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Digital channels are just lipstick on a pig

I just sat through a nice presentation from Cognizant President Prasad Chintamaneni at the CEB Summit in Boston …

Prasad

… and was pleased to see others referring to channels and front-end investments as sticking lipstick on a pig.   Something I’ve been saying for a while, as you have to re-engineer the core to be fit for digital, not just keep sticking things on the front-end; and the only reason we talk about channels at all, is because we have just one in the 1970s – the branch – and have been sticking crap on top of that legacy for the last fifty years, cementing it in place thanks to our channel overlay.  We have to get out of that and rearchitect for a digital core where there are no channels.  There’s just access to the digital core. 

Anyways, I’ve blogged about this so much, I’m starting to get repetitive so, rather than do that, I was intrigued to see the questions posed to Prasad at the end and thought I would discuss them here.

Which of the forces driving digital do you as the nearest-term threat to traditional financial institutions?

Probably social lending and crowdfunding.  According to Foundation Capital this is forecast to rise to a trillion dollar market by 2025 and I see Kabbage, Lending Club, Funding Circle and more taking a huge slice of the traditional credit market from banks.  Some say that banks are just offsetting direct credit risk to these guys through wholesale funding of their businesses.  I say that if lean and mean loans and savings firms offer services on a razor-sharp margin basis directly through servers between savers and borrowers, then what are the banks left with?

How do you drive adoption through an aging customer base?

 Well it’s blatantly clear that the highest earners are often the most digitally savvy and it also intrigues that we think millennials are where it’s at, whilst banks like Fidor say no, it’s the over 40s.  Digital is not an age thing so much as a mentality thing.  How do you look at the world and how smart are you with tech?  Often grandpas and grandmas are the ones with the headphones on at the dinner table these days, and you have to tell them to stop texting.  It’s not always the kids.  However, the real point of this question is what are the incentives to use digital?  That’s easier to answer: it’s giving people control of their money 24*7.  That’s what is really driving adoption.  That people can see where it’s at, what they are doing with their lives financially, and can control that in real-time.   That’s the incentive.

Given the regulatory environment, what will happen to the digital disrupters when the CFPB (Consumer Financial Protection Bureau) look at them?

Great question.  Many think that digital disrupters are liked by the regulators as they are creating more competition.  Of course, they are; but are they also creating more risk?  If all the SMEs getting loans through Kabbage and Funding Circle on the basis that they don’t meet the risk criteria at the banks, what risk criteria are Kabbage and Funding Circle using?  That’s going to be an interesting development over time.  Maybe it means that all the upstarts gradually feel the pinch of the regulator’s hand on their collar and, over time, start behaving just like banks.  As they do so however, they’ll have stolen a good portion of current bank business.

Many of the success stories for digital finance are in the consumer retail side of things.  What impact will digital have in other areas?

To be honest, digital is mainly discussed in consumer lending and payments right now, but it’s impacting just as much, if not more, elsewhere in commercial and investment banking.  Looking at things like Holvi, eToro, Betterment, Personal Capital, Currency Cloud, Ripple and more, you can really start to see a digital rearchitecting of the system.  Some banks are part of the rearchitecting, such as Deutsche Bank with their Autobahn App Store, but most are still going Digital What? I feel sorry for those ones as they won’t be around in a few years.

Can you point to anyone who’s doing this digital bank strategy right?

I always point to a small few like mBank in Poland, Fidor Bank in Germany, ICICI Bank in India, Commonwealth Bank in Australia, Deniz Bank and Akbank in Turkey and even USAA and Bank of America.  The reason why I pick on these is that they have all embraced digital fully and taken significant steps to adapt and adopt.  For example, ICICI place all their customer service in Facebook communities, as does Fidor and Deniz Bank.  USAA is investing in cryptocurrencies and are renowned for great digital remote service, but you cannot ignore what Bank of America is achieving with mobile digital services for the masses such as location-based loyalty discounts using Cardlytics.  CBA transformed the bank through cloud and mBank threw away the mother ship – BRE Bank – to become truly digital.  All of these deserve credit.  There are more out there too btw, but these are the top of mind examples.

What advice would you give to a bank that needs to transform to digital?

Make sure the CEO is committed and, by that, I mean the old chicken and pig breakfast sort of commitment (the chicken participates, but the pig is committed).  Does the CEO believe I this and are they aware and knowledgeable of what digital means to the bank?   Are they leading the change or delegating it? These are critical questions as you won’t succeed otherwise.

There were lots other questions but maybe the last one was key:

Is Fintech going to destroy banks or will banks adapt and survive as Fintech reformed?

I’ve been playing this question on the blog for the past week, with the argument that we’re adapting winning over being destroyed.  Nevertheless, it’s easy to argue either way.   The net: net is that banks will be destroyed if they ignore Fintech and the digital reform it is introducing to finance.  That’s the only thing you really need to focus upon. 

More on this later …

 

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • The question here is about opportunity
    Opportunity #1 Continue to cut costs in core markets, and be commoditised. Gradually eroding your customer base to become a profitable, smaller bank that never quite lives up to it’s potential. Outlook ~RoE will rise and fall with economic conditions
    Opportunity #2 Commit from the CEO down, into the tech strategy. The CEO MUST understand how the core is to be modernised, replaced or adapted. Even if this start’s at the margins of the business. CBA, mBank… as you say. This works. Outlook ~RoE will dramatically improve as will share price
    Of course #2 is harder. Mostly because your executives and staff won’t understand it.