So yesterday, I identified the three biggest challenges to banking today based upon a major dialogue on social media with the Next Bank Facebook community. Those three barriers are regulations, legacy and culture.
The three barriers are intertwined in a vicious circle. Regulations stop banks from innovating; legacy systems stop banks from innovating; a risk averse culture stops banks from innovating. All three things work together to wrap the bank in ropes of stagnation. Management are unwilling to change systems because it is too risky. Management are unwilling to place systems in the cloud because it is too risky. Management are so focused upon regulation, that innovation takes a back seat.
That’s one view of the world. The other view is that these are intertwined reasons for doing nothing.
These are excuses put into play by some banks and bankers to ignore innovation and change, and focus upon the status quo and shareholder value.
That is the key question: how do you create shareholder value?
We had this debate last week in a discussion around making dramatic change within the bank. One of the key executives said to me: what makes you think we can focus upon customers and innovation and moving digital, when our critical focus is shareholder value? We cannot innovate unless it delivers shareholder value. That is why you need to show me the ROI before we’ll invest in digital. We need to see the numbers.
I regaled, by saying that shareholder value and stakeholder value are mutually inclusive, not exclusive. You can deliver greater shareholder value by investing in people and process and innovation and change, than by stagnation and constraints. Banks will die from false constraints. That’s the key.
These constraints are false. The legacy, shareholder value, regulatory and cultural constraints are false.
I do not know one bank that has not been transformed if the leader has the courage, capacity and competency to make the change work.
Take the example of Michael Harte, Chief of Operations and Technology at Barclays Bank and former CIO of Commonwealth Bank of America. I loved his story of presenting a strategy to the Board of CBA to move their infrastructure into the cloud and the bank’s executive team said nah, too risky mate.
Unperturbed Michael went to the regulator and talked through the plan. Come the next Board meeting, he represented the plan to the Executive Team but this time had the regulator in the room saying it’s a good idea y’all. Now that’s the way to make change happen, and change they did. In so doing, the bank saved 35% of their cost of operations per annum by moving into the cloud and became the most agile bank in Australia, from a technological point of view (just look at their list of innovations).
Or take the example of mBank in Poland. A bank that was doing well – it was the fourth largest bank in the country – but could see it had fallen behind in both brand perception and capability, so it transformed. Now it’s the third largest bank in Poland and has won every award out there for innovation, but they weren’t that innovative. They were just courageous. They had a CEO who could see the problem and had the guts to change it.
So these three barriers – regulation, legacy and culture – are false barriers and are caused by false leadership. A bank CEO could sit there, as one told me, and just do nothing. Just oil the machine, and you’ll deliver all that’s needed from a shareholder’s return point of view. In fact, by investing in nothing, most banks would make greater shareholder returns than by investing in something.
But if you don’t invest in anything, that’s a process that will keep you going for a year or two and then, before too long, all that deferred investment will have to be spent in one year to catch up with the stagnation it caused.
So you have to invest in something. Then a risk averse leader will invest in the only the things that have to be done. That creates a risk averse culture and one that focuses upon just doing what the regulations require. That requires no legacy renewal. It just demands a lot of tinkering. These banks get incremental improvements and maintain parity with the industry, but they don’t achieve anything special. Achieving something special takes courageous leadership that has a vision.
And there’s the real rub. A differentiated bank is one that has a vision, strong leadership and the guts to make something happen.
That’s what I’ve seen in CBA, mBank and a few others – ICICI Bank, Akbank and, to a lesser extent, Wells Fargo and Barclays – but it’s rare. It’s rare because most banks and bank leadership only want to do enough. They’re not interested in doing their best. Just enough.
Just enough is good enough if you’re a screwed up bank but, for any bank that’s running on gas rather than running on empty, you can do so much more. So be courageous in leadership and give our people the culture to innovate to overcome the false constraints of legacy and take regulation to create innovation.
Just a thought.