Digital banking: BBVA’s González –

The digital banker

by Duncan Kerr

BBVA has embarked on a bold transformational strategy to become the

world’s first digital global bank, and reinvent itself as a knowledge-based
information company, fit – it hopes – for the modern era and beyond.
Could the Spanish bank be providing a blueprint for the future of
banking? CEO Francisco González certainly believes so.
About 20 kilometres to the north of Madrid lies the small and nondescript town of Tres Cantos,
best known for two things: it was dictator general Franco’s first planned town in Spain; and,
second, it was runner up to the bid from France to host the 2018 Ryder Cup.

Less well known, even among the locals, is that Tres Cantos is home to an operation in the
vanguard of the digital banking revolution.

BBVA’s Tres Cantos data processing centre might sound far from the frontline of banking
innovation, but this super high-tech building tucked away on what appears to be no more than
an industrial estate, is a powerful physical manifestation of the Spanish bank’s digital vision.

Under the command of its long-serving chairman and chief executive, Francisco González,
BBVA is embarking on the type of bold transformational strategy few other global bank CEOs
seem to want, or are indeed able, to grasp fully.

To transform into the first truly global digital bank, reinventing itself as a knowledge-based
information company along the way, is a profound ambition – one very different to the strategic
visions set out by most other CEOs of large global banks in the post-financial crisis era.

Underpinning this strategy – something that González, once a software engineer for IBM in
Argentina, has been thinking about for a long time – is the pervasive impact new digital
technology is having on every possible aspect of life.

The US is going to be one of the best markets because it is one of the

most digitalized societies and has one of the most rudimentary banking
services. There is a big gap to be filled Francisco González
González, who is 70 this year, believes he knows exactly what the digital era means for the
banking industry.

"Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter
a highly regulated, low-margin business such as banking. I disagree," says González. "What is
more, I think banks that are not prepared for such new competitors face certain death."

The threat of encroachment from big internet players, and even start-ups, to the financial and
banking world is getting ever more real and visible. Payments, money transfers and foreign
exchange are already areas of traditional banking where technology firms are active. That
Google has a number of banking licences throughout the world should provide bank CEOs with
more than just food for thought too.

Indeed, if that isn’t enough to make bank CEOs sit up and take notice of the new tech
barbarians approaching their gates, the prospect of Google or Apple deploying billions of dollars
of spare cash to buy a large bank might just be.

"Why not?" says González. "That could happen… You cannot stop the rising tide."

Even though González believes certain aspects of banking won’t change dramatically from one
day to the next, he does fire another warning shot at the industry and bank shareholders when
he says that the "market valuations of banks will change dramatically, and probably over the
next couple of years".

There is no doubt this is why BBVA is undergoing such monumental change. Change that
González is convinced will win the bank he leads recognition.

"Frankly, we think we have a huge opportunity to become the first bank in the world to
successfully transform into a pure digital house. It’s not just about being a bank, it’s about being
a knowledge-based information company."
He adds: "My view is by the end of next year, BBVA will be perceived by the market as a new
digital player, and as a result we should be able to capture quite different and ultimately higher
valuations from investors."

Understanding exactly what this transformation means for BBVA and its customers and clients
will be crucial.

González says: "As banks, we have huge amounts of information, but we store this in different
parts of our business. For us, what we are doing is transforming that information into knowledge
and then that knowledge into products. For our customers, it’s about being able to access
everything they need in real-time, using our digital applications or platforms."

He adds: "Digital is a tool. In banking, it doesn’t just mean financial products, but information
and insight for our customers."

Reinventing banking

Some of this might sound familiar. Since the turn of the century the banking industry has been
grappling with using the internet to try to reinvent itself. Online-only banks such as Wingspan in
the US and Egg in the UK were born around the time of the last technology bubble in 2000.
Then in the mid-2000s some banks such as Iceland’s Landsbanki launched online-only savings
accounts. Unfortunately neither development went particularly well.

In recent years, greater success in online-only banking has come in the form of Hello Bank! in
France, Simple and Moven in the US, Holvi in Finland and Rocketbank in Russia. What’s
different this time around?

First, the impact of Apple. In 2007 it launched the iPhone and then in 2011 the iPad – two
developments that taken together have arguably had as much impact on banking as any past
financial crisis or the regulation that followed. The proliferation of smartphones and tablets has
enabled banks to go digital in a way they couldn’t in the past. People and companies are
embracing digital technologies as never before.

Second, most of the cutting-edge development has been in start-up or marginal players. No one
can describe BBVA in those terms. It is a large global bank with over 7,000 branches, 50 million
customers, and after close to a decade of investment is transforming into a digital bank.

What’s more, BBVA has already built the solid foundations on which its digital banking ambition
can, it hopes, be realised: a state-of-the-art information technology platform supporting its entire
global business. This is vital to not only support the explosive growth in the volume of financial
transactions via smartphones and other digital technologies, but also enables BBVA to focus on
developing applications that can provide its customers with the precise service and information
they want, how they want it and at the time they need it most.

Other banks have taken the opposite approach. González says that has risks.
Heart of the machine: BBVA’s state-of-the-art data centres at Tres Cantos near Madrid

"Most banks look only at the rooftop – the products and services that customers see," he says.
"The problem is if you only build the rooftop, and don’t change the structure underneath, the
whole building becomes very unstable."

It was in 2006 that BBVA decided to invest in building this new technology platform. Seven
years later, having spent roughly €850 million a year on average between 2011 and 2013, the
platform went live and operational. It has been moving fast since then. BBVA agreed to buy US
online-only bank Simple in February – which will help accelerate its transformation in a core
market – and in March announced a new structure, including the creation of a new digital
banking division, charged with leading its transformation across the group.

BBVA’s progress thus far looks impressive, but what’s surprising is the lack of any equal
aggression among other banks to pursue a more emphatic digital strategy.

Across Europe, for example, retail banks have digitized only 20% to 40% of their processes,
while 90% of European banks invest less than 0.5% of their total spending on digital, according
to analysis by management consultant McKinsey.

McKinsey estimates that digital transformation will put upward of 30% of the revenues of a
typical European bank in play – particularly among high turnover products such as personal
loans and payments – and that banks can remove up to 25% of their cost base by leveraging
this digital shift.

"Put together," says McKinsey’s Tunde Olanrewaju, "the economics of a digital bank will give it
a vast competitive edge over a traditional incumbent. It’s fair to say that getting digital banking
right is a do-or-die challenge."

Many banks still see digital too narrowly, often as standalone front-end features and
applications. Commonly lost in the mix are the crucial changes to the underlying technology
platform, processes, data assets and staff skills.

Olanrewaju says another key reason often cited by bank executives is security and risk
concerns, but this is in contrast to other global industries, he says.

"The airline industry, arguably beset by even stronger risk concerns, has automated just about
every aspect of its customer experience in the last 10 years, boosting customer service without
compromising safety. Banks can do the same. What’s more, the effort is likely to pay for itself –
and then some."

Enormous pressure

Banks throughout the world are under enormous pressure from shareholders to tackle their cost
bases, and if there is one cost in particular that this digital transformation could reduce
substantially it’s the cost of branches.
Spain faces an acute challenge in this respect because there are more bank branches (over
800) per million customers than any other country in Europe. This is palpable when walking
around Madrid or any other Spanish city – bank branches line the streets.

If everything is moving digital, can we hear the death knell for the bank branch?

Far from it, says BBVA’s Luis Uguina, head of technology, digital banking.

"As humans we of course still need some form of human reassurance and contact in the
banking services we are provided with, and particularly if you’re spending a lot of money, say on
a house or a car. So there is no need to close branches because they are still providing a
valuable service to our customers. But branches will need to transform in the way they are used
by customers."

BBVA’s pilot branch in Madrid offers a window into what this entails. It’s modern, bright,
spacious and – at a leap – has something of the bridge of Star Trek’s USS Enterprise about it.
Its design is meant to help improve the customer experience, but that really is delivered through
what the customer can do.

And customers can do everything they did before – although queuing seems no longer to be an
issue – and do more. For example, the interactive ATM machines inside have as much
capability as any staff member behind the desk. And that’s what it’s about: equipping customers
themselves with the digital tools to do what staff used to do for them. Being handed more power
in this way is all part of what BBVA calls its omni-channel digital banking strategy. That is,
customers need the same level of service over all channels, whether mobile, tablet, desktop or
branch, and the ability to jump freely between them.

No doubt BBVA will cut down its branch network in time. But as Brian Burrell, senior investment
analyst at Thornburg Investment Management in New Mexico, one of BBVA’s largest
institutional shareholders, says: "The basic bread-and-butter side of servicing their banking
customers moves to a digital, automated process; it allows those remaining bank branches to
focus on generating more income and bring about deeper engagement."

He adds: "Their staff are therefore engaged in higher value transactions – that’s a very
important point of their digital strategy."

Future thinking: BBVA CEO Francisco González

An equally crucial component of this strategy, and one Uguina enthuses about, is the bank’s
open-platform initiative, which it launched two years ago.

"What this means is that if Amazon, for example, wants to create or provide an account for its
customers, we can provide this to them through an open API," he says, while simultaneously
illustrating this on an expansive white wall in one of the many meeting rooms in BBVA’s flagship
innovation centre in Madrid. "We can provide the financial capabilities to any third party that
wants to provide financial services products. That could be Tesco, Wal-Mart, Amazon or anyone
else. In that sense it would be a Tesco account powered by BBVA."

Uguina, who has worked for banks in the technology realm all of his career, says BBVA has not
yet established any such relationship with a retail player, but the potential is certainly there,
even though it’s still early days.

Phase one was only completed six months ago, and now BBVA has launched software
development hackathons to help it develop the platform much further.

"We are more or less innovating in the same way in each of the countries we operate in, but the
areas we are focusing on in each country are quite different," he says. "So, here in Spain we are
innovating around new ways to make mobile payments. In Mexico, we are focused on the
unbanked population, which includes innovating around mobile payments, and small payments
particularly. In the US we are focused much more on mobile payments and social networks."

Asked where he sees the best opportunity for what the bank is doing in digital, Uguina says
there is tremendous potential everywhere, but especially the US.

"We probably have the only real-time banking platform in the US right now through BBVA
Compass. If we then mix this real-time platform with the open architecture we are developing,
we have an incredibly valuable proposition for any start-up in the US."

No hiding enthusiasm

Even though many international banks have tried and failed to crack the US market over the
years, the opportunity for BBVA is potentially huge, and González cannot hide his enthusiasm
for leading the bank’s attack there.

"The US is going to be one of the best markets," he says. "Why? Because it is one of the most
digitalized societies in the world and has one of the most rudimentary banking services. There is
a big gap to be filled."

That top-level commitment and drive could be the difference. "One of the main advantages of
the support that we receive at board level is that we are allowed to think in terms of medium-
and long-term initiatives," says Ignacio Bernal, BBVA’s head of IT development. "That’s so
important. At other banks, they want to work on the same initiatives, but their boards are too
focused on the short-term. You need to have a balance."

As a former management consultant who has advised other large European banks on their
digital transformation, Bernal knows a thing or two about it. Yet while Bernal is convinced BBVA
is pursuing the right strategy in the right way, he explains that such a transformation is not
without its challenges.

He says the main one is managing a two-speed bank.

"We still have a large traditional bank that must keep going. That requires skills and capabilities
totally different to those that are required in the digital environment," says Bernal.

"Second, we are starting to see that it is very difficult to attract top-notch talent. We are starting
to fight for the same talent, such as the big data analysts, mobile and cloud experts that
Amazon, Facebook or Google are looking for too."

Third, he says cyber-security is an ever-changing challenge. "We have invested a lot in security
in the past… But now we are seeing that the challenges today are bigger than they were two or
three years ago."

"The fourth challenge," he says, "is changing the mindset and behaviour of staff not just in the
IT division but throughout the entire bank. A mindset of testing and trying new things is not
particularly natural in traditional companies."
 There is no need to close branches because they are still providing a
valuable service to our customers. But branches will need to transform in
the way they are used by customers Luis Uguina
Of all the challenges that BBVA and other banks will face in pursuit of becoming digital banks,
or even a knowledge-based information companies, convincing shareholders could be one of
the toughest.

For Burrell at Thornburg, BBVA’s digital transformation was not a primary reason he decided to
invest just over a year ago. He does believe however, that it is absolutely necessary for large
banks to move in this direction sooner rather than later.

"On the whole, it’s something that banks across the world have to do," Burrell says. "It’s a
necessity rather than a choice because of various trends and how customers will interact with
banks and the types of services that are delivered. It’s also important for staying competitive
because it allows banks greater contact with their customers, which potentially could bring
higher margins."

He adds: "Over the past few years BBVA has been investing substantial amounts each year in
technology and operations. That investment is actually decreasing in the coming years, which
signals to us that they have made substantial investments and are probably ahead of the
curve."

Rapid evolution

The way customers use their banks has evolved rapidly in recent years. People want simple,
fast and transparent banking services with real-time customised pricing, all accessible while on
the move. Mobile banking not only provides a much more intimate, flexible, convenient
customer experience, it also offers banks the alluring potential of multiplying the number of
customers they have using their services worldwide.

Furthermore, big data and cloud computing will be important in improving the customer
experience further and enabling banks to succeed in the digital era.

Big data is something that partly encapsulates the process González describes in transforming
the repositories of siloed data or information that banks have on their customers and clients into
products, knowledge, insight and ultimately new and potentially sustainable revenue streams.

Some say big data is still not particularly well understood – there’s a lot of buzzwords bandied
about, though few people understand what they mean – but what is certain is that this form of
deep-dive data analysis is driving innovation and product development across industries. It is
only in the past few years banks have recognised that power.

What’s critical in capturing it – and for banks particularly the enormous flow of financial
transactions by its customers and corporate clients in any given minute of the day – is having a
processing centre with the full capabilities to analyse it.

BBVA’s Tres Cantos centre is designed to do just that and more, collating information in real-
time on each and every single financial transaction its customers and corporate clients make.

In 2006 there were 90 million digital transactions a day globally across BBVA’s entire banking
business. Today, that figure is around 250 million; by 2020 González believes that it could grow
as high as 1 billion.

Tres Cantos houses every single piece of hardware – rows upon rows of supercomputers and
sophisticated high-powered servers – needed to support this growth and ultimately underpin
BBVA’s digital banking platform and vision.
And yet given the furious pace of technological advancement, perhaps the biggest risk of all is
that this operation and the digital platform it supports becomes obsolete all too quickly.

It’s the one question that the CEO and chairman of the world’s newest knowledge-based
information company cannot answer definitively.

"We just don’t know if in five or 10 years we will be seen as old," González says.