Many commentators have focused on the fintech threat. Those that see fintech as the end of banking as we know it, point to examples where fintechs deliver services faster, better and cheaper than traditional banks. Those that see fintechs as a passing annoyance point to regulatory concerns such as when the UK’s Financial Conduct Authority recently called for an international regulatory framework to be applied to fintech startups.
Others point to problems such as those at Lending Club and more recently at Wonga, as examples of how the upstarts won’t survive in the long term. However as the fintech threat is just a symptom, many of these responses risk missing the point. The point is that customers’ expectations are evolving – their experiences of the technology they use every day and how leading companies are leveraging that technology to deliver outstanding experiences are changing what they expect. They expect products and services tailored to their needs, delivered to the channel they prefer, at a time of heir choosing, and at very low cost – ideally free.
Creative destruction has been well known in business for a long time. Only 71 of the original 1955 Fortune 500 companies remain. However Digital Darwinism – when technology and society evolve faster than your ability to adapt – has turned creative destruction sometimes known as Schumpeter’s gale into Schumpeter’s hurricane.
Clearly it is better to adapt than resist, or even worse try to ignore. But while consultants offer lots of evidence of the benefits of being a digital organisation few offer insight into what a digital bank actually is and fewer still provide concrete steps on how to become one.
So what is a digital bank? It’s a bank that can create and launch products in seconds, assembling them from components and ideally targeting individual products to individual customers. It’s a bank that optimizes customer interactions for specific customer preferences using the channels they want. It’s a bank that uses complete end-to-end automated, robotic and streamlined processes, which carry the combined intellectual property of the entire company. It’s a bank that turns vast flows of messy, raw data into real-time insights to anticipate customer needs before they even express them.
These four areas; product innovation, customer focused interactions, optimized processes and insights driven service strategy sound very obvious and fairly simple, but implementing them isn’t. Clearly some new entrants have been able to do it, but established banks don’t have the luxury of pressing pause on their businesses and starting all over again from scratch.
Established banks need to keep their businesses running while they re-invent themselves, from the inside out. People used to refer to core banking system transformation projects as a heart transplant or changing the engine of a plane while still in flight, but the scope of this new transformation is much wider.
It’s like a heart replacement on top of a kidney replacement, while doing a lung transplant and with a little bit of brain surgery thrown in for good measure. A wait and watch approach runs the risk of banks slowly losing small but significant parts of their business to new players. While established banks enjoy customer preference because of the ‘trust’ factor, there are numerous examples across other industries where incumbents’ confidence in customer loyalty has been proved wrong, more so with the shortened attention span and lot of innovation happening in the financial services market.
Partnering with a fintech or acquiring one is becoming trendy, but it is only a short-term solution if it is not accompanied with the transformation of core processes.
It is more about changing mindsets and fortunately technology can help. While the nirvana of “plug and play” software that is interchangeable has not yet been realised we have reached a point where software from independent software vendors is both sophisticated enough to meet most business needs and flexible enough to be integrated into most infrastructures. And because the solutions’ capabilities have advanced they can be used to replace operating areas in a way that adds tangible business value without requiring the major surgery. Channel systems can be replaced without affecting middle office systems.
McKinsey’s two speed architecture approach talks about managing this transition easily. However, it needs to be kept in mind that for a unique and digitised customer experience, it’s not just the front-end that needs to be on a faster architecture, but the back-end also needs to move along. Business verticals, such as lending, can be replaced from front to back without affecting other business areas.
Even slices of businesses can be replaced, for example channels for lending, or front to back for mortgage processing, whereas previously these kinds of changes required massive development and system integration projects, that is no longer the case. So, the software solutions exist and the project methodologies are in place. The steps to become a digital bank are solidifying.
Customers are clearly expecting a response – the question is who will give it to them?