Expert case by

Cristian

Digital Lab at LETA Bank (McK/BCG Digital)

Case information

Difficulty: Advanced

Interviewer-led

< 100 Ratings

Times solved: 6.6k

Competitive response Growth strategy Market analysis New product Organizational behavior Profitability analysis

Case Prompt:

Let’s assume our client is LETA Bank, a large Central European bank with around 3M customers and within the top five banks in the mid-sized European country where it is operating. In a recent benchmarking exercise led by the European banking group that owns the bank, LETA Bank appears to be underperforming relative to competitors in terms of its personal loan sales. Our objective is to support LETA Bank in identifying the root cause of its underperformance and to develop a strategy for addressing it.

The bank recently hired a new CTO who is excited about working with us and whose hypothesis is that the bank is currently lagging behind in terms of its digital assets and products, which makes it fall short of customer expectations, thus leading to lower sales across its product groups and especially in its most popular lending product – the personal loans.

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Question 1

What are the factors that you would like to investigate in order to test the CTO’s hypothesis?

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Question 2

The client shared with us some further data from the benchmarking exercise, looking at the sales of personal loans within the top five banks, as well as results of a customer survey study ran by a different consulting company on the customer preferences for digital services. What are some of the insights that you can draw based on these graphs?

For context, a digital personal loan is a personal loan that is provided online via browser or app. Customers may prefer it because it is faster, more streamlined and does not require them to visit a branch. Some banks in the industry might also have faster pre-approvals for digital personal loans which customers often find attractive.

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A good answer might include but is not limited to…

Chart A

LETA Bank is the only player within top five without a digital personal loan product
Compared to Bank 4, LETA Bank sells the same number of regular personal loans, with the additional sales of Bank 4 coming only from digital sales. This already suggests the high potential for LETA Bank to consider developing and selling a digital personal loan. A similar pattern can be observed for Bank 3.
Banks 1 and 2 are digital leaders, with 50% or more of their sales in digital personal loans. This suggests that the market overall has a high preference for digital products, once again highlighting the importance for LETA Bank to consider developing a digital product.

Chart B

LETA Bank customers have a high appetite for digital products which is not currently satisfied by the client’s product offering
The digital preference is especially high amongst the younger age groups (18-30 and 30-45). These are also the most important customers to retain and attract since they are likely to have a longer relationship with the bank over their lifetime.
If LETA Bank would offer digital personal loans, it is likely to surpass Bank 4, judging by the comparatively higher preference for digital products.

A very good answer would provide an integrated story with a strong hypothesis supported by the data available in the two charts.

Example: Based on the information provided, LETA Bank should consider developing a digital personal loan for at least three reasons.

One, it is currently the only player in top five without a digital product, suggesting the need to develop one if it would like to compete further with the industry leaders.
Two, digital products seem to be a priority in the market, with the two market leaders having over 50% of their sales from digital personal loans.
Thirdly, LETA Bank customers interviewed in the survey demonstrate a strong appetite for digital products, more so even than Bank 4, once again suggesting the importance of LETA Bank to develop such a product in order to retain its customers and further acquire new ones.

Question 3

What is the annual profitability increase that LETA Bank is likely to see if it manages to develop and sell enough digital personal loans to match Bank 3 in terms of overall sales volume? Assume that digital personal loans will cannibalize 10% of the current regular personal loans. Also, assume that the profit margin of a regular personal loan is 5% and that of a digital personal loan is 8 percentage points higher.

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Step 1

Current personal loans sold by LETA Bank: 20,000 units / month

Current personal loans sold by Bank 3: 35,000 units / month (25,000 regular + 10,000 digital)

To close the gap, LETA Bank would need to sell an additional 35,000-20,000 = 15,000 digital personal loans.

Step 2

Additionally, due to a cannibalization effect, 10% of the current personal loan sales are going to be converted into digital personal loans.

Regular personal loans converted into digital loans = 20,000 * 10% = 2,000 units / month.

Step 3

15,000 digital personal loans * Revenue per loan * Margin per digital loan + 2,000 converted digital personal loans * Revenue per loan * Additional margin of digital loan = 15,000 * 500 * 13% + 2,000 * 500 * 8% = 1.05M / month

Annualized, this would mean 12.6M / year

Interpretation

This is overall a ~13M EUR increase in yearly profits, which comes as a consequence of satisfying the appetite for digital personal loans within the current customer base as well as through attracting additional customers. Further considerations should take into account the duration to ramp up to this target as well as some of the associated costs.

Question 4

The CTO is very excited about the results of the analysis and for your confirmation of the potential for a digital product. She is keen to set up together with our team a Digital Lab to begin transforming the bank into a digital banking leader in the country.

What she has in mind is an Agile cross-functional team of analysts, designers, data scientists, developers, consultants, etc. focusing on developing from scratch a new digital product for the bank (the digital personal loan), then aiming to scale their practices and digitize other products, with the end goal of digitizing and transforming the bank as a whole.

She is asking what are some of the main implementation areas that the bank should account for in order to launch the Digital Lab and begin the digital transformation?

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Question 5

The CTO finds your approach fair and she is keen to request the necessary resources from the banking group that owns the bank. She would need our support though with analysing in how many years would the bank be able to break even considering the estimated cost of starting the Lab is 8M EUR and it will need to be financed from the additional profits? To simplify, assume that the Digital Lab will manage to develop and launch the product within a year. Sales are then likely to start from the following years at a rate of 5,000 units / month and increase by about 50% every year.

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Question 6

The CTO is grateful for the analysis conducted and is now preparing for a meeting with other senior stakeholders at the bank. To pre-empt some of the questions she is likely to receive, she is asking you what are some of the risks to consider with this ambitious overhaul of the bank’s image and value proposition?

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Question 7

The CTO would like to hear your selling story for the bank’s digital transformation. Could you provide a quick synthesis of your findings and why the bank should go ahead with the digital program?

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Digital Lab at LETA Bank (McK/BCG Digital) i

Case Prompt:

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Digital Lab at LETA Bank (McK/BCG Digital)