How Itaú Unibanco is driving digital transformation in the financial services industry
Digital technology has transformed the way people interact with each other and also the way services are provided. In the financial services industry, the widespread adoption of digital platforms have been transforming, creating new competitive opportunities and challenges. In that context, Itaú Unibanco (ITUB), Latin America’s largest corporate & investment bank, has implemented one of the most innovative operating models for digital services, which revolutionized the traditional financial services in Brazil by introducing (i) new digital channels to its operations, with the use of digital branches and (ii) cutting-edge mobile technology in its interactions with clients.
The Digital Branch
Launched as a pilot project in 2013[1], the digital branch was designed to operate in extended schedule, from 7:00 in the morning to midnight, providing the bank’s clients with more convenience and flexibility. The biggest difference in this model is how the manager relates to the client. The goal is to solve 100% of the customers’ banking needs remotely and, whenever possible, instantaneously, without them needing to go to a physical branch. Chats, cellphone messages and videoconferencing with managers and financial advisers are some of the alternatives. As a result, the bank was able to (i) strengthen their relationship with their clients, (ii) increase client satisfaction and process efficiency by reducing throughput time of its services and (iii) improve profits by reducing its overall costs associated with providing the services in a physical branch.
As of December 2015[2], approximately 59.7% of ITUB customer base banked through digital channels. As shown in the graphs below, the number of digital branches have been increasing since 2014 and will be probably follow that trend in the upcoming years. In addition to that, ITUB also have been increasing the number of transactions made through electronic channels to almost 70%. Since transactions performed in electronic channels bear a lower cost for the company, ITUB was able to increase its profits for these transactions and at the same time scale up its client base.
Mobile Technology
In addition to investing in new channels, ITUB also improved its current electronic tools by developing a range of apps that allow clients to access their accounts and perform banking transactions using smartphones or tablets. One example is the Itaú Pagcontas app, which allows convenient bill pay through cell phones. Another example is the Itaú Tokpag app that allows person-to-person money transfers via mobile phones. Both examples, illustrate the way how the bank is disrupting with the financial services supply chain. In a traditional bank, the customer goes to the bank, while in a digital bank the bank goes to the customer.
Challenges Ahead
In this new business model created by ITUB, one of the main challenges faced by the bank will be to make the business scalable. In order to address that, Itaú has invest more than 10 billion Brazilian reais in a Data Center that is the state-of-art of its category. Also, in order to ensure that the bank will be able to reach its clients, it will need to invest in (i) mitigating the risks of cyber-attacks (investing in cyber security) and (ii) expanding its client base by promoting digital inclusion.
In order to deal with digital safety, ITUB has created an internal team to develop new security features and also design internal process, policies and procedures to deal with better safety both in the bank’s website as well as in its apps. Also, the company has created a Virtual Card tool, which generates a unique credit card number to be used in online transactions and that expires after the purchase is made, making it safer for its customers to use the credit card online without sharing personal and financial information with the seller.
However, in regard to the digital inclusion challenge, the bank still needs to show some improvements. The bank’s lower-income segment, which has 23 million account holders, depends on access to smartphones, which is something that not all the population has. As a result, the company should create projects aiming at increasing the level of digital inclusion. One way to do that would be to partner with retailers to provide loans for cell phone purchases, which would address the digital inclusion concern and at the same time increase cross-sell. Similarly, the bank should invest in providing its clients with digital training in order for them to be more familiar with the available technologies. By doing that, the bank will increase the utilization rate of its apps and reduce costs associated with processing clients demands through traditional and more expensive channels.
It is clear that ITUB is recurrently investing[3] in developing new technologies to improve its operations and client interface and delivering on its promise to “be the leading bank in sustainable performance and customer satisfaction”. However, the road for innovation is endless, and there is still a lot of room for improvements. (794 words)
FOOTNOTES:
[1] Initially the project was aimed for account holders with monthly income of more than R$10,000 (approx. USD 3,200)[1], who did not have the time, neither the desire to go to a physical branch. However, as it succeeded, it was later expanded to other client levers.
[2] As per Itaú’s 2015 Institutional Presentation available at: https://www.itau.com.br/_arquivosestaticos/RI/pdf/en/Apresentacao_Institucional_eng.pdf
[3] In 2012 the bank announced[3] the investment of R$ 10.4 billion in technology, innovation and service over the course of the next 3 years, which represented one of the largest private investments of a financial service provider in technology. The money would be directed to (i) the construction of a new Data Center with capacity to support the expansion of operations in the next three decades and also (ii) the improvement and design of new tools for expanding digital channels, such as internet banking and mobile banking.
SOURCES:
http://ebusiness.mit.edu/research/OrgCapital.pdf
http://www.centerforfinancialinclusion.org/storage/documents/IIF_CFI_Report_FINAL.pdf
http://www.itau.com.br
https://www.itau.com.br/_arquivosestaticos/RI/pdf/en/IFRS31122015_ing.pdf?title=Complete%20Financial%20Statements%20(IFRS)%20-%204Q2015
http://www.itauunibanco.com.br/relatoriodesustentabilidade/eng/download/Itau-Unibanco-revista-2010.pdf
Very interesting article! I would personally love to be assisted with online services simply due to convenience. However, Digitalization in this sort of product/service – which should basically attend “everybody”, including lower-income customers – presents some challenges. As mentioned, service will be limited by access to smartphones and internet. Another challenge is dealing with older people. As much access as they may have, it is known that they prefer a more personal approach, which in this case, is contrary to the online proposal. I wonder how fast Itau can outcome these challenges posted by the population that does not have access or does not like the online interaction, to incentivize them to migrate to the online banking.
On the other hand, all the cost savings from the initiative (which I would expect to be incremental over time) shoul support investments in both a) creating more access to smarphones/ internet and b) Providing e more personalized service to elderly. In addition, it does seem that Itau is acting fast and becoming the 1st mover to occupy this space, which should definitely help them gain market share and continue to create a strong brand with differentiated services to its clients.
I love how ITUB is innovating to the digital world. Online banking is clearly an area of growth, but it does disadvantage those who do not have access to smart phones or internet on a regular basis. I love the idea of creating a partnership to give loans for smartphones. I would make sure that the loan is with ITUB and not the retailer providing the phone to make sure the switching cost to go to another bank is high.
I also love the innovation in the Virtual Card. I know a lot of the barriers to online banking are security issues rather than operational ones. These short term “credit cards” help to alleviate that risk and are a true differentiator for ITUB. If the bank keeps innovating with unique programs that benefit their clients and increase switching costs, I think there’s no end to what they can do in the digital world.
Great article! Digitalization has definitely impacted the way consumer banking industry operates. As the largest bank in Latin America, ITUB seems to be leading the industry to more innovation. However, I would echo AJR’s concern about security. If there is any sort of data breach at ITUB, it will be difficult for the bank to gain back clients’ trust and its reputation from the event. I would be interested to know about the bank’s plan if such thing were to happen.
Thanks for an interesting post student12! Cost cutting through technology investment accompanied by a reduction in branch footprint has been the way the leading Nigerian banks GTBank and Zenith stand ahead of their peers valuation metrics P/BV. Do you think Itau will be able to maintain its position as industry leader in the face of competition from established banks and fintch upstarts?