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Why most banks fail at transformational change

I had a few wake up calls in my years of working in financial services, and a couple of key ones gave me an insight into the mentality of major financial firms that have stayed pretty true ever since.  The first was working with a major bank on a process re-engineering project.  We had narrowed down the project to one of two areas: payments or mortgages.  I was really keen to try rethinking the mortgage process, as it was complicated and challenging.  Spanning several products – mortgage loan, life assurance products, home insurance products and the deposit account – it would be an amazing leap in thinking.  We had already rebadged the mortgage making a home, and realized that the customer experience could be transformed.  Customers didn’t want to have a mortgage product or financing to buy a home, we had realized.  What they wanted was to feel safe that they could afford to buy and eventually own the house they had found.  This fact was forgotten in the 2000s, when we had a house buying explosion fuelled by Credit Default Swaps and Buy-to-Let Landlords, but the key to the mortgage and home buying process is the ability to afford the loan, the security of living in that home, and the confidence of eventually owning that home.

Meantime, the payments process – which the bank called money transmissions – was just a bit boring.  It was looking at taking a few percentage points off the cost of moving money from bank-to-bank via BACS, CHAPS and SWIFT.  Yeuch.

The bank chose the latter project however, much to my dismay.  When I asked them why we had to do the boring project, they answered: because it’s safe.  The decision maker felt that the mortgage project was not only too big to pull off, because it involved so many line of business heads and spanned multi-functions and multi-products, but was too risky to succeed until they had gained some experience of re-engineering first.  Hence, they chose the payments process as their first and only project.  They never got around to rethinking the home making process and, twenty years later, when I met the guy who was the decision maker, now retiring, he said to me: “you know Chris, I wish we had done something bigger, but the bank’s culture is to avoid step change”.  I asked him if the mortgage process was still the same, spread over many lines of business and zero integration.  “Yep”, he sighed, as he walked into the vault (bankers never retire, they just move into the vault).


So then another project some years later came to light.  This project was for a large insurance company and we were going to embark on a step change project.  The project was half way through, and we had started with: how would we build this company today if it didn’t exist?  After days of brainstorming processes, products, services and structures, we had designed the ultimate customer process.  Our project had begun by looking at how the customer interacted with the insurance group and how, if we were the customer, we would want to interact.  After some deep dive sessions, we had created the ultimate customer touch vision, and had then come back to Earth to see how that vision related to the current insurance operations.  They didn’t.  We concluded that to create the ultimate insurance company we would have to transform the firm and re-engineer systems, structures and services to build the #1 insurance company in Britain and possibly the World.


Unfortunately, the project got shot down by the CEO before it got to fly.  The reason given is that the company did not need to be the ultimate customer experience or #1.  They were doing fine as they were.  In a debrief session with the Head of Innovation, he told me that he had really pushed the project to succeed but the CEO was retiring in 18 months and did not feel it was worth the risk.

The reason I recount these two stories is that they pretty much sum-up the culture and attitude of the average incumbent financial firm.  Most of the firms are run by CEO’s who have risen to the top of the organisation over decades and only have three to five years to make their mark.  By the time someone suggests a transformational moment, the incumbent CEO believes it is far too risky to their short-term tenure to take a long-term bet.  This is why most incumbent CEO’s don’t change core systems, don’t transform processes and products and don’t do anything radical.  It’s not worth it as they just want to steer a steady course, get their shareholding bonus and build a nice pension pot.

Equally, when it comes to transformational change, it is rarely viewed as worth it.  Because most of the institution’s competitors are doing nothing radical, the incumbent does the same.  Fast following and low risk incremental change are the mantras of the industry.  Transformation, disruption and step change breakthroughs are relatively unheard of.

This may be the biggest risk to the incumbent institutions today however.  After all, Fintech is completely dedicated to transformation, disruption and breakthrough change.  If banks stick firmly to their low risk incremental strategies, they will never be able to keep up with the fast moving transformational Fintech community.

Now some banks seem to be trying to create ways to embrace this change: incubators, accelerators, hackathons, Open days, investment arms, venture capital funds and more are all there, but it doesn’t mean the banks mentality has changed.  Banks are still led by CEOs who came to the top of the heap as CFOs with financial acumen or CROs with risk aversion.   Very few CEOs were technologists or even understand technology.  They don’t understand why the bank can’t deliver a simple app and believe that blockchain is something they have to have, but have no idea why.

Don’t think that I’m dissing these guys, as if I would.  Just as I have no idea how a butterfly option works or the differences between IFRS and GAAP accounting, it doesn’t mean I’m stupid.  It just means that I’m not qualified to run the investment bank or the finances.  Do I need to understand them?  At basic level yes, otherwise how could I be heading up the bank, but at a detailed level I just need to make sure I have the right talent that I can trust to look after these areas.  This is what really concerns me in most incumbent banks, in that they have the wrong talent.  The person looking after the Digital Bank and Fintech change for the bank are too often people the CEO has placed there to be their keep the troops happy person: don’t rattle the cages, transform the bank, shake the trees or battle the internal politics.  Just do enough incremental change to make it look like we’re engaged.  

It won’t work guys.  On the other hand, you put a real change wizard in that role and what seems to happen, in most cases, is that they leave.  I always remember a comment from one change wizard was that, in most organisations, they either wear you out or wait you out.  Either way you’re out.

Anyway, apologies for a Friday rant and I’ll be back to Happy Mondays.

About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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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