Banks: 6 Digital Imperatives
– Rudyard Kipling
Banks are subject to a lot of noise about FINTECH today. Optimism regarding technology is at a high, mobility is widely regarded as a game-changer, and vast amounts of capital are being deployed in FINTECH. Banks may be tempted to dismiss the noise entirely, or they may panic and overreact. We recommend a middle ground that focuses on separating the signals that are truly important from the noise. Specifically, this means that banks should be less preoccupied with individual FINTECH attackers and more focused on what these attackers represent – and build or buy the capabilities that matter for a digital future.
1) Use data-driven insights and analytics holistically across the bank. Attackers powered by data and analytics – be they FINTECH, large consumer ecosystems (e.g. Facebook, Google, Apple), or some of the more progressive financial institutions – are opening up new battlegrounds in areas like customer acquisition, customer servicing, credit provision, relationship deepening through cross-sell, and customer retention and loyalty. Consider the provision of credit - one of banking’s last big moats. Access to large quantities of transaction data, underwriting and custom-scoring customers for credit-worthiness, understanding and managing through credit and economic cycles – these are unique assets, skills and capabilities that banks have built and leveraged over centuries. But now the large-scale availability of new and big data (and the fact that banks no longer have a monopoly on such data) is pushing banks to radically transform just to keep up. Building a comprehensive data ecosystem to access customer data from within and beyond the bank; creating a 360-degree view of customer activities; creating a robust analytics and data infrastructure; and leveraging these to drive scientific (versus case law-based) decisions across a broad range of activities from customer acquisition to servicing to crossselling to collections - all are critical to a bank’s future success.
2) Create a well-designed, segmented and integrated customer experience, rather than one-size-fits-all distribution. The days of banking being dominated by physical distribution are rapidly coming to an end. The proliferation of mobile devices and shifting preferences among demographic groups mean that customers expect more real-time, cross-channel capabilities (e.g. status inquiries, problem-resolution) than ever before. Physical distribution will still be relevant, but far less important, and banks must learn to deliver services with a compelling design and a seamless unconventional customer experience. Banks must recognize that customer expectations are increasingly being set by non-banks. Why does a mortgage application take weeks to process? Why does it take an extra week (or two) to get a debit card online versus in a branch? Why can’t a customer make a real-time payment from his/her phone to split a dinner check? Banks need to respond to these questions by improving their customer experience and meeting their customers’ changing expectations. Financial services is the only business where you can be rejected as a customer. In an age where mobile devices provide real-time trasparency on just about everything, it is critical to provide customers with information about the status of an application or what other documents are required. Account balances must be consistent across channels, and banks should consider the real-time updating that an on-demand app such as Uber provides and aim to deliver that level of transparency when it matters. Such innovation provides opportunities for banks to improve and differentiate their customers’ cross-channel and crossproduct experiences.
3) Build digital marketing capabilities that equal eCommerce giants. Today, banks are in a fight for the customer, not only with other banks but also non-banks. The moats that have historically protected banks will not even begin to compensate for the wide gap in marketing skills that currently exists between eCommerce players and banks. Big data and the advanced analytics capabilities described above are merely the foundation of digital marketing. Mastering digital media, content marketing, digital customer lifecycle management and marketing operations will be critical to banks’ success. Building these capabilities and recruiting and retaining digital marketing talent will require considerable time and investment.
4) Aggressively mitigate the potential cost advantage of attackers through radical simplification, process digitization and streamlining. After the last dot-com boom, banks successfully electronified core processes. Now they must digitize them. The difference is crucial – an electronic loan processing and fulfillment process at a bank largely implies the sharing and processing of PDF files of paper documents. We estimate that the majority of the cost of processing a mortgage is embedded in highly manual loops of work and rework. Digitizing a mortgage application would involve creating and manipulating data fields in a largely automated manner in the cloud, e.g., borrower income and liabilities. This will be a multi-year process for banks, as it will require the integration of multiple legacy systems and potential re-platforming to enable truly digitized processes. Simplification, digitization and streamlining opportunities exist across large swaths of banking operations. The sooner banks attack these opportunities, the more prepared they will be to compete with FINTECH attackers that have a structurally lower cost base. New technologies will offer banks opportunities to test and scale to achieve efficiences. For example, as the hype surrounding Bitcoin currency fades, it is clear that the “baby in the bathwater” may well be distributed ledger technologies that enable more cost-effective storage and rapid clearing and settlement of transactions in the banking back office.
5) Rapidly leverage and deploy the next generation of technologies, from mobile to agile to cloud. The technology agenda for banks and bank CIOs has become even more demanding and complex. First and foremost, “mobile-first” is not just a buzzword – it is the clearest directive banks could receive from consumers about how they want to interact with their service providers. Secondly, banks must fortify not only their technologies, but also their internal processes and cultures, to defend customers’ data from breaches. Third, the pace of innovation in banking is accelerating rapidly, requiring banks to increase their speed to keep up, including software development through techniques such as agile and continuous delivery. Finally, significantly faster, more nimble and dramatically lower-cost versions of processing and storage technologies are now commonplace. Banks need to move onto such platforms, retiring and replacing legacy systems quickly. Since such systems are neither easily nor quickly replaced, many banks may choose to move to a “two-speed architecture” approach that builds more flexible layers of technology on top of existing stystems, but still draws on and interacts with those systems to provide the next generation of technology agility and seamless customer experiences. From providing truly scalable application architecture with a particular emphasis on mobile to addressing the cybersecurity threats they face every day to learning agile delivery and modernizing their infrastructure, banks have a challenging, but important road ahead in building next-generation technology capabilities.
6) Rethink legacy organizational structures and decision rights to support a digital environment. The typical organization chart of any bank will show a matrix of products and channels, with physical distribution usually leading in size and scope. The P&Ls that accompany these matrices vest power in the owners of the channels and products that are most likely to be in the firing line of FINTECH attackers. These attackers are typically oriented to customer metrics tied directly to their financial performance. In contrast, most banks have consensusoriented cultures that require a long time to build alignment. Banks must complement their existing P&Ls with approaches that enable faster adaptability to external changes and foster cultures that support speedier decision-making. Banks must think hard about how best to organize to support the five preceding imperatives, i.e., what organizational structure and decision rights will most effectively support a data and insight driven operating model, a distinctive customer experience, digitized processes for greater efficiency, and next-generation technology deployment? What innovations should take place within the bank? What should be developed in incubators or even in separate digital banks under separate brands? Should the bank have separate laboratories or a VC-like investment vehicle to be able to experiment with new technologies?
Taken together, these six imperatives carry the same overall implication for banks as the six markers do for FINTECH: a long-run shift in the nature of competition and successful business models. An overarching challenge for banks is how to “open up” structurally – both in terms of how they leverage partnerships and how they permit other entities to access their capabilities. Those banks that pursue a thoughtful approach to meeting this challenge will be best positioned to evolve their business models and find new sources of value for their customers, while performing well financially.
The age of FINTECH is here. Will this time be different than the dot-com boom? Will most FINTECH attackers fail? Will the few attackers who succeed fundamentally reshape banking? Regardless of the odds of success for individual FINTECH attackers, banks must seek important signals amid the FINTECH noise in order to reposition their business models and cultures for success. There is no time to lose.