Most banks have evolved from days of branches and large offices, to banks with multiple channels of distribution and extensive technology backbones.
The issue banks have with this structure is that the technology backbone is broken.
This is well illustrated by a comment from one payments manager who said to me that he gets his highest rating for performance if he changes nothing. This is because the complex beast of transaction processing is best left alone. If it ain’t broken, don’t try to fix it. Leave it well alone.
This is why some banks have payments systems that are ten years, twenty years, thirty years old or even older. There is the classic story of one UK bank that still processes in pounds, shillings and pennies – a pre-decimal system – and Britain converted to decimalisation back in 1971!
But this just isn’t good enough anymore. Not only does it mean that banks are intransigent to change, but they will also be outsmarted by new players.
For example, it’s already seven years since Europe determined to introduce the Payments Services Directive and the Single Euro Payments Area, and we still have no end date in mind, nor do we have any idea how to get our customers to migrate to these instruments.
Many say it will be 2018 or after before we get to a fully-integrated Eurozone. That would make it a sixteen year change program.
Similarly, most banks will admit that there are so many councils created to provide governance over the change of these systems, that you can only move at the speed of the slowest player … that is why change is so slow in the backbone infrastructures of this industry.
But it won’t be slow for the new entrants: the Payments Institutions.
It wasn’t slow for PayPal, who have rapidly become one of the largest payments processors by volume of transactions, and yet they are not even ten years old.
What PayPal achieved, and other Payments Institutions will do the same, is not just to build innovation on the old, out-of-date, legacy backbones … but to completely rethink the payments process as a layer of innovation above the backbone.
This will happen more and more with other Payments Institutions.
Where this leads is that banks need to fragment themselves.
Break the bank into pieces.
Each piece should represent a piece of functionality, a process, a capability.
And for each piece of functionality, a process, a capability, the bank should ask hard questions: are we good at this? Should we be doing this? Could we provide this service to other banks? What would it mean if we did? How much do our customers value this? Would they pay for it?
Without this hard analysis, banks will stagnate in the sandpits of historical approaches, where legacy builds upon legacy, and the bank tries to serve all customers across all channels in a bank managed way.
Doing the above results in average and will never be exceptional.
Instead, banks should focus upon who they are trying to reach and serve, and in what way.
They should then look to see which areas of this service they can deliver exceptionally and, where it is average or below average, either improve it or junk it.
This means that the old way of banking, where the bank would deliver the entire infrastructure, product and service in a vertically integrated package, is no more.
Today, for banks to compete, they must focus upon where they have strengths, and outsource the rest to the best provider of the services they need to offer around their core competencies.
Equally, a bank must stop believing that they can serve all of the people all of the time. That is the reason banks have expensive legacy overheads because they are trying to keep the old products alive for the old customers, whilst trying to innovate services at the other end for the new customers.
The result of a bank believing they have to do everything internally end-to-end and serve all customer demands from legacy customer channels and instruments to new ones, is failure.
Banks must rationalise to categorically reach and serve the customers they want to reach and service the best, and internally restructure to process and manage only the parts of the customers’ processes they are strong at delivering internally whilst outsourcing the rest to the best.