It is becoming more and more difficult for traditional banks to compete in an increasingly digital marketplace. With most bank systems stuck in the last century, the conversion of legacy technologies to new platforms with total reliability, security and resilience is a massive challenge.
How can today's banks evolve to a new model of servicing and processing, where the mobile internet allows consumers to bank wherever and whenever they want using an increasing array of devices? How can banks leverage their existing foundation to compete with new and nimble mobile-first competitors?
Best known as an independent commentator on banking and the financial markets through the Financial Services Club blog and Chair of the networking forum The Financial Services Club, Chis is the author of several previous books covering everything from emerging regulations to innovation and new currencies. He is also Chief Executive of Balatro Ltd, a research company and a regular commentator on BBC News, Sky News and Bloomberg on banking issues.
In reading an advance copy of Digital Bank, I found that Chris provides a great overview of the digital revolution in banking from channels to systems to emerging currencies. He also provides in-depth analysis of the how incumbent banks such as Barclays to new start-ups such as Metro Bank in the UK, Alior Bank in Poland and FIDOR Bank in Germany are building for a digital future.
As several noted fintech followers mention in online reviews of this book, Digital Bank is the most recent must-have for anyone wanting to help their organization stay relevent in banking or for businesses wanting to better understand the impact of digitalization on the marketplace.
What inspired you to write this newest book?
I've been blogging daily since the start of 2007 at the finanser.com. With the blog, I would write a series of four or five posts on a particular subject, like why branches were the wrong focus, how data is becoming the new banking battleground, why existing banks have challenges, what organizations are innovating in unique ways, etc. These posts were never edited or placed in any sequence, but provided a great foundation for potential chapters in a book. So, I finally got around to taking all of that experience and all those thoughts and personally editing them into a readable, digestible, logical book.
What do you hope readers take away from your writing?
The overarching theme of Digital Bank is that banks are being fundamentally restructured and challenged by the Digital Age. From physical services through physical branches, we have rapidly become a business that provides digital products through digital relationships. That leap is not happening fast enough, however, as most banks are tied to their traditional operational, technological and physical structures. This book provides a roadmap to take that old bank into the new world, how it can be achieved, proof points as to why it is needed and lessons of what to do and not do. Anyone dealing with digital bank distribution through the mobile, social internet will find it useful.
What is the biggest challenge traditional banks face in their move to become a 'digital bank'?
We talk about a Digital Divide between the Haves and the Have-nots, and the same divide exists within banks between the Believers and the Non-Believers. Some bankers believe the future is all digital, some believe it is just another channel added to the existing branch-based network. It is the Non-Believers who are the challenge, as many of them will dismiss and hold back change.
By way of example, those that built the bank do not want to destroy the bank they built, so they will do all they can to defend it. If they built a branch-based bank, building a digital bank that destroys much of the reason for the branch-based bank's existence is unnerving. So, they will block all efforts to digitise the relationship. That is the core challenge . . . how to convert the traditionalist decision makers to really commit to digital. Once you have that commitment, it's still not easy, but no bank will succeed if the management team is not truly committed to the program.
By way of example, those that built the bank do not want to destroy the bank they built, so they will do all they can to defend it. If they built a branch-based bank, building a digital bank that destroys much of the reason for the branch-based bank's existence is unnerving. So, they will block all efforts to digitise the relationship. That is the core challenge . . . how to convert the traditionalist decision makers to really commit to digital. Once you have that commitment, it's still not easy, but no bank will succeed if the management team is not truly committed to the program.
What institution(s) globally have made the greatest strides to embrace the future? Why?
There are quite a few stand-outs for me, from some of the major banks who are investing heavily in innovation projects, such as Citi, to regional banks who have reinvented their technologies, such as Commonwealth Bank of Australia (CBA), to smaller banks who are changing the rulebook, such as BRE Bank in Poland. The common theme in all of these banks is that they are truly commited to change.
Citi has invested millions in innovation centers and proejcts across the world, as well as ripping open much of their processing to offer transaction banking as an API, for example. CBA has placed most of their core processing infrastructure in the cloud. Even though the internal management was pretty reticent about this change initially, once the CIO got the regulators endorsement and they moved forward, it made them far more agile as well as saving 35% of their cost base year-on-year for systems support.
Finally, BRE Bank was being massively challenged by a new entrant called Alior Bank in Poland, a fully mobile-social networked bank. In response, BRE decided to reinvent the bank. They invested in a new core system, installed it over 14 months and, once completed, threw away the old bank and now call themselves mBank. You heard me . . . they shut down the old bank and replaced it with one fit for the Digital Age. I'm not saying everyone has to be so bold or brash, but when faced with bank competition fit for the Digital Age, you've got to do something fundamental to compete or your organization will no longer be relevant.
Yes and no. From a technology standpoint, newer organizations are obviously better fit for the future as they start from a clean operation. There's no legacy systems and there's no previous installs of branch networks, contact centers or online banking. So, they can really push the boat out for creating the right infrastructure and process for customer engagement at the outset. That's what Moven and Simple are doing in the USA, and we see other examples like FIDOR in Germany and Alior in Poland that are doing the same.
Are newer organizations (as opposed to traditional banks) better positioned for the future?
Yes and no. From a technology standpoint, newer organizations are obviously better fit for the future as they start from a clean operation. There's no legacy systems and there's no previous installs of branch networks, contact centers or online banking. So, they can really push the boat out for creating the right infrastructure and process for customer engagement at the outset. That's what Moven and Simple are doing in the USA, and we see other examples like FIDOR in Germany and Alior in Poland that are doing the same.
However, new banks do not have the same bank relationships, branding, governance or knowledge of risk, compliance and audit that traditional banks have in their blood. That's why it took Metro Bank twice as long to launch in the UK as they wanted. They had to get the right management team, endorsed by the regulators, to open their doors. Then they had to get the capital to cover the guarantees of funds that the regulators demand for those customers they onboarded.
None of that is easy, and it takes deep pockets to get a bank licence and the guarantees that go with this. But, here's what stands out for Metro Bank . . . the fact that they were fit for the future with technology meant that they reinvented their digital bank services within three years of launch. They are on their second generation internet banking platform already. That's down to having the right technology operations from the get-go, to be able to be that nimble and quick. So, I would say that new players are fit for the future from a technology standpoint, but they need to be fit for the rules from a bank standpoint before they can really play.
If a bank wants to be positioned for the future, where should they start?
That is the question all banks are asking. Where to begin. I would rather start with 'where do you want to end up'? Then build the transition path between here and there. Where's your vision for the future of your bank? How radical is that as a departure from the bank you have today? What will be involved to get from here to there? Who is going to make it happen and by when?
That's all simple management change program thinking, but the hardest part is to build the vision because often we will be hampered by the thinking of where we are today. We have branches, we have contact centers, we have an online bank. You have to just dump that thinking from the start, when building your vision, or you will fail. That means bringing in fresh thinking, which will not be dogmaed by internal constraints or history.
Ideally, create a new team with a leader from outside the bank who can look over everything with a fresh pair of eyes and create the future without constraint. The hard part is then taking that team's thinking back into the bank, as it usually means cannibalising or destroying parts of the old bank to build the new bank. But it can be done. Again, it all goes back to how committed the CEO is to the process. If the CEO is committed, then anything can be achieved.
That's all simple management change program thinking, but the hardest part is to build the vision because often we will be hampered by the thinking of where we are today. We have branches, we have contact centers, we have an online bank. You have to just dump that thinking from the start, when building your vision, or you will fail. That means bringing in fresh thinking, which will not be dogmaed by internal constraints or history.
Ideally, create a new team with a leader from outside the bank who can look over everything with a fresh pair of eyes and create the future without constraint. The hard part is then taking that team's thinking back into the bank, as it usually means cannibalising or destroying parts of the old bank to build the new bank. But it can be done. Again, it all goes back to how committed the CEO is to the process. If the CEO is committed, then anything can be achieved.
What is the biggest change we are going to see in banking in the next 5 years?
The biggest change is from a number of perspectives. From a regulatory point of view, there's the dull stuff about banks withholding more capital for a rainy day, better management of risk (especially liquidity risk), increasing competition and transparency, and financial inclusion (open banking for all).
From a customer point of view, the beat towards mobility will continue. All banks are focused upon delivering killer financial apps for corporate and consumers today, and that will pan out into a digital wallet fight. Then it gets interesting, as banks will soon drop the focus upon the device - the cellphone - and move on to focus upon the customer experience. This is because the world is rapidly moving into digitizing everything. Putting chips inside a pair of glasses or a watch so that Google Glass or Samsung Galaxy Gear Watch can replace the laptop or the phone. Then we will start to put chips into walls, floors, ceilings, gutters, handbags, clothes, jewellery and lightbulbs (We already are doing this, in case you hadn't noticed).
Eventually, everything everywhere will be communicating. From you to intelligent systems and services all around you, in the air, all day long. Like the Minority Report, everything will be intellisensing everything, and service will be augmented to be relevant at the point of your customer's context. This means that banks will move from device to wallet to understanding how to be a proactive, predictive enabler of commerce at the point of relevance to the customer. That battle is going to be a tough one for banks stuck with branches, as that's a digital data war. And that's what the book is all about, how to win customer mindshare as your audience interacts digitally with everything.
Chris Skinner is best known as an independent commentator on the financial markets through the Finanser (www.thefinanser.com) and Chair of the European networking forum the Financial Services Club, which he founded in 2004. The Financial Services Club is a network for financial professionals, and focuses on the future of financial services through the delivery of research, analysis, commentary and debate and has regular meetings in London, Edinburgh, Dublin and Vienna.
He is the author of nine books covering everything from European regulations in banking through the credit crisis to the future of banking and is a regular commentator on BBC News, Sky News and Bloomberg about banking issues.
About Chris Skinner
He is the author of nine books covering everything from European regulations in banking through the credit crisis to the future of banking and is a regular commentator on BBC News, Sky News and Bloomberg about banking issues.
More can be discovered about Chris here: http://thefinanser.co.uk/fsclub/chris-skinner/
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