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Three key steps to becoming a Digital Bank

I had a fascinating conversation with a bank about digital strategies, and am now well versed in my approach.  A bank has to redesign itself from the ground up to be digital.  It’s not a channel or an add-on, but fabric and foundation of the new way to bank.  Old systems that process in batch over days no longer are relevant in a real-time mobile world, so we must rethink.

To do this, we have three challenges: first to buy into digital; second to get everyone on board; and finally to convince our customers.

The first part is the hardest part: to buy into digital.  What I mean by this is to have the executive team really understand what transformation is needed.  This transformation is turning the banks’ operations on their head and replacing the physical foundation with a digital one.  For the past fifty years, banks have cemented their foundations in physical structures.  It began with automating branch operations with centralised systems.  Mainframes that stored branch ledgers and automated deposit accounts for internal efficiency.

Our discussion of channels then arose as we layered things on top of those centralised ledger systems: ATMs, call centres and more recently internet and mobile.  It is the reason why our internet services look just like the debit and credits of those old bank branch ledger systems.  Because they are. 

The bank I met here said they were the first to automate anything with an IBM mainframe purchased in 1961.  I asked if the system was still operational.  He said it was in a museum now, thank goodness but, you never know.

In other words, we are fifty years on from those first technologies and our systems are still working as they were fifty years ago.  We just access them through digital devices today.  We have to change this.

When a bank therefore mentions the digital channel, I know they don’t understand or buy into this process.  When a bank introduces me to their Head of Digital, I know they don’t’ buy into this.

This is because digital is not a channel or function, but it’s a fabric and foundation of the new bank.  The new bank needs one common digital infrastructure that underpins the whole bank.  The new bank will have buildings and humans layered upon that digital infrastructure, but it needs to convert thinking from having a physical foundation with channels on top to a digital foundation with access through physical and digital media.

If a bank really understands this, then they understand that this is a bank-wide change program that has to be led by the entire executive team, not by one person who’s been given the job.  When the entire executive team has brought into the program, then you can move onto the second phase but, before we get into that phase, what exactly is the executive team buying into?

They’re buying into a reformation of the bank.  A reformation that involves re-thinking all of their processes, structures and operations.  A reformation that involves becoming customer-centric, not product-pushers.  New banks create conversations with communities where they become relevant through relationships in the space where the customer is most active: mobile social.  Old banks push products through channels, where they cross-sell by aggressively marketing through the space where the customer is most seen: old media.

What I’m describing here is a huge leap of thinking amongst the leadership of the institution and most institutions do not have this.  It’s too hard.  They haven’t brought into the process and don’t’ see the reason why.  Where’s the burning platform.

Well, here’s the burning platform.  If a bank thinks they can layer digital over physical, they will fail because the new entrants who are layering physical over digital beat them hands down on margin and rates.  It is why P2P lenders are succeeding so fast. A P2P lender enables those who have money to transact with those who need money through software and servers.  Banks core business was doing just that: managing the risk between deposits and loans; but banks do this through humans and buildings.  P2P connects through the network and therefore achieves a differential of a few basis points.  Banks just cannot compete with that cost model unless they convert to digital.

The same is true of payments – TransferWise, Klarna and Blockchain being examples of the shift in this space – and many other areas of banking from Wealth Management (Betterment, Wealthfront, Personal Capital) to investment banking (eToro, BATS Trading, Addepar, Quovo).  So banks that think they can ignore this space need to wake up, shake up and become lean and digitally mean.

In fact, to really underscore the true impact of these lean and digitally mean new entrants, Goldman Sachs http://www.p2p-banking.com/services/prosper-goldman-sachs-quantifies-potential-impact-of-us-p2p-lending-on-bank-profits/ say that they will steal 8% market share and 7% of bank profits over the next five years, doubling to a 14% market share in ten years when, according to Foundation Capital http://venturebeat.com/2014/05/05/dozens-of-p2p-lenders-will-hand-out-1-trillion-in-2025-vc-predicts/ , the P2P lenders and crowdfunders will manage $1 trillion worth of credit.

THAT is a burning platform, especially if you add in the other sectors of payments, wealth, investment and retail.

So once the executive team buys into the Change the Bank program, phase one, things get harder in phases two and three (just when you thought I was going to tell you it gets easier).  How are you going to change the bank?  What are you going to change the bank into?   Does the bank stay in its current form or become a new bank?  Do we keep the old bank name or create a new bank brand?  How do we bring the staff with us?  How do we change their culture to be digitally enabled and focused and confident?  What does this mean to our products, services, processes, structures, operations?

In other words, this is the implementation phase and it’s not just implementing the new digital foundation of the bank but it’s bringing the whole company along with you.  For some banks, this will be too hard and they will quit.  For some banks, this will be too hard and they will just invest in creating a new bank.  For some banks, this will be achieved, but it will take time.  Plenty of time.  Probably five to ten years in time.  Now you might say that’s too long! but no, it’s long enough.

After all, we are talking about a massive bank transformation of systems, organisation and thinking, and that takes time.  For the systems, there needs to be migration plan for agility which, at its heart, places data analytics at its core.  That data must be in a separate structure to processing.  In other words, data is cloud-based and is separate to processing.  Too many banks have their content (data) tightly coupled to their servers (processors).  This is the reason why they cannot change their systems because their systems have to run 24*7 non-stop with zero downtime.  You can change that by placing the data into a cloud-based warehouse, but it’s going to take time and planning.  Once that data is cleansed and in the cloud, you can shut-down the engines (the servers and processors) overnight and replace them.  But you cannot do this when your engines have the data locked inside.

For the organisation, the organisation has to become customer-centric.  Too many banks have product silos where cards don’t talk to lending, who won’t work with insurance services, who have no idea what the deposit account team does.  That is ridiculous and I’ve written about this many times (my favourite is equating this to if Amazon was a bank).

The organisation has to be customer-centric and by this I mean that they become a trusted advisor, based upon a holistic view of the customer.  That holistic view integrates internal data with external data, and allows the bank, through their data analytics, to become a trusted friend.  Where do you find your friends?  In your social network of course.  And so the new bank becomes my friend by being relevant in giving me advice when appropriate. 

Hey Chris, we see you recently liked the Mercedes AMG through your Facebook page, and would like to help you get one.  You’re good for a loan with us to get this  new one, which has just become available through our partnership with Mercedes at a 20% discount.  We know you can also afford the monthly repayments of $450 a month as you just finished off your last loan with us on your five-year old BMW.  Let me know if you want to talk about it here or on the phone, and please let me know if this is the sort of thing that interests you or, if not, we’ll just stop talking about it.   

Hell yea, 20% off and it’s affordable, I’m good to go.  The thing is that this takes a customer-centric view, but needs digital customer service staff to make it happen.  These teams may come from the existing branch operations, as they’re sliced and diced, but they need to be good on social networking and Skype.

In other words, different skill sets and different focus.  Equally, it’s not meant to be around product-pushing  but conversational dialogue.  This may look like a loan push to you, and it is, but it’s based around knowing me as an individual, my preferences, my social dialogue and, most importantly, permission to have this conversation.  I will have connected with my bank as my trusted adviser to allow this conversation and can switch it off just as fast if you break my trust.

It’s all about trust.  Not product-pushing, but contextual conversation that’s allowed and appropriate.

Finally, in phase two, the thinking must be right and this relates to the discussion above in that, as systems and organisation are changing, so is the bank’s culture.  The leadership team are communicating, the systems are changing, my role has moved and I’m getting new messages and training in how be socially digital in finance.  Hey, I’m a new employee!  Once the staff get that, the whole bank gets that.  The buy-in therefore phase one is from the executive and then, in phase two, it’s from the whole team.

Then comes phase three: converting customers to be digital.  I’ve heard a number of banks say ah, our customers aren’t ready for this.  We’ve given them the technology and they don’t want it or use it. Maybe.  Or maybe it’s not the right technologies or communicated correctly or targeted effectively.

For example, the case study I often refer to in my presentations is mBank, because they transformed. They went through most of the process I’ve described above: led from the top, pushed through the organisation, transformed from top to bottom and then delivered to customers.  But the really interesting aspect of the mBank story is how they delivered to customers.

The bank rolled out the new services and persuaded customers to switch in four phases:

  1. Sign up to the new bank services as a pre-registration (leading edge customers)
  2. Sign up to the new bank services from the big launch campaign (early adopters)
  3. Sign up to the new bank services through targeted communications (demographic focus)
  4. Switch to the new bank services because of all these benefits (mass market)

The first phase got the cool innovators and second phase many digital natives.  The third phase captured mainly millennials who like the idea of mobile social, whilst the fourth phase was targeted at the mums and dads, aunts and uncles.

What I liked about this is by the time they got to the fourth phase, after around a year, about a third of customers had switched from the old bank service to the new bank service.  Now the challenge was how to get those   mums and dads, aunts and uncles to switch.  So there were two hooks.  The first was to advertise that new mBank was just like old mBank, their original branch ledger and bill pay style internet bank system, but with all these extra benefits: it’s on the mobile; it’s integrated with social networks; you have Skype-to-call if you ever have a question; you can checkout your statements in a Google-style search; you can see your calendar of forthcoming payments, not just ones that have been paid; and so on.

But the real hook, the killer hook, is that you can now connect financially with your sons, daughters, nieces and nephews.  Hey, it’s a family thing.

After a eighteen months from launch, the bank has managed to get over 70% of customers to use the new digital bank services and, for those who are loathe switching, I think they will be eventually told that there will be a charge for staying on the old bank platforms.

In other words, it’s all about converting humans to be good with finance digitally through simplicity, convenience, communication and insight.   It’s a design thing.   You need digital banks designed by humans to be used by humans.  In fact, I often talk about the humanity in banking and this blog post covers some of this.  The humans in the leadership role need to be converted first; then their team; and finally their customers.  It’s all about having life augmented through digital structures that humans can leverage.  Simple as that.

 

 

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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  • > “If a bank really understands this, then they understand that this is a bank-wide change program that has to be led the entire executive team, not buy one person who’s been given the job”
    It strikes me bank executive teams are much more worried about Grexit, the next regulation coming at them or getting through the next results cycle.
    The irony is they all *think* they understand digital, they may even start to *sound* like they do. Talking about their new smart phone, pushing the latest “targeted loyalty marketing campaign” that cost £80 million and barely made 10% of that back in revenue…
    Pretending to understand is the worst kind of sin. It alleviates the management team from the burden of having to take long term, strategic bets. When they do invest for the future, the company wide change programmes are usually just a head count reduction and a re-org. That isn’t bravery, that’s giving the problem to someone who’s CEO – 5 and can’t get the political support to do anything brave.
    Then there’s a whole team of 20, sometimes MANY of these teams dedicated to finding disruptive innovation and bringing it to life.
    Except they never do.
    There are two types of big banks
    Those who are digital from the inside out (often less sexy looking / feeling but actually growing) and
    Those who are digital on the surface (they’ll have some fancy APIs, maybe mobile app awards but their core is rotten, every 3 years or so they go through a big head count and branch closure cycle, their business is eroding but life goes on)…
    There is no technology strategy, because events, markets and policy are very distracting.