Just 20 years old but with roots going back more than a century, KBC Group, headquartered in Brussels, Belgium, is a living example of taking a unique business model and turning it into a finance company that meets the diverse needs of its customers from end to end. KBC Group was born by the merger of two Belgian banks (Kredietbank and CERA Bank) and one Belgian insurance company (ABB Insurance). Today, this premier bank-insurance company boasts more than 11 million customers and 1,500 branches, primarily in its core markets: Belgium, the Czech Republic, Slovakia, Hungary, Bulgaria and Ireland. According to its vision statement, KBC aspires to be the “reference for bank-insurance in all our core markets”.
Today, International Banker was joined by Mr. Johan Thijs, Chief Executive Officer, and Mr. Erik Luts, Chief Innovation Officer and Executive Director, of KBC Group.
Gentlemen, thank you for being with us today….
The quarter saw KBC Bank Ireland sell a significant chunk of its legacy portfolio of nonperforming loans. Johan, has this benefited the bank and the group?
Johan: Over the past two years, KBC Bank Ireland has focused on the implementation of its new “Digital First” strategy and a continued expansion in the retail market. Going forward, our focus will be on retail and micro SME (small and medium-sized enterprises). The sale of corporate-loan sub-portfolios fully fits within the bank’s strategy and ambition.
The sale will allow KBC Bank Ireland to achieve an NPL-level reduction by approximately 40 percent and a NPL-ratio reduction of approximately 11 percentage points (versus the end of second-quarter 2018), thus accelerating KBC Bank Ireland’s ongoing NPL-reduction efforts. At the same time, the transaction results in balance-sheet optimization, allowing KBC Bank Ireland to reduce future earnings volatility, to clean up legacy and to fully focus on sustainably and profitably growing its retail- and micro-SME business. On the KBC Group level, the transaction is expected to result in a net P&L (profit and loss) impact of +14 million euro and a release of risk-weighted assets of approximately €0.4 billion, leading to an improvement of KBC Group’s CET1 (common equity Tier 1) ratio of 7 basis points.
By 2020, once the digitalisation strategy has been completed, what do you hope it will have achieved, Erik?
Erik: In 2017, KBC announced a three-year, 1.5-billion investment programme for innovation and digital transformation. By 2020, new innovations, new technologies, new systems and new customer expectations and behaviour will probably have claimed the stage. It is our ambition to follow the direction indicated by our customers, and our innovation efforts will not end by then. However, our biggest achievement will be when customers start recommending KBC to their friends and family because they like our service—both digital and human—so much. That is what is really drivingus.
In 2017, KBC acquired United Bulgarian Bank as part of your intended expansion in Central and Eastern Europe, making you the leading bank-insurance group in Bulgaria. Do you still consider this a worthwhile acquisition, Johan?
Johan: The seamless merger in early 2018 of our Bulgarian CIBANK and UBB banking entities and the acquisition of the remaining stake in the UBB-MetLife joint venture have confirmed our position as a strong player on the local market. Together with DZI Insurance, the new UBB makes KBC the genuine reference bank-insurance group in Bulgaria that is able to offer a full range of bank-insurance products to our Bulgarian customers in an omni-channel environment. Today, under KBC colors, UBB is the number one bank-insurer and a top-three player in banking in Bulgaria, with double-digit market shares in banking, leasing, life and non-life insurance. Thanks to this acquisition and subsequent merger, we have reached critical mass in Bulgaria, both in the retail and corporate markets.
We strongly believe in the potential of Central and Eastern Europe and are convinced there is still room for further penetration of our bank-insurance model. That is why we are still looking for possible further expansion, if any, in our Central and Eastern European home markets, but only within strictly defined parameters and conditions, both strategic and financial. We are not in a hurry, but if an opportunity arises, we will certainly consider it.
Erik, how much of an overhaul is being conducted on the bank’s existing IT infrastructure? Is capacity being expanded to accommodate cloud computing?
Erik: In the future, cloud platforms will be increasingly used by KBC. Five years ago, KBC was the first European bank to make use of the cloud, which even required regulatory approval. Today, more than 95 percent of the Belgian office and mail applications run on our private cloud architecture, which is an important step to gradually bringing applications to the public cloud.
We are in the process of making our infrastructure more “open” (API) to interact with other ecosystems, like the Benelux payment platform Payconiq. We have also connected with Amazon Alexa and Google Home personal assistants. The challenge, however, is to ensure that whatever connection we make, cybersecurity and the General Data Protection Regulation (GDPR) are fully respected.
Are you satisfied with the current capabilities of KBC’s online- and mobile-banking services, Erik?
Erik: KBC’s omni-channel approach, which is applied throughout the Group, ensures a seamless integration of the distribution channels: online, mobile, brick and contact centres. Our service and product offering is not dependent upon how the customer interacts with us. This requires a maximum availability and performance of online and mobile channels. Our biggest achievement is that we have built a full-fledged omni-channel model.
What is KBC’s sustainability strategy, Johan?
Johan: Our sustainability strategy is built around three cornerstones and is fully embedded in our business strategy. Responsible conduct, based on integrity and a healthy awareness of risk, forms the long-term basis of our approach to sustainability. It is the only way to ensure that we provide appropriate advice and assistance to our clients. To enhance our positive impact on society, we aim to offer financial solutions in a number of areas that meet a specific requirement in society. These focus areas are environmental awareness, financial literacy, entrepreneurship and—depending on the local situation—health or longevity. Embedding our sustainability strategy in our business strategy ensures that our sustainability principles are incorporated into all of our activities and grounded in every part of the organisation.
Johan, as you have just touched upon, one of the cornerstones of your sustainability strategy is “encouraging responsible behaviour on the part of our employees”. How is this implemented in practice?
Johan: Responsible behaviour, based on integrity and a healthy sense of risk, forms the long-term basis of our sustainability approach. Only in this way can we advise and guide our clients appropriately. After all, the trust of our customers depends on the responsible behaviour of each individual employee, each and every day. That is why it is one of the pillars of our sustainability strategy. This is put into practice by making responsible products and giving responsible advice about them, in other words by acting correctly, with honesty and integrity, transparently and discreetly…in short, ethically.
Erik, what is the most innovative product or service KBC has introduced since your appointment as Chief Innovation Officer?
Erik: The innovative drive of KBC is not the merit of one single person but the natural consequence of our corporate culture fostering personal initiative and empowerment in a transnational approach. This creates a permanent flow of ideas that are checked, tried and developed whenever there is a potential business case. In doing so, we managed to introduce the dynamics of a start-up in an international financial group. This is our main source of innovation.
Recently, in Belgium we introduced PSD2 (Payment Services Directive 2) compliant transfers with KBC Mobile from accounts our customers hold with various other banks and check their balances of these accounts. This is one of the first fully operational multi-bank apps on the market. Our mobile services also include automatic-payment facilities for parking, and blocking of debit and credit cards in case of suspected abuse. Alexa digital-assistant owners may even ask Alexa for their account balances.
Last summer, KBC also presented its brand new Virtual Space concept that uses 3D technology. Using software from the gaming industry (based on the Unreal Engine 4), a virtual world is created where products, services and support are experienced in a completely new way. KBC also took the initiative to unite several leading European banks around an innovative blockchain platform, the first to facilitate trade-finance transactions for SMEs (small and medium-sized enterprises). This platform, We.Trade, evolved into a joint venture between 12 major European banks.
Given the significantly greater role technology and digitisation now play in banking and insurance, how has your role as a leader changed, Johan?
Johan: KBC evolved into a far-from-traditional, top-down led company. Since 2012, KBC has embraced a group-wide corporate culture called PEARL. PEARL is an acronym. It stands for Performance, Empowerment, Accountability, Responsiveness and Local Embeddedness, and it has been an important factor in achieving strong results and a driver for innovation in our group. Forty-three thousand KBC employees all “breathe” PEARL. PEARL is a mindset, a philosophy of working, which is fostered by the people on the floor. To make PEARL a success, we have been working top down, but clearly also bottom up. That is real strength, which is not easy to copy.
The earliest example of this steering force is our smart-banking app, which was developed according to the PEARL mindset. It all started quite simply. I actually said to some of my staff that we needed a smartphone app on the banking side and on the insurance side. I gave them a budget, a six-month deadline and all the freedom to try to find a solution. This is empowerment and accountability to the extreme. Guess what happened? Some people took the initiative, set up a team and actually developed in only three months’ time a smart-banking app, which afterwards became the most innovative banking app in the Benelux.
Erik, as Chief Innovation Officer, what specific traits or qualifications do you look for in someone who wants to work under you?
Erik: It is not so much a question of “under” rather than “with”. Innovation at KBC is predominantly an internal force which has been brought together in innovation labs—not only in Belgium but also in other core countries of KBC. All these teams are multi-disciplinary: IT specialists, developers, designers, product specialists, data analysts, etc. My job is to connect the dots to make sure we have a clear strategy, an alternative offer for the client, a coherent architecture, etc. People working for and with me should be able to create an environment that enables change and execution. They need to have a burning desire to change the company.
At KBC, we focus on short-term delivery of solutions, while always keeping an eye on our long-term vision.
What is your view of AI being increasingly utilised, Erik? Will this technology replace jobs?
Erik: A lot of banking jobs are repetitive in nature and do not need complex decisions. These jobs we can already automate today with RPA (robotic process automation) and IPA (intelligent process automation). This will replace people for certain. However, other jobs will emerge. Robots need to be trained, managed, etc. Already today, KBC has several applications in robo and AI. In insurance and helpdesks, we are deploying decision-making models for claims. Based on NLP (natural language processing), we launched some chatbots that are currently assisting customers when they need support or when they have everyday questions on banking products. We are also deploying deep-learning methods assisting with complex (investment) decision-making and in taking strategic decisions.
AI has great potential, but still a lot of questions need to be answered.
What is your most important challenge over the next 12 to 18 months, Johan?
Johan: The main disruptor to our business is not technology. Digitalisation is only an instrument. The main driver for disruption today and tomorrow will be changing customer behavior. This change is fundamental for our future business models and the way we deal with customers. Banking customers expect a 24/7 availability and instant response to their financial needs—just as they are used to the same kind of convenience in e-commerce. Our underlying processes will have to be able to provide that convenience, requiring substantial investments in redesigning not only our core systems but especially the mindsets of all of our employees.
KBC heavily invests in innovation—internally and through collaboration with promising fintechs. Rather than fighting innovation, you’d better embrace it and integrate it in your business model. That is your best guarantee to stay relevant. That is why our biggest challenge is complacency. Today, we are living in the most challenging time of the past 25 years. Tomorrow we may have to face a “competitor” we don’t know yet. To prepare for this is difficult, because people do not like change by nature. It means we cannot allow ourselves to rest on our laurels.
It doesn’t sound as if KBC is likely to rest on its laurels any time soon. Gentlemen, thank you.