Platform economics and open banking. PSE Acquiring Conference Wednesday, 4 November, 208 Nicholas Heller CEO & Co-Founder, Fractal Labs info@askfractal.com
SMART v Platform powering SME banking. Regulated by the FCA Regulatory sandbox Digitising loans for securitisation askfractal.com Authorised Payment Global Distribution Audited Enterprise Institution Partner Grade Technology 2
Platform economics win. Apple Amazon Google Morgan Stanley Citigroup Wells Fargo Bank of America Source: Google finance 3
Banks are not creating economic profit. Software 2,500 Technology & Hardware 2,000 Pharmaceuticals,500 Aerospace & Defence Media,000 Food Products 500 Gas Utilities 0 Airlines -500 Marine -,000 Banks Electric Utilities Economic profit by sector divided by the number of companies 2 Global top 2595 companies greater than $.5bn 3 Includes 94 banks with revenues greater than $.5bn Oil, Gas & Consumable Fuels Source: McKinsey Strategy Practice and Corporate Performance Analytics Source: McKinsey Strategy Practice and Corporate Performance Analytics 4
Origination and sales are ~65% of global banking profits. Balance-sheet provision Global banking revenues and profits by activity, 206 Core banking US $ billions Fee-based businesses,53 Lending () 28 596 Current/ checking account 49 26 Deposits Investment banking (2) 20 54 62 620 Transactions/ payments (3) 605 Assets management and insurance (4) Total Revenues Total after-tax profits ROE Loans to retail and corporate clients (overdrafts, specialized finance, credit card, trade loans) 2 Corporate finance, capital markets, securities services 3 Retail and wholesale payments transactions, including cross-border payments and remittances 4 Asset management includes investment and pension products, insurance includes bank-solf only Source: McKinsey Panorama - Global Banking Pools Origination/ sales 2,085 (53 %),87 (47 %) 404 (35 %) 748 (65 %) 4.4 % 20 % 5
Fee based businesses to see largest margin reductions. Fee and margin reduction in revolutionary digitization scenario percent 0-3% 0-20% 3-0% 20%+ US UK China Japan EU Dev ing East EU MEA Latam EM Asia Consumer finance 3.9 3.8 7.7 25. 9.7 0.5.3 2.3. 3.4 Mortgage 2.5 5..0 4.4 3.7 3.2.0 0.2.6 0.6 Checking deposits.0.4 0.4.4 0.6 0.9 0.3 0. 0. 0.0 Term deposits 3.8 5. 0.0 5. 3.9 3.9 5.5.5 8.9 2.3 Cash management 0.5 0.7 0.2 0.7 0.5 0.5 0.2 0. 0. 0. Corporate lending 0.7 0.9 0.8 0.7 0.7 0.7 0.6 0. 0. 0.2 Payments Payments 7.3 23.6 8.6 23.6 8. 8.0 8.6 2.3 3.6 3.6 Wealth Mgmt Asset/ wealth mgmt 6.6 2.7 3.9 2.7 6.6 6.6 3.9..6.6 Retail Corporate Source: McKinsey Panorama - Global Banking Pools 6
Banks are drastically cutting costs to reach profitability. 20.9 Cost reduction $ billion 3.2 FTE reduction thousands 45 42 208 9 9 3.0.0.2 0.6 2020 206 30 8 2.4 7 25 6. 0 9.6 8 5.7 3 8 5.3 0.8 US 7% UK 2% EU 2% Analysis based on the largest 20 banks per YE assets (US/EU), the top 4 banks according to assets (UK) 2 GBP, euro and JPY converted to USD at current exchange rate (Oct 206) Source: Bank Annual Reports Share of total costs/ FTEs US UK EU % 9% 4% 7
Operational efficiency and innovation is the way forward. Unsustainable expansion (2002-2007) Financial crisis (2008-20) New reality (202-205) Average ROE 4.0 % 7.3 % 9.0 % Revenue growth () 6.8 % 3.9 % 5.3 % Loan/ deposit in developed markets 24.6 % 28 % 05.8 % Price/ book value In developed markets 2.2.0 0.9 Percent of banks trading below book value In developed markets 28.4 % 66.0 % 6.7 % Primary driver of economic growth Volume Risk cost Operational efficiency Revenue before risk cost 2 Fixed conversion rate, $ 206 Source: Thomson Reuters, SNL, McKinsey Panorama - Global Banking Tools Going forward (207-2020) Entering new non-traditional banking markets/ businesses 8
One size fits all is dead. #SMEBankingIsBroken 9
SME banking is broken Most banks define SME as the 59% of SME's feel banking services segment - thereby assuming over 5 aren't tailored their needs and over million businesses in the UK have 5% believe the services provided identical needs. are one size fits all.* Business owners feel underserved and undervalued. * https://tamebay.com/208/04/smes-still-feel-under-served-by-uk-banks.html 0
Most businesses are invisible to banks. Commercial Banks make 85% of The other 75% is left untapped due their revenues from just 25% of to a lack of data, intelligence and their commercial customers.* understanding of SMEs needs. #Shift80:20Thinking * https://www.mckinsey.com/industries/financial-services/our-insights/using-data-to-unlock-the-pote ntial-of-an-sme-and-midcorporate-franchise
Data around the UK SME funding gap is getting clearer. 39,000,000,000* 59,000,000,000* UK SME Funding Gap UK SME Funding Gap 206 208 Access to Finance, House of Commons Report 206 SME Magazine, September 208 * https://publications.parliament.uk/pa/cm2067/cmselect/cmbeis/84/84.pdf * http://www.smeweb.com/208/09/20/high-street-bank-converts-just-8-sme-loan-applications 2
We live in the anticipate my needs era. Relationship Recommendation Managers Engines 800s to Today 990s Next-Best-Action Next-Product-to-Buy 2000s 208 3
Customers now expect the Next-Product-to-Buy experience Ongoing Immediate Memorable Personalised Anywhere, Value Fulfilment Experiences Moments Real Time 4
Banking must be customer driven. Ecosystem of services Provided by a network of partners Offered via a platform with deep intelligence Fully personalized and always accessible 5
Enter, open banking. #PlatformEconomicsWin 6
Intelligence is gold. Demographic data Behavioural data Financial data Old world New world Static Identity Dynamic Identity 7
Provide intelligence to enable an entirely new customer value exchange. New customer propositions Data intelligence Categorisation, analysis, credit scoring, alerts, nudges and forecasting engine Data Aggregation 8
Empower banks to unlock entirely new revenue opportunities from their SME customers. Lending Cash Management Payments Protection 9
Next-Product-to-Buy engines can have dramatic results. A 50% increase in new 6 out of 0 customers New SME product sales SME product leads. purchased a new product upwards of 30%. when alerted. Increase overall commercial revenues. McKinsey Insights - October 208 2 0
The automation economy is here. Banking has fundamentally changed. info@askfractal.com 2