IDC PERSPECTIVE

Digital Transformation in Spanish Bank Santander

Marta Muñoz Méndez-Villamil Nancy Poppi
Philip Carter Jan van Vonno

EXECUTIVE SNAPSHOT

FIGURE 1

Executive Snapshot: Santander's DX Journey

Source: IDC, 2017

July 2017, IDC #EMEA42884417

SITUATION OVERVIEW

Across all industries, we are seeing IT dramatically change how organizations run their
businesses. In an era driven by accelerated innovation — built on the four technology forces of
IDC's 3rd Platform (i.e., cloud, mobility, Big Data analytics, and social business) — we have seen
the adoption of technology move from bespoke solutions for mainly large corporations to virtually
unlimited computing power using this technology from the comfort of our homes, schools, and
social environments with the arrival of the smartphones. The democratization of technology and
demanding tech-savvy customers are forcing companies to embark on a digital transformation
journey.

There is a real need to transform the traditional business to maintain relevance in the market and
serve customers with higher expectations, who want to interact with the companies in a more
dynamic or intuitive way — at any time or place, and with personalized offerings and services that
satisfy their specific needs.

Most organizations involved in a DX journey are defining a road map of initiatives, starting with the
implementation phases, prioritizing the ones that will bring more benefits to the customers. But
where exactly are they in this transformation journey? What are these companies doing? How are
they structuring and organizing this transformation? What are their challenges and lessons
learned?

Many companies are establishing their own drivers for digital transformation, with multiple
variations from one company to another: increase revenue, reduce cost, improve customer
experience, or a mix of all of them. But regardless of the driver, they face similar issues when
defining the organizational structures, collaboration approaches, employee engagement, and
metrics/key performance indicators (KPIs) used to measure digital success.

IDC believes that changes in the operating model are relevant to the financial sector when many
customers start operating in self-service mode via apps and the web, allowing relationship
managers to act as specialized advisors by helping customers with their finances. In this model,
advisors and customers can meet in locations other than the branch, and bank facilities are not
mandatory to operate. This can lead to cost reduction that can be passed on customers in the form
of better interest rates or discounts.

This IDC Perspective focuses on how retail bank Santander is approaching digital transformation
and how this affects its business operations from four different points of view: organizational
structures, collaboration approaches, employee engagement, and metrics/KPIs used to measure
DX success. It is based on an interview with Alberto Fernandez Tomé (corporate head of digital
transformation in Santander) to understand his vision of the bank's current transformation.

ADVICE FOR THE TECHNOLOGY BUYER

To move up the maturity ladder, organizations must prepare and educate their businesses and IT
stakeholders on the importance, impact, and benefits of DX across the organization. DX is not just
another technology trend — it is a critical business priority for many CEOs and their leadership
teams. The fact that majority of organizations are still in the early to medium stages of maturity
shows that DX is not as simple as buying a technology solution. DX requires organizations to
radically rethink how they do business.

©2017 IDC #EMEA42884417 2

Organizations will need to focus on developing their vision and strategies for DX of products,
services, and experiences to deliver value to partners, customers, and employees. Additionally,
organizations need to leverage digital technologies to transform processes and operations to
deliver world-class experience across products and services to customers and the entire
ecosystem. Harnessing the real value of data in a secure environment and personalizing customer
experience are some of the aspects organizations need to start focusing on if they wish to move in
the right direction.

Insights
Company Background
Banco Santander is a leading retail and commercial bank based in Spain, with a significant market
share in 10 core countries in Europe and the Americas. Santander is the largest bank in the
eurozone by market capitalization and among the top 12 banks on a global basis. Founded in
1857, Santander currently has 12,000 branches and 188,000 employees worldwide, of which 3,000
branches and 23,000 employees are in Spain.

Santander created a corporate digital transformation unit and appointed Alberto Fernandez Tomé
for DX for retail and commercial banking. He also manages all the front channels in contact with
customers: branches, ATMs, contact centers, remote management, mobile, ecommerce, social
networks, and business intelligence (CRM and content of the relationship manager software).

Santander started its digital transformation journey almost eight years ago, focusing on customer
facing tools and providing omni-channel experiences. In the past four years, the company has
deployed mobile and internet applications and enhanced its digital contact channels with
customers, aiming to turn the customer mindset to a digital framework. With this strategy, the bank
has reached out to all business areas such as risk, segments, products, and marketing to help
create a new culture and a new way of work.

The main driver behind Santander's DX is to improve competitiveness with its peers, exceed
customer expectations, and comply with current regulation. Moving low-value transactions to digital
channels allows relationship managers to focus on high-value communication exchanges with
customers, which in turn should lead to increased loyalty and eventually sales increase.

Santander customers' expectations are changing at a par with the rest of the ecosystem. With its
varied portfolio and customers of all ages, the bank has been able to prove that good digital
services provide more convenience. The bank relies on branches' efforts to explain digitalization
and show people how to operate on this new digital environment, especially through the pervasive
use of mobile apps where they are to be more loyal and visit more often (30% more than the web
channel).

Santander has publicly communicated its goal to reach 30 million digital customers by December
2018, and the contribution of each country is very well defined and committed. Specifically, the
bank expects to achieve this by capturing new and fully digital customers through branch
engagement to attract customers to digital channels (which have a user base of 128 million
customers). The biggest volume of new customers will come from customer digitalization. The
bank has 15.5 million loyal customers (people and companies who see Santander as their main
bank), and the goal is to reach 18.6 million loyal customers by 2018.

©2017 IDC #EMEA42884417 3

This is also changing the way the relationship manager communicates with the customer. Part of
the staff continues to work at branches, yet DX allows the bank to locate part of its staff remotely —
staff can meet customers from different locations by using videoconferences as well as internet
and mobile tools. These tools still allow the bank to have strong relationships with customers
without being physically present. In many countries (e.g., the U.S., the U.K., Brazil, and Mexico),
Santander promotes relationships between customers and the bank through videoconferences and
social media. On the other side, it is fully digitalizing onboarding processes, including know-your-
customer validation and all compliance requirements.

Santander's innovation strategy is manifest in the number of projects it currently runs:

 Chatbots and artificial intelligence to improve its customer service (the U.K., Mexico,
Argentina, Spain, Brazil) approach with conversational machines, both in Santander
channels and social media channels.
 Face-to-face payments, deploying Santander Wallet in five countries to pay via mobile
devices in establishments and shops, and incorporating peer-to-peer (P2P) payments at
country level to conduct transfers between customers sharing only the mobile phone
number (Bizum in Spain, Paym in the U.K., etc.).
 Machine learning algorithms for risk management to improve the way Santander measures
risk in Spain (Openbank, which tailors product offerings to individual customers and
increases security and fraud protection), especially for SMEs in Mexico and the U.K.
specializing in fintech.
 Personal finance management, implemented in Chile, the U.K., and Spain, helping
customers to better understand their finances through meaningful conversations, analyzing
their consumption patterns, and guiding them on wiser ways to spend and manage their
money.
Santander is currently focusing on blockchain pilots, trying to understand the use of this technology
that has high potential to disrupt financial markets and make processes more democratic, secure,
transparent, and efficient. IDC believes disintermediation is a threat to big institutions, but it also
opens an opportunity for institutions holding the customer relationship.

DX Leadership and Organizational Structure

Santander retail and commercial banking has a clear mission — help people and businesses
prosper and earn the lasting loyalty of customers. Its DX strategy is aligned to this mission, using
digital tools to have meaningful conversations with customers to provide offerings in the most
convenient way. Its DX strategy is then communicated across the entire organization to ensure
alignment using internal campaigns, training courses, and specific communications.

This vision allows each country to plan a three- to five-year road map for digital initiatives that is
reviewed on an annual basis; this is to ensure the initiatives proposed are always aligned with the
main strategy, both from an IT systems plan and from the organizational structure. The bank's
expected result from this process is an equilibrium between having a clear and defined direction,
with the flexibility to change priorities following market trends and needs, previous results, and new
capabilities. In addition, company culture has a friendly approach to "failure," understanding that
DX is not an exact science and requires both testing and learning from market response. "Failing
fast" through pilots before launching an initiative at worldwide level, for example, is preferred to
launching an expensive program in all markets without any guarantee of success.

Santander regularly analyzes the maturity of the company on new disciplines developed (such as
machine learning, Big Data, digital analytics, etc.), refining the plan, project portfolio, and
organization structures for the following year according to the evolution of these new technologies.

©2017 IDC #EMEA42884417 4

IDC found that there are typically different approaches to structure digital transformation in an
organization: individual contributors, corporate DX offices providing support to all the organization
with or without profit-and-loss (P&L) responsibility, or having digital leaders assigned in existing
lines of business.

Although there is no specific area for DX at the individual country level, there are small innovation
teams in each market. Santander DX's initiative is driven by the group organization, and countries'
business lines are responsible for transforming themselves according to the goals provided, the
numbers to be achieved, and the initiatives plan for the year, with the support of corporate DX. The
corporate DX office provides directions regarding global and corporate implementations, makes
sure technology and knowledge are shared between the countries, and enables the whole group to
evolve together. The corporate structure of Santander's digital area currently consists of 70 people,
leveraging group capabilities of different countries to improve results and reach country goals on a
project-by-project basis.

DX budget is managed at country level. This has radically changed from five or six years ago,
when it was defined by the IT department. This budgeting strategy is aligned with the bank's
requirement regarding transformation, which is no longer seen purely as a technology
implementation, but as a change on the business model to adapt to the new ecosystem. On top of
this, individual countries can take advantage of global agreements already in place between the
corporate DX area and third-party companies for local implementations, providing important
savings to the business.

Collaboration Approaches and Employee Engagement

The IT systems department at Banco Santander is a key area, which is highly skilled on digital
capabilities and manages all integrations to the core systems as sensitive architectural
components. This was achieved through highly skilled staff involved in specific career development
plans and by hiring specialists on digital technologies to grow internal knowledge. The goal is to
cater to around 70% of needs and developments internally with existing resources. However, the
use of a collaboration model to integrate third-party companies and fintechs for non-core solutions
also delivers solutions to market in a faster and fit-for-purpose manner. IT and corporate DX work
together to evaluate these collaboration opportunities, incorporating technical and business views,
respectively.

The role of IT is changing from managing small number of projects to running hundreds of projects
in each country (e.g., with the incorporation of new agile methodologies). This area focuses on
deploying new application programing interfaces (APIs), developing good platforms to combine
Santander services with partner services, and developing a new middleware platform to reduce the
IT costs and increase flexibility. IT strategy is aligned with the business to fulfill its expectations.

Santander launched InnoVentures (a $200 million fund based in London) in 2014 to get closer to
the wave of disruptive innovation in the fintech space. The goal of the fund is to bring value to start-
ups partnering with Santander, growing from a very early stage to a more mature stage by
providing business expertise and help to scale.

IDC believes that when organizations want to achieve change, especially under the DX scope, it is
required that employees ultimately change the way they do their jobs. But this goal will not be
achieved if employees are not involved nor engaged, and if they are unsuccessful in their personal
transition.

©2017 IDC #EMEA42884417 5

Santander understands the importance of having the support of its branches across the
organization to ensure the success of its DX journey. Branch evangelization and engaging
relationship managers to the digitalization process is achieved by a strong top-down strategy, wide
communication, and an incentives and rewards scheme. Santander understands that if relationship
managers feel comfortable working on a digital environment, they will be the best prescribers of
digital strategies. In addition, Santander has developed a program to explain to branches the
benefits of various digital and mobile features before they are launched into the market, and in
many cases, relationship managers act as subjects for functionality testing. With a clear objective
to encourage digital alternatives, all sales achieved by digital channels also count toward
individuals' annual objectives.

Additionally, yearly initiatives such as the "Digital Day" (or "Digital Week" depending on the
country) that tackle everything digital with special speakers communicate to branches the market
trends and initiatives to be launched on DX throughout the bank. They also reinforce the digital
mindset in bank staff.

In addition, over 500 "digital ambassadors" have been specifically selected due to their tendency to
become digital early adopters and spread the use and benefits of the digital solutions available to
the branches; they help branches analyze their digital performance and provide centralized
feedback on what to improve.

Metrics and KPIs

IDC found that proper follow-up on DX initiatives requires the identification of transformation goals
and quantitative indicators to measure the progress on the SMART criteria (specific, measurable,
achievable, relevant, time-bound). The point is not about defining a lot of KPIs, but performing a
proper follow-up of the set indicators to ensure the changes being made deliver the expected
results, or reacting in case additional adjustments are required.

 There are many KPIs related to the use of the digital channels, mainly web and mobile.
Figures show there were 22.1 million digital customers in 1Q17, with mobile growing
almost 60% year on year. The main KPIs being measured are number of digital customers,
number of transactions done on digital channels and other channels, volume of sales on
digital channels, among others. Countries measure KPIs across all channels, with the goal
of reducing low-value transactions on face-to-face channels and eventually convert
customer to digital.
 Regarding customers, Santander has an internal benchmark aiming to be among the top 3
financial institutions on customer satisfaction in all countries. The bank uses external
consultancy services to perform surveys to customers, inquiring about Santander services
satisfaction against other competitors.
 Employee use of digital channels is also a good reference. According to the bank, there
seems to be a correlation between employees' and customers' use of applications. The
conclusion of this correlation is that when the relationship manager is fully engaged in
digital initiatives, it is easier to convince customers to move to digital channels.
Santander's figures show a strong trend toward digital channels — internet and mobile channels'
usage is increasing 25% yearly compared with face-to-face transactions. This confirms that the
strategy is successful, and the population is rapidly adopting new initiatives.

©2017 IDC #EMEA42884417 6

Essential Guidance
Santander found a way to take advantage of its branches to develop digital transformation.
Relationship managers in branches are the main allies to this strategy, managing relationships with
customers and helping convert them to digital channels (internet and mobile applications).
Implementing the incentive plan to branches and the digital business reduced employees'
resistance to the model, and they committed to transform the company.

However, the main challenge for Banco Santander is to get the entire organization to work together
and share common objectives — working for one goal and changing the way they work, with
multidisciplinary teams and different hierarchical levels based on the skills required for a specific
initiative. This can only be achieved using new collaboration tools and new methodologies as agile
and design thinking.

The Santander case provides essential guidance to organizations looking to implement a digital
transformation strategy:

 Build mixed teams with internal and external people. Find people inside the organization
with an eagerness to learn and with the appropriate skills to execute digital capabilities.
Hire external people to make the internal knowledge grow, working toward one goal.
 Get the business to commit and drive DX. The support of different areas within the
business is essential to drive transformation, as DX is not solely seen as an IT change or
technology implementation, but as a business model change. Having the business
managing part of the budget can be an excellent way to guarantee their involvement, with
the necessary IT technical support to develop the different initiatives.
 Set up a strong leadership culture that rewards the "failing fast" concept. Most employees
are used to working under pressure, target numbers, and restricted budgets, and
organizations that are quick to blame and identify culprits when failure happens. Failing
fast is a new way of thinking and working in the digital transformation journey, but it
requires organizations to change their mindset, from the top levels to the last employee, to
work with this new culture.

LEARN MORE

Related Research
 Design Thinking in European Digital Transformation: Consultants, IT Services Companies,
and Agencies (IDC #EMEA42463717, April 2017)
 Does 3rd Platform Technology Pave the Way for Digital Transformation? Technology
Adoption and Trends by Industry in Europe for 2017 (IDC #EMEA41352217, March 2017)
 IDC FutureScape: Worldwide Digital Transformation 2017 Predictions (IDC #US42259317,
January 2017)
 IDC FutureScape: Worldwide Digital Transformation 2017 Predictions — European
Implications (IDC #EMEA42239616, January 2017)
Synopsis
This IDC Perspective is part of a series that focuses on the different digital transformation
strategies, approaches, and implementations across various Western European organizations. It
focuses on how Santander Spain is approaching innovation and digital transformation, as well as
how these affect its business operations from four different points of view: organizational
structures, collaboration approaches, employee engagement, and metrics/KPIs used to measure
success.

©2017 IDC #EMEA42884417 7

About IDC
International Data Corporation (IDC) is the premier global provider of market intelligence, advisory
services, and events for the information technology, telecommunications and consumer technology
markets. IDC helps IT professionals, business executives, and the investment community make
fact-based decisions on technology purchases and business strategy. More than 1,100 IDC
analysts provide global, regional, and local expertise on technology and industry opportunities and
trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help
our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading
technology media, research, and events company.

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