When Citi GPS (Global Perspectives & Solutions) predicted in March 2019 that incumbent banks could lose between 10 and 30 percent of their income because of the influx of new digital-first ventures, it was the latest in a long line of warnings for the global financial-services industry. The message is coming through loud and clear that banks need to change direction or risk losing out over the long-term.
As well as partnering with fintechs and building their own digital offshoot brands, many banks are well on their way to meeting the challengers and collaborating to boost business. But planning for change and achieving transformation are worlds apart: as Peter Drucker famously said, culture eats strategy for breakfast.
The qualities for which banks have traditionally been valued, including stability, trust and security, have also been the ones that have held many of them back. Some commentators have argued that banks have needed to focus on regulatory compliance and solvency to the detriment of thinking like a customer or building digital-first operations—as their fintech challengers have had the luxury of doing. And it’s true that the “not invented here” syndrome is alive and well in many financial institutions. Fintechs say that they find the process of collaborating with big banks slow and difficult; new individuals or teams brought in to deliver digital transformation feel stifled and unempowered; innovative ideas don’t make any progress.
The barrier that’s often getting in the way is not a lack of vision for the future or even the absence of a strategic program for change. What’s missing is a culture that delivers the vision—and rewards team members for enabling the program. In some ways, banks are in a fortunate position of having significantly changed course at least once in recent years, under the auspices of regulators focused on eliminating overblown risk-taking cultures. By developing a new set of values for everyone to live by, banks necessarily had to change their training, recruitment and reward processes; demonstrate that senior leaders believed in—and genuinely lived—company values; and introduce new working methods, including checks and balances on non-compliant behaviour.
Now the same must happen to enable a digital future, whether that’s building a new bank brand, collaborating with fintechs or transforming operations. Nothing will happen by accident, and remaining the same will almost certainly block progress completely.
Starting from the top
Just as banks had to change tack following the financial crash of 2007-08, today’s financial institutions need to respond to the threats posed by new market entrants, including fintechs but also bigtech firms such as Alibaba, Google, Apple, Facebook and Amazon. Stage One is a vision of where the bank is headed, its values and its strategic plan for change. By establishing a clear “North Star” for everyone to follow, the senior-leadership team sets out a pathway for the future. This enables the whole team to buy into one vision, which in turn helps them understand why decisions are being made about organizational structures, processes and people.
Of course, this vision must be built around the needs and expectations of customers but also around the capabilities of technology to deliver change. The leadership team has a responsibility to understand what is now possible and to invest in innovative technologies such as the cloud, artificial intelligence, data analytics, mobile, robotic process automation and open APIs (application programming interfaces), which means involving marketing and product development in their discussions about the future, along with information technology (IT).
As part of this process, the team needs to assess its current technology platforms and whether they are fit for purpose. Can any manual processes be automated? Where must humans remain in place to solve customer problems? How can we ensure that data is not hidden away in silos, making it impossible to analyze? And where can we work to improve the customer journey?
The need for speed
Planning a future technology architecture needs to cover three elements, which must travel at different speeds:
- Systems of records and back-office core operations, including customer transaction data. Developments and changes to these systems can—and indeed, should—move at a slower speed;
- Systems of differentiation, which include decision-making, pricing, analytics and risk-management tools in the middle office. These need updating more often to accommodate changing business practices or customer requirements;
- Systems of innovation, or customer-facing apps. These must be updated frequently, either with self-built skills or in partnership with third-parties.
Looking in more detail at this third category, banks need to encourage developer teams to work in a different way, more akin to fintechs, which are used to an agile, scrum environment. Teams working on customer-facing systems or apps need to be more mindful of what consumers, businesses or investors want to see from their banks and translate requirements into new capabilities. That implies building teams that look outwardly rather than inwardly, are multidisciplinary, have diverse views and can work collaboratively with colleagues across different areas of the business. It also implies the removal of any “command and control” structures that still exist in development teams. Instead of micro-managing, team leaders need to ensure that tech professionals are empowered to find solutions to customer problems in line with business strategy.
In common with the previous need to move away from a risk-taking to more prudent culture is the requirement to open up communication channels across the business. In its 2013 Bank Survey, entitled “Culture in Banking Under the Microscope”, Deloitte observed that “62 percent of senior bankers believe that upward communication of concerns, or lack thereof, is a significant cause of problems within their own bank”.
As part of their cultural-change approaches, banks should recognize that poor communication is not just a problem for institutions that need to allow whistleblowing to report misdemeanours and risk-taking; it will also get in the way of innovation. A good idea can come from anywhere and anyone, so mechanisms to capture and reward ideas and insights should definitely be put in place. This thinking can extend outside the bank and incorporate ideas and approaches from third-parties via APIs and cloud platforms. Outside third-parties can include fintechs and academics and even individuals who are engaged via hackathons.
A platform-based approach that incorporates a testing environment and allows for fast feedback is crucial to these new ways of working. Development teams can move away from a monolithic approach to software development and break it down into the delivery of individual microservices. This means that if one service doesn’t perform as expected, the team can learn and move on to the next challenge as quickly as possible.
A continuous-delivery model is one of the biggest mindset changes that banks need to enable in order to change their cultures and embrace the digital future. It means allowing developers to try ideas out and bring new functionality to their customer-facing systems, without having to wait for the next wholesale system upgrade.
While Citi GPS’s Bank X report warns that banks’ revenues are under threat from new players in the financial-services sector, it also predicts that “digitalization can lower costs by 30-50 percent”. By taking deliberate steps now to change their internal cultures and effective use of technology, banks can make sure that they mitigate the risks and take full advantage of the opportunities that lie ahead.