UABS KNOWLEDGE

FINANCE & BANKING

Ian Narev on the banking revolution (2)

2 July 2017

In the second of a two-part series on how digital technology is transforming the way banks do business, Commonwealth Bank of Australia CEO Ian Narev talks about loyalty, cost efficiencies, and the challenge of the blockchain. An alumnus of the University of Auckland Business School, he joined CBA, Australia's largest company by market capitalisation, in 2007 as Group Head of Strategy.

Video Transcript

0:05

The ability for technology, with our help, to provide people with greater insight, confidence on things like budgeting, expenditure – what we would generally call financial literacy and financial empowerment – is extraordinary. At the bank we had a session last week where we had a couple of Harvard professors who are doing research in this area. And we were taking their thinking about how technology works and what financial literacy means together with our ability to use and analyse data to provide insights to customers. And on issues like saving up for a house, how much you can afford to live comfortably on but still service debt, what you should be saving for superannuation over time, the ability of the technology interface, if it is very lively, together with the analytics, to provide real value-add to customers on managing their own financial circumstances is extraordinary. It is a classic example of where the customer – including business customers – and the bank both benefit. Because it means we are doing our part to help the customer understand how to use finances in a way that is going to maximise their wellbeing, at the same time we are able to make better decisions on risk management and all those sorts of things. So, in an environment where every day we are making risk decisions and our clients are making budgeting and lifestyle decisions, the ability of the technology interface plus the richness of the data to help customers and us at the same time is really quite transformational.

1:43 The challenge of the blockchain

Like most of the technological innovation, we see digital currency and the distributed ledger as both a threat and an opportunity. And in many ways that is the way you do need to think about it. When we think about digital currency specifically, we first separate it into the distributed ledger – that underlying technology which clearly is very powerful – and the whole application of the blockchain in financial services is a big theme. It is still at a very experimental phase. Over the next few years I think there will be a lot of talk about the innovation but the fundamental innovation at scale is probably a few years out. But it will happen, and it will transform our industry because at a certain level it fundamentally changes the role of the intermediary. And if the blockchain is built out and everyone has the computing power to use the blockchain, you have really got to think about what does that mean for the intermediary in a world which is increasingly on the blockchain. So, that is Part A.

Digital currency is slightly different because, yes, it is part of the same blockchain question, but because of its nature as an application dealing with currency, and the nature of currency and the role of the reserve banks and regulators, that is a different category – aligned technologically, but quite different, I think, from a regulatory perspective. So, our view on that is follow it closely, experiment with it, be close to the people who are innovating, but don't try to be too predictive about the way the world is going, because it is going to end up being quite different from what we see today.

I think the mobile wallet is already getting popular, and is only going to increase in popularity. It means a lot of different things to different people, but broadly the way we think about it is any different device that you have, –whether it is wearable or a phone or whatever it might be – increasingly your financial needs and your transactional needs are contained within that device. Now, there are a lot of debates about what the end state will be. Banks would like to think that they are still going to have a very significant role within that wallet. Others probably are going to try to push the banks back and own the customer relationship, and effectively relegate the banks' position to secondary in the eyes of the customer. So, it is one of these areas which is evolving quickly. A lot of people believe they have got capability to add value to customers, and so therefore the playing field is getting very broad. What we bring to the table is a very deep understanding of financial needs, and a very strong customer base. So, we feel that we have a very strong deck of cards in the game. What we need to make sure, though, is that we can execute well. And, generally, where the banks are going to be challenged – they have a lot of the legacy advantages, but if they can't move quickly and evolve quickly and innovate quickly, those legacy advantages can pretty quickly be lost. And so, the mobile wallet is one area that we are particularly wary about.

4:45 Banks cannot assume loyalty

The relationship between technology and loyalty is very interesting because you cannot assume loyalty. And although, over time, particularly in financial services, a lot of people will say customers have a high degree of apathy, that is changing because it is easier to switch. As an incumbent banking relationship – I opened my first bank I think when I was five and I still remember my number, so you get a lot of long-term relationships – but you just can't assume any more that because I have had it since I was five I am going to stick with the ASB. So you have got to do more to earn the loyalty. And one of the ways you can do it is by providing customers greater insight into the breadth of their financial services needs, and their budgeting and wellbeing, because by definition doing more with you will present to them a filler picture of their own finances. The reality is that other companies that are not banks can probably do that as well by just effectively owning the customer interface and drawing on data from other sources. So, we don't have a natural protection to that opportunity, but we are a natural player in it. And our view is that, given that we can play a role in deposits and home loans and credit cards, superannuation and investments and insurance – life insurance, general insurance, and all those things – we are able to show customers that the whole is greater than the sum of the parts. And, if we succeed in doing that they get benefits out of the relationship, we get more loyal customers, and that works for both of us.

6:23 Price matters

When we have our strategy discussions, one of the underpinning beliefs, which will never be shaken, is no matter how good we get at innovating and improving the customer experience, aspects of what we do have commodity characteristics and price matters. And there are people with inherently lower cost models competing for our customers' business and they are inevitably going to do it at lower price points. It is an absolute existential imperative for the bank to evolve to a lower cost structure. And that is why, when we talk about technology, we always start with what it can do for the customer. But equally, when we are talking internally, we look at the ability of analytics, artificial intelligence, robotics etcetera to fundamentally transform the cost base. Now, that does not mean we don't need people. We do need people. But it does mean that as the bank continues to grow, we ought to be able to do it in a way where we are able to get much better economies of scale for our investments. And, if we can't do that, we can be beautiful and customers love dealing with us but at the end of the day they will go where the mortgage is cheaper, or where you get a better deposit rate. If we are going to compete with that aspect of what they want, which we need to do, we must be doing it from a much, much more efficient cost base.

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