Temkin NPS data, we grouped the companies into low, moderate, and high NPS groups, and summarized the difference in annualized percent growth in total returns for each group from 2008–18. Source: McKinsey analysis; TRS data from DataStream 2008-2018; Temkin Group “October 2017 Net Promoter Score Benchmark Study” 25 Reimagining customer engagement for the AI bank of the future

extension, may affect the company’s value. Given representative or adviser as soon as the request the rising trend in customers’ expectations for exceeds machine capabilities. online, offline, and hybrid journeys, disruptive companies in diverse markets are creating Finally, it is crucial to personalize journeys in just customer-centric interactions and journeys the right way. For example, customers appreciate that are fast, simple, and intuitive. Guided by a recommendations that they would not have relentless commitment to customer satisfaction, thought of themselves. They often do not want Amazon has achieved a high level of customer more examples of what they have already bought. loyalty through value, convenience, and reliability They need to be given the recommendations at in online shopping. Uber has set a high bar for the right time, when they are in “shopping mode.” speed, safety, and amicable service supported For example, sending a customer a reminder by frictionless end-to-end customer journeys. for repeating an order for flowers based on a Netflix has created a highly differentiated purchase made on a special date last year, like an experience by analyzing the viewing choices of anniversary, may work very well. At the same time, hundreds of millions of subscribers to create organizations must be careful not to be “creepy” highly personalized recommendations from its and offer instead recommendations that are highly stock of diverse content. relevant without crossing lines.⁷ The challenge for banks is to examine each Reimagined engagement requires crucial element in the design of differentiating integrated capabilities customer experiences. First among these is the ability to open a service request on the device To successfully design and implement their of choice anytime, anywhere. Second, each engagement layer to become AI-first, banks need interaction should build on previous history to develop five capabilities: and continue without interruption or repeated steps when the customer shifts from one 1. Adopt a holistic, data-driven approach to device to another. The service interface should understanding how customers engage with the also be capable of recognizing the customer’s bank. Best-in-class players achieve this in three context and adjust messaging accordingly. A major steps: third crucial element is speed: For example, a customer requesting a higher credit limit through — Implement a real-time, enterprise-wide data a chatbot should receive a response within infrastructure that captures virtually all data seconds, supported by real-time analysis of the points for a given customer’s relationship with customer’s risk profile. If the request cannot the bank’s various divisions and supports be met at once, the time frame for fulfilling the a unified customer view encompassing request should be stated clearly. all channels, journeys, and products. (The traditional siloed analyses undertaken by any Fourth, chatbots, voice assistants, and live one of various teams have little relevance in an video consultations make it possible to dispense AI-first organization.) with long, detailed forms and questionnaires. Insurance provider Lemonade offers a chat- — Consolidate data on a central platform: To based application form that follows a carefully ensure that these enterprise data sets are designed conversation to generate an insurance utilized effectively and widely across teams, quote. Likewise, self-serve journeys can offer AI-first banks aggregate the data captured from prompt access to assistance through chatbots, multiple internal and external sources into a with the ability to shift instantaneously and central customer data platform. seamlessly to a live video chat with a service 7Julien Boudet, Brian Gregg, Jane Wong, and Gustavo Schuler, “What shoppers really want from personalized marketing,” October 2017, McKinsey.com. Reimagining customer engagement for the AI bank of the future 26