108.10台灣銀行家雜誌第118期 / By Olga Rakhmanina
Changing to Survive: How to Stay Relevant in the Digital AgeBankers Digest
The global banking industry is being swept by a technological revolution urging incumbent operators to reconsider their strategies and business models. Competition from digital disruptors has intensified in the last few years and they are likely to be defining the rules of the banking game going forward. Whilst incumbents continue to hold significant market presence and enjoy close customer contact, they cannot afford to rest on their past successes and must adjust their operating models as a matter of urgency.The traditional banking industry is no doubt experiencing unprecedented pressure to change if it wants to preserve its central role in our relationship with money. The pace of change is accelerating and deadlines are tight as new market entrants – powered by agile technology solutions and unburdened by extensive branch networks or IT legacy systems – are making significant progress in transforming banking services to meet ever increasing consumer expectations for speed and convenience. Competitive pressures are compounded by enhanced regulatory scrutiny as well as bleak economic conditions, which tend to affect incumbent players more than challengers. In fact, it’s not all doom and gloom, according to some analysts. In its recent report on digital disruption in banking, the Boston Consulting Group (BCG), a management consultancy, concluded that traditional players are likely to get stronger in the near future – thanks to the inherent might of multinational banks, high barriers to entry and recovery progress following the global financial crisis. There is an important caveat, however: ‘Banks will have to redefine themselves and change how they operate. Anything else would be a mistake’ . They need to move and they need to move quickly, if they want to maintain their competitive advantage in the digital future. Indeed, any board which looks to keep its bank in business in the long term has transformation on its agenda and recognises importance that digitisation will play in delivering future success. Michael Corbat, Citigroup’s CEO, described his bank as ‘a technology company with a banking license’ as far back as 2014 . Other banks view themselves in a similar vein, from Norway’s largest financial services group DNB to Singapore’s biggest bank DBS . This transformation requires re-evaluation of banks’ operating models, how they are structured and how they interact with third parties. PARTNERSHIPS ARE THE WAY FORWARDGone are the days when banks were largely self-contained organisations providing customers with end-to-end services; instead, they find themselves in an environment populated by a large number of fintech firms and other businesses with a focus on particular elements of the service, which banks can partner with for maximum commercial and consumer benefit. As a renowned expert on digital banking Jim Marous pointed out in his 2018 Forbes article, both sides complement each other with banks bringing scale and brand recognition while fintechs contribute technology as well as an innovative, agile and customer-centric way of operation . In the report titled New Bank Strategies Require New Operating Models , Bain & Co, a management consultancy, explains that banks now face an important choice to determine where they sit on the ‘value chain spectrum’ with manufacturing financial products at one end and their distribution at the other. As the report points out, most banks opt for a combination of the two to exploit competitive advantage in areas of their strength, which they then complement by partnering with external parties – whether other banks, financial institutions or fintech start-ups – to fill the gaps in expertise or capabilities in other fields. This choice will inevitably require modifications to banks’ operating models to make sure they can fully support the chosen strategy. As banks increasingly rely on external partnerships – with open banking as the most prominent example of how banks and fintech firms can come together to transform banking services – they will need to make modifications to remain commercially viable and legally compliant. Some arrangements might, for instance, amount to outsourcing which will trigger additional obligations and financial regulators will be particularly interested to understand how banks ensure that responsibilities are allocated and complywith in the increasingly complex network of partnerships. Firms will also need to exercise extra care in ensuring that essential tasks in any customer interaction are performed to the same standard as before: For instance, who is responsible for making financial crime checks and maintaining compliance with data protection regulations? In its Strategic Review of Retail Banking Models, the UK’s financial watchdog Financial Conduct Authority (FCA) considered a range of scenarios for the future of the retail banking industry in the UK, which have relevance to other markets too. Banks, for instance, may be viewed as ‘utilities’ in the future where traditional deposit-takers and lenders start losing the direct relationship with their customers as a result of the disintermediation process. As incumbent banking institutions struggle to match capabilities of new entrants to offer value-added services, such as money management and budgeting functionality, which have a transformative effect on customer experience, consumers may interact more and more with third parties for their banking needs. Answering a simple question such as ‘Whom do you bank with?’ might become a bit more complex thanks to consumers losing that direct connection with their banks. This will no doubt have devastating impact on brand loyalty in the long term. In the FCA’s view, unless traditional banks learn how to harness their data effectively and provide services that customers actually need, it is possible that digital challengers will win the battle for customer relationships . MIDDLE OFFICE IN THE FRONT SEATAs banks seek ways to modify their operations to fit into the new digital age, their risk management functions are likely to take centre stage in this exercise. In its report The Future of Bank Risk Management published in 2015, McKinsey & Co, a management consultancy, considered changes likely to occur in the function by 2025: ‘It is likely to have broader responsibilities, to be very engaged at a strategic level, and to have a much stronger, collaborative relationships with other parts of the bank’ . Advancements in analytical tools and widespread automation of internal processes will enable banks to offer their clients fast and customised services. Similarly, enhanced capabilities – such as know-your-customer procedures, better assessment of credit risk and cybersecurity protection – should help banks manage their risk exposures. New technology is not without risk, however, especially as regulators around the world are still developing a fitting response to the evolving landscape of financial services, an area which remains fluid in many aspects. Against this background, risk management expertise will be necessary for advising on the digital transformation of the business and ensuring that customer experience and protection remain central to this change. With the external environment experiencing significant transformation, risk management teams will also have to make substantial changes to their internal processes, skills and resources to contribute to the bank’s strategy effectively. Industry observers agree that risk management will have to ‘go digital’ itself if it can deliver on its ever growing list of tasks in the future. And as it becomes a beneficiary of new technologies in its own right, it will be able to produce more granular management information reporting as well as support better and quicker decision-making. Information Technology (IT) is also an area that has the potential to either propel traditional banking to new levels of commercial success or hold it back to a point where bank loses ability to offer competitive services to its customers. The FCA identified siloed IT systems which have limited ability to talk to each other as a significant obstacle towards building a comprehensive customer overview to enable the bank to offer financial products that actually respond to consumer needs. Incumbents are particularly vulnerable to this issue as they need to maintain existing infrastructure – often slow, complex and disjointed – which takes most of the business time and financial resource. Gartner, a research firm, was often quoted last year to estimate that about 65% of overall IT spend in banking would go towards maintaining existing legacy systems leaving limited resources for business transformation efforts . Industry experts point out, however, that to build effective infrastructure fit for the future will require banks to move away from their legacy technology. Furthermore, the new approach should allow for sufficient flexibility which will allow some elements to be managed centrally while others delegated to the relevant business units to launch new functionality or implement changes in a more effective manner. This requires a different approach to managing people and projects.ON PEOPLE AND HOW THEY WORKModifications to the operating models might not have the same effectiveness or impact if they are undertaken by people who do not possess the relevant expertise to carry them out. Brett King, a global banking influencer, has this advice to banks looking to reinforce their future competitiveness: Stop hiring bankers and focus on skills, such as data, machine learning, programming, behavioural psychology and experience design. Most importantly, he reminds that leading transformation at any bank requires digital expertise at the top of the organisation, including its board of directors. Industry analysts concur, however, that these new skills are already in high demand and traditional financial services firms do not necessarily make the list of preferred career options for talented individuals, as they opt for excitement of working in more dynamic fintech environments. Inability to access the necessary talent makes the transformation task even more complicated and experts suggest that overcoming this challenge might involve establishing partnerships with fintech and engineering firms, or even acquiring them. How people work together also matters a great deal as experts point out that the traditional ‘waterfall method’ in managing projects, such as new product or software development, is not effective in the current market environment. Agile working is the way forward, they say, with its iterative and flexible approach to project management, which allows companies to move quickly towards their objectives. Inspired by giant technology names, such as Google, Netflix and Spotify, the Dutch banking group ING implemented the agile model in 2015 with the aim of reducing time to the market, increasing employee engagement and improving customer experience. In its interview with McKinsey & Co in 2017, the bank extolled the contribution made by its 350 nine-person squads – better described as teams containing skills from across the organisation to work on business solutions – towards meeting those objectives . CUSTOMER NEEDS AS THE MAIN DRIVER OF CHANGEOperational transformation is no doubt a time-intensive, expensive and disruptive exercise for the day-to-day business of banking. There is also a significant risk that companies lose sight of the true purpose for this change, which is to build a stronger relationship with their customers. As a result, companies embarking on their transformation journey need to adopt a customer-centric approach that seeks to remove unnecessary barriers to service and streamline product offerings which look to respond to consumer needs rather than sell existing products. Experts also promote a transformation approach which focuses on customer journeys, e.g. opening a bank account or making a loan application, and internal processes which support these journeys, as opposed to modifying the actual products. The key lesson from the success stories provided by digital disruptors in the last decade is not their ardent adoption of new technologies, data processing capabilities or agile ways of working, but their enthusiasm for using these new resources to identify existing gaps in banking services from the customers’ standpoint and address them with intuitive and frictionless solutions. Modern consumer expects banking services provided in a matter of minutes rather than days or weeks. To borrow terminology promoted by Singapore’s DBS, customers are a lot more likely to develop loyalty towards ‘invisible’ banking which operates in the background to their daily lives and will avoid services with distinct and disruptive presence which require extra effort for no additional benefit.