Talking about transformation at conferences every day gets you into a mantra. My mantra is leadership and how banks lack technological leadership. The pushback is that you have too many technologists without banking knowledge. We need banks run by people who understand money, and they can tell the technologists what to do.
I’m not so sure. A bank cannot delegate its future and that, to me, is the fundamental flaw in the argument over banks being led by bankers. If banks are digitalising and have to be fit for the internet age by unbundling their vertically integrated structures to open source finance, can a control freak really understand this fundamental change in operations?
I say control freak purposefully, as there are few big banks that delegate their IT externally. They may use solutions from external providers, but do they truly put their IT out to the markets or are they adapting such systems to their internal needs and making them proprietary again? For me, I suspect the latter. In fact, it amuses me when we talk about legacy structures, as banks have legacy IT, their providers have even greater legacies in many instances. Add a bank bespoke implementation of a legacy solution and you have a legacy upon a legacy. Or is it a heritage? Whatever.
Anyways, back to the main point: banks are hugely reluctant to open source their operations and that’s where the Fintech community are scoring points. By taking the vertically integrated, proprietary and legacy structures of finance, Fintech firms are able to narrow target every piece of banking, componentize and open source it.
his is why we have narrow peer-to-peer structures for payments, credit and advice emerging which seem innocuous on the surface, but may be truly transformational within. It is the true innovator’s dilemma. Banks believe that they must control the value chain and process of finance but Fintech is breaking that vertically integrated value chain apart.
Now what the truly visionary and innovative banks are doing is recognising that Fintech firms are just widgets of capability. They are taking their capabilities, evaluating their functionalities and, where necessary, copying or partnering to bring that functionality to their clients. White labelling and partnering with Fintech firms is not an embarrassment. It’s not an admittance of weakness. It is more a recognition that someone can do a narrow line function better than you and, as a company with centuries of brand recognition and millions of customers, bringing that capability to your client base is visionary.
These banks will be the ones that survive the transition from last century distributors of paper through a physical network to this century distributors of data through a digital network. The challenged banks, rather than the challengers, will be those that try to keep their vertically integrated control of operations. Banks no longer control any part of their value chain. They do not own the customer; they have zero digital relationship, unless they earn it; and most of what they do can be provided by an alternative far cheaper and easier, because the alternative players are replacing buildings and humans with software and servers.
So this is where the leadership has to be created. Leading incumbent banks from their traditional command and control structures to open sourced operations that are shared, cooperative and inclusive. This is the core of conversion to digitalisation and, as most bank leadership is immersed in risk management and control structures, open sourcing the bank is a really tough ask. Many banks will fail to meet this challenge, not because their bank is weak or unable to adapt, but more because their leadership is weak and unable to adapt.
Open sourcing finance is the shared economy business model of partnering, white labelling and integrating components to create a new business model of aggregated components of product and service. Any bank resisting such change will not survive and, to understand such change, truly requires a leadership with technological prowess, not just banking knowledge.
Hence, when I come back to this thought of banks not needing technological leadership, just good leadership who can delegate the change to the right advisors, whether internal or externally, I fundamentally disagree. You cannot delegate the future of the bank. You cannot ignore your obligations to lead the change. Should your bank leadership think that’s the way to go, I’d leave the bank.