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The three reasons banks fail to embrace digital effectively

I’ve been presenting the theme around what banks have to do to become digital for a while now, and obviously have blogged and written loads about it, and yet something still niggles in the back of my head.  I guess it’s that I’ve written some of the things down, but not all, and the thing that I haven’t blogged in clarity form yet is what stops banks being digital.

Incumbent banks have lots of issues, and I’ve regularly blogged they have to change core systems and have passionate leadership from the whole executive team.  But why?  What’s the real problem with being an incumbent bank?  Surely, we have the upper hand?  Millions of customers, thousands of staffers, hundreds of branches … and therein lies the problem.  The problem is threefold. 

First, banks were built upon a presumption of a branch or face-to-face interaction in a physical space.

Second, their technologies have been implemented based upon this null presumption.

Third, their organisational structures are fundamentally flawed due to product silos.

I summarise these three challenges as a focus upon physicality, legacy and product.

Let’s just explore these three major challenges in a little more depth.

The focus upon physicality I’ve called many times, and it’s this issue of how the bank grew up.  The bank grew up with a presumption of physical interaction.  This foundation of the bank led to branches and relationship managers, and most of the activity of the branch teller and their managers were form filling.  Account opening; KYC; mortgage and loan applications; credit and debit card forms; making international payments; dealing with cash and coins; helping small businesses … all of these things involved lots of transactional servicing.

Then technologies came along – mainframes, ATMs, call centres, internet – and eroded much of the transactional effort.  However, we implemented these technologies based upon the founding structure of the bank: that the transactional, face-to-face relationship is key.

It’s a hard one to let go of but, until we do, we are hampered by heritage.  You can never be a digital bank whist talking about channels and the need to bring the branch along with you.  As I’ve said so often, you need to talk about access and think about what branches are needed for access to digital self-service structures, if any.

This is why the first and most fundamental shift to digital is to accept that this will be a massive change program of the whole bank, not just a project with designated leader.  Digital requires restructuring the bank to a foundation that has the presumption that the internet underlies everything in the bank.  Branches, employees, customers and all technologies are implemented upon an IP-base.  Once that’s clear we can move on to point two: legacy.

I keep saying banks must get rid of their old systems – many of which were developed before Mark Zuckerberg was even conceived! – and implement fresh, new, shiny ones.  Not all banks.  Banks in China, much of Asia, Africa, Latin America and parts of Europe such as Poland ahttps://www.w3.org/People/Berners-Lee/nd Turkey, have core systems implemented after 1994, the year the internet ignited thanks to Tim Berners-Lee  and others developing the WWW (World Wide Web) in 1989.  But the banks that are handcuffed by heritage – mainly those in Europe and America – have to ditch their stinking old monoliths for newly integrated enterprise structures. 

This is a tough call, but the facts speak for themselves.  According to various sources, European banks spent around £40 billion ($60 billion) on IT in 2014 but only £7 billion ($10 billion) of that spend was invested in new innovative ideas.  Most – £33 billion ($50 billion) – was spent just keeping the lights on by patching and maintaining increasingly creaky and fragmented legacy systems.  To put that in real context, less than 20% of tech spend is going into digital innovations; more than 80% is being spent on keeping everything working.  That is just not right.

To me, it is like watching a house on fire and the CIO and his team are the fire department.  The fire department are spending all their time trying to stop the house burning down, and a small amount trying to build better fire prevention systems.  Meanwhile, they haven’t noticed that the owner of the house is pouring petrol on the flames from behind to ensure the fire will never go out.

Fire

The fire of legacy will never be tamed if we continue to spend all of our time investing in keeping it going.  We have to bite the bullet and work out a plan to get rid of it, either through migration or reinvention.  At that point, you go back to the core question: do we evolve the bank or build a new one

The answer to that question will be different in every bank but assuming:

(a)    the Executive Team understand that Digital is a real Change Program for the whole bank and not just a rinky-dink project; and

(b)   they are committed to a massive infrastructural rethink from core systems that cemented in place physical structures to a new enterprise core that enables digital access in real-time;

… and both of those are BIG ASKS …

… but assuming they can buy into (a) and (b) then (c) is pretty easy.

(c) is: what is the right organisational structure for our new bank? and hey, if we’re coming learn and wiping out the old structures, then we can start completely afresh.

So, if you’re starting afresh, would you really have built the bank’s structure today in the way you have?  Of course not.  Today’s structures are awash with baronial masters of houses of cards that are toppling and falling as we speak. Their house of cards is built upon product silos and no product silo structured company will survive in the digital age.

Digital allows you to micoserve mass customers in real-time for almost free, but you can only do this if you have a holistic view of the customer’s data.  And you’ll never have that if the King of Spades won’t share his customer data with the Queen of Diamonds.

House cards

In fact, as I’ve blogged before, banks are only built as product-focused companies due to an error in the 1960s and we can rebuild to be customer centric.  However, we can only rebuild to be customer-centric if we commit to a massive change program from the Executive Leadership team down.

Hence, for all these reasons, the three big challenges of a focus upon physical, legacy and product, can only be broken if the bank truly commits to digital change.  Meantime, if it doesn’t, what then …

Bank dead

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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  • For the majority of banks I totally agree and this was the basis of my work for Lloyds Single Customer View in the early 90’s. However I would add there has to be a clearer distinction between manufacturing and distribution. Distribution (front office) has to be customer centric, removing product silo’s and even widening choice to becoming a “marketplace”. Whilst manufacturing focuses on scale and lowest cost. Some banks may also need to decide whether they should do both manufacturing and distribution.

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  • Romain ZHOU

    I am wondering if there is any special regulation or rule on Digital-only banks in the UK?