There was quite a bit of coverage of an analyst report last week, putting forward the notion that big banks should forget converting the existing organisation, systems and structures, and start over. This one is from Oliver Wyman and, for me, it goes straight into the same bin as the Gartner forecast that most banks won’t be around in ten years. The reason? They recommend that banks do not try to convert their existing operations to digital banking but, rather, launch a brand new digital bank. A greenfield approach.
Hmmmm ... I don't think that will work and maybe it’s just me. Maybe I’m an old fart, living in past rose-tinted worlds of banking, but I think not. It’s more to do with the regular forecasts for years that banks are dead meat. Yet, banks continue to not just survive, but thrive.
This is for two reasons: one, they are the backbone of nation’s economies and often hold governments to ransom; and two, there is not much alternative.
On item one, banks control countries, not governments. You may think I’m wrong, but there are many occasions where I’ve seen governments held to ransom by their banking fraternity. The crisis of 2008 was a great example. Governments could not tell banks what to do, but the banker could tell governments what to do. By way of example, US banks had huge resistance to the wording to the Volcker rule that banned proprietary trading in investment banks. Over the years, it has been watered down due to intense Federal lobbying and now is hardly recognisable to the original proposals made.
There are other examples, but generally banks hold governments to account … literally.
On item two, sure, we are promoting more competition in banking, but is it really happening? Sure, we have FinTech unicorns, but are they threatening traditional banking markets or serving new markets?
I always remember the Wallis reforms in Australia in the late 1990s was meant to break up the Big Four Aussie banks (NAB, CBA, ANZ and Westpac). Today, they’re as big and strong as ever, and embroiled in another major review and reform that the politicians say will make a huge difference … yet, how can it when the politicians are held to account by the very institutions they are trying to reform?
Anyway, that’s not the point of this blog update. It’s instead to throw some shade at Oliver Wyman.
Sorry guys, and I totally understand what you are trying to say: it would be easier to reboot the bank and launch a new one, than to try to reform the old bank to be digital. I agree with that sentiment. However, in practice, I haven’t seen one bank do this well.
Co-op had Smile … where did that go? Halifax had Intelligent Finance … where is that today? Egg launched in 1998 … where is that now? First Direct is an amazing success … but only in its narrow niche.
And yes, these are all UK examples, but there are examples overseas such as Moneyou from ABN Amro or UBank from National Australia Bank, but neither is firing bombs under the main bank’s foundations. This is because any bank that launches a new bank which will cannibalise its mainstream business fails. Internal structures ensure that the mainstream banks’ most influential people will kill the new-born baby.
You may then say that’s not true. In coverage of the Oliver Wyman report, The Financial Brand cites Marcus from Goldman Sachs as a great example of success at launching a greenfield bank. Yes, it is … but Goldman Sachs had no retail bank before, so it has no cannibalisation issues.
In this blog in 2016, I made the case as to why this fails:
The idea is that the new bank will have no legacy, no constraints, can develop from a clean sheet of paper and be the bank’s very own challenger bank. The expectation is that the new bank will eat the old bank, over time, until at some point in the future the old bank can be shut down.
This is a strategy, but it is a flawed one. First, does the new bank have the commitment to eat the old bank, or is it just being launched to show that the bank can create a digital first proposition. Second, what is the commitment to the new banks’ success? Does it have the full support of the old bank’s executive team, in terms of budget, capital, resources and talent pool? What happens if the new bank eats into the products and services of the old banks’ lines of business? Will the SVPs be happy to see their bonus destroyed and given to the newbie upstart?
And even if the new bank succeeds in challenging the old bank, what do you do with the old bank? Just dump it and let it rot? That’s not viable as the millions of customers of the old bank expect it to continue and survive. They don’t want to change to new bank and will resist it. This was the case with mBank in Poland who found it easy to convert the young and enthusiastic … but the final 30% who didn’t want to change to the new bank took years to win over. Why should the customer switch and change? Do you just dump the customer along with the old bank?
And if you do have an old bank that has to be maintained and kept up and running, then it will drain the focus and resources from the new shiny bank. After all, it’s far costlier to maintain an old, legacy bank such that, after a few years, you’ll wonder why you launched a brand-new bank that has cost millions which could have been sunk into converting stinky old bank.
So, Oliver Wyman, I applaud you for producing a report that on the face of it argues for an easy idea in principle which, in practice, will rarely if ever work. In fact, I think your report is useless, but at least it garnered some press coverage. After all, the only reason I would ever launch a separate digital bank would be as a defensive move against the challenger banks, not to cannibalise my own bank. If you went down that route, then these tips from McKinsey may help or, if you’d rather make it easier, just plug into Foundry from 11FS. In fact, with 11FS, you can launch a brand new bank really fast, as RBS’s Mettle demonstrates.
Good luck with it all anyways.
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...