The recent announcement that Wells Fargo entered into a partnership with Amazon, signalling the online retailer’s entry into the tricky – but massive – US student loan market, is only the latest in a series of alarm bells being sounded in the financial services industry regarding the tech giants’ long-feared (and widely expected) entry into the banking arena. This is part of a wider pattern of gradual involvement by big tech into FinServ, and some see this as the biggest threat facing banking, though there are many other challenges, some of which I discussed in a previous post.
Whatever your view about the tech giants’ real appetite to get into a highly regulated and not very profitable retail market, there is general consensus among analysts, the Big Four and an increasing number of executives that banks are likely to lose a significant proportion of their business to non-traditional providers in the next decade, which is a sobering thought.
Some banks – though by no means all – are scrambling to respond in a number of ways: setting up digital units, investing in incubators, acquiring fintech startups, or betting on the next big tech. More recently, banks have started pulling in digitally-savvy executives to ‘shake things up’ in an attempt to optimise for digital transformation, and we are also seeing changes finally occurring inside some banks to adopt new ways of working, such as Agile, Scrum and DevOps, though these efforts (with some notable exceptions) are largely limited to tech teams.
These are encouraging signs, but way too many of these efforts are merely scratching the surface of the complex evolutionary work that needs to be undertaken in order to achieve meaningful digital change that sticks.
Part of the problem is the compartmentalised and process-driven nature of banking, leading to the tasking of ‘digital’ to ‘specialists’ whose main focus is often a techno-deterministic view of what transformation entails. Challenges are expressed as finite, self-contained technology ‘problems’. Hardly a day goes by without mention of blockchain, robo advisors, AI, fintech, cybercrime, or PSD2 (the EU’s open banking directive), each requiring new technical ‘solutions’ or new processes or methods, with the human element of this usually relegated to user adoption and training.
In a similar vein, the other main driver of digital transformation is the customer centricity mantra beloved of 90s marketers. Applied to today’s digital reality, this translates into the following logic: if bank customers are online, using apps, reviewing products and buying services with minimum human intervention (and without the bank’s knowledge), then it makes sense to learn more about their buying journeys, and try to reach them wherever they gather in the digital world, so we can target them with digital products. Unfortunately, at least some of this focus has translated into intrusive digital ad serving, promotions, campaigns and me-too apps, which do little to reassure banks’ changing and increasingly digital customer base, who are leaving in droves.
Important as both of these efforts are, thinking of them as specialisms, handled by IT and Marketing respectively, misses two essential realisations, which need to be considered when engaging in any transformational effort:
- First, in the 21st Century the need to change is not a finite challenge requiring a clearly-delineated response, but an operational constant. Whether we focus on more traditional business change, or digital transformation, it is not a well-defined package of work which can be assigned to technical specialists for linear execution. Banks that are beginning to adopt more agile ways of working understand the iterative nature of this effort, but much more needs to be done to develop enterprise-wide digital capabilities that enable banks to ‘sense and respond’ to constantly-changing conditions, rather than expect ‘change’, ‘digital’ (or for that matter, ethics or compliance) to be handled by ‘specialists’ somewhere in the organisation.
- Second, building the right digital capabilities, skills and ways of working requires a significant re-think of the organisational structure of banks, which are largely optimised for a process-driven type of bureaucracy which has its roots in previous centuries, but has since become at best a significant brake on modernisations and, at worst, the hiding place of jobsworths counting the days to retirement. Again, this is not really about hiring management consultants to re-draw the org chart, or shaking up management teams to bring in some digital skills. Rather, this requires the leadership courage and vision to empower staff across all levels of a banking organisation to take responsibility, change what is not working, and become agile and digital by default, rather than expect IT or HR to put in place yet another process of modernisation from the top down.
So what are the alternative approaches that banks should explore? As we have long argued, undertaking a process of meaningful digital transformation is not simply the addition of new technology to existing business & operating models, but the development of lasting, sustainable, digital ways of working across the enterprise. Anything more superficial, like ad hoc tech projects and marketing initiatives, will be nothing more than extraneous add-ons to the transformation effort, leading to short-lived impact.
Instead, banks need to look inside their organisations to identify a set of precursors to, and catalysts for, a meaningful digital transformation effort, which can be identified through a concerted internal discovery effort (using a variety of simple primary research methods to elicit information, gather data and surface ideas across the whole organisation) early on in the transformation process.
The precursor : catalyst ratio will vary from bank to bank, as will their relative weighting. There may also be some tricky classification questions, especially if we take a narrow definition of precursor (something that precedes, and is a condition to, a wider change effort); and catalyst (something that accelerates digital change, without which there is limited reason to engage with it), especially as these tend to bleed into one another in a complex banking institution. However, some of these might include:
- Integration: banks may well see the acquisition of innovative startups, technologies and teams as a shortcut to building digital capabilities and even future marketshare. This is of course the logic of corporate venturing and the sponsorship of incubators, but where banks – and large bureaucratic businesses in general – usually fail is in the integration of these new shiny nuggets of innovation into the wider organisation, without killing what made them special in the first place. There is no silver bullet to take to this problem, and even though large digital business suffer from many of the same post-acquisition problem, banks would do well to learn from them to maximise their chances of successfully integrating new businesses and teams.
- Structure: banks should follow established models of decentralisation and spontaneity, such as teaming. Smaller units can operate very efficiently as independent teams, within an operational framework provided by leadership and business objectives, together with clear operational rules (it is a regulated industry and for very goods reasons). There are multiple successful case studies in very structured and traditionally hierarchical organisations, proving that the decentralisation of operational teams can coexist with more traditional management techniques, enabling leaders to make fewer decisions but focus on the most important ones, leaving day-to-day operations to run relatively independently.
- Talent: I am old enough to remember a time when getting a job in a bank was seen as an insurance to a stable, if not prosperous future. This is no longer the case for a number of reasons, but if banks are serious about surviving and thriving in the digital present and near-future, they need to start thinking of Facebook, Apple, Google and Amazon as their competitors for talent. How many of the best and brightest STEM minds produced by the world’s top universities consider banks as their employers of choice? If the answer is not many, then banks need to put in place a talent hiring and retention strategy that rivals the top software and digital businesses out there.
- Intrapreneurship: the single biggest drag in innovation and new ways of working is the lack of an entrepreneurial spirit among the vast majority of a bank’s employees. Challenging the status quo is usually not encouraged, and there are no clear incentives for doing so. In this way, new ideas, efficiencies, improvements usually go by the wayside and are lost in the mass of ‘real work’. Banks need to find a way to encourage intrapreneurship, which in turn will facilitate shorter project delivery times, increased knowledge sharing, and greater collaboration. Instead of sponsoring external incubators, banks must create an internal space for ideas to flourish, leading to new products and services.
- Capacity: nothing will get done, in banks or elsewhere, if we leave transformation efforts in the hands of external consultancies who have a vested interest in prolonging their engagement and charge day rates. Rather, banks need to build internal digital capacity through a process of learning, reverse mentoring, and experimentation. Consultancies will still have a role, helping to form strategy and providing ongoing support, but most of what is needed to transform banking digitally can come from internal resources, if these are properly enabled and empowered.
- Leadership: just as some banks have accepted that they need to have competent digital people at the top of their structures, and are acting on that, so they must ensure that the concept of leadership within their organisations is challenged and rebuilt to be fit for the digital future. Digital leaders are not necessarily the most senior executives whose word must be obeyed – on the contrary, that can act as a barrier to transformation. Rather, banks need to identify and nurture change agents who have a vested interested in making digital things happen, a passion for the considerable amount of work required to do it, and a pre-disposition towards new, social and digital ways of working.
- Connectedness: despite the proliferation of collaboration tools and enterprise social networks within the banking sector, these have suffered from limited engagement and a lack of strategic thinking in their implementation and roll-out. ESN adoption has slowed down largely because of a failure to demonstrate clear business value from the new ways of working that these platforms can enable. The key to ESN adoption is its relevance to work, which means that instead of just tracking built-in vanity metrics, success must be measured through impact on core business benchmarks. In practice, organisations struggle to do this well because they have no reliable way of setting ESN-specific business objectives. Without connectedness as a core enabler, digital transformation will be hard to embed in any bank (full disclosure: we have developed a methodology that allows us to systematically align the social actions performed by ESN end-users with a client’s overall business objectives. In turn, this enables us to set relevant, in-the-flow success metrics, which can be tracked and measured across multiple data sources, as well as qualitative inputs, e.g. workshops, interviews, etc).
- Culture: rather than think of this as an ill-defined intangible, the development of a strong culture within banking is dependent on the examples and priorities set by its business managers and digital leaders. Culture in this sense can flow from encouraging and facilitating the other precursors and catalysts listed above, alongside more traditional and established values that will be specific to each bank. Above all, these can contribute to the development of a greater trust internally, which will in turn reflect on the banks’ operations and dealing with its end customers, at a time when trust is a scarce commodity.
There is no set starting point for discovering – and testing for – the existence of these precursors and catalysts, which will vary from bank to bank. An obvious place to start might be to just follow the ‘red thread’ provided by your customers’ digital journey (which will also help to get buy-in internally), but in some cases it might be better to start with the back office, as Bertrand Duperrin astutely observed.
Wherever you start, the business of modernising banks to make them more digital, responsive and human needs to start now, as just chasing superficial ‘quick wins’ and reacting to quarterly results or the latest news item is almost certainly not going to cut it in today’s FinServ landscape.
If you want to find out more about how to kick off a meaningful digital transformation process inside your Financial Services organisation, please head over to our dedicated service pages, or just get in touch for an informal chat on how we could help.