Transaction Banking : Digital Take-over or Digital Make-over

The question has often been asked: why were banks caught so badly wrong-footed in transforming themselves in the face of the plethora of new entrant challenger banks and financial technology firms?

The Dow Jones is up over 2.5 times since 2008: no wonder people have forgotten the crisis.

Writing here, some 10 years plus after a near financial industry melt down, yet with the Dow Jones Index at an all time high,[1] and with unprecedented levels of excess liquidity, one may forgive the short-term memories of many readers.

However, for many operating across Retail and Corporate banking businesses, the longer term context will not be forgotten. The sheer scale and number of projects that followed the crisis put an immediate brake on client-led product development, with the imperatives of complying with a regime of regulatory initiatives becoming the single axis of all change resource (and monies) in the bank. But as we all know, change resource is more than money and accompanying people – how it is allocated heavily drives the level of innovative intensity and creativity across the whole company. Little surprise then, that banks could and would understand the language only of constraint, risk aversion and consensus-driven decision making. Those pressing for innovation and any entrepreneurial activity quickly became behavioural pariahs and ostracized from the mainstream bank.

Post-crisis regulation dominated the agenda allowing competition to step in

Fast forward to a time when the sheer velocity of change is getting faster and faster and where activity delays of weeks or maximum months sends shivers down most people’s spines.  How do we need to look at a period of many years when progress was frozen? Well, with real regret.  Regret because it really put the banks on the back foot and left the door fully open for competition to step in. And so the invitation was accepted and, as they say, the rest is history.

A second, less-anticipated development has been what can only be described as the Jeckyll-and-Hyde behaviour of a handful of regulators in the developed world: agitated by the lack of progressive decision making by consumers and SMEs, they launched into a full dismantling of the cosy club of domestic banking by driving a hard agenda of payments innovation and open banking. The key industry reference point was probably the damning report issued by the UK’s Competitive Market Authority unambiguously titled  ‘Making Banks Work Harder for You’.[2]  If, in the past, the regulatory pressure was conducted under a cloak-and-dagger approach, now the boxing gloves were clearly taken off.  Siding with the proponents of new technology and business models, the regulators had their opportunity to crack open the monopoly chain over product development, pure play manufacturing and client distribution and ‘ownership’. Now, on paper at least, this strong linkage would be broken forever, with banks needing to scramble to defend their beachheads.

Regulators have clearly moved from shoring up capital to making banks feel the full force of competition.

But defending core business and elevating the level of commitment to digital transformation has in some respects paid off for a number of institutions. Whilst popular opinion has wanted to write off banks, evidence to date shows that they are not capitulating. Overall, cost cutting and trimming business scope has arrested the decline in worsening ROE performance. Up to relatively recently, market shares of major banks in the UK and USA has showed little dilution. More recently SME lending and mortgage business distribution has shown some signs that the larger banks are losing ground – but again this is not a seismic change.

The history of digital “transformations” is woeful, but has paid off for a few.

What might be truly game-changing, however, is the advent of new data protection legislation (GDPR) across the UK, EU and, in future, to be followed by other regions (indeed, GDPR’s scope already effectively stretches way beyond Europe’s shores). GDPR came onto the statutory books at the end of May and draws much tighter parameters around how financial institutions and, importantly, the fintech industry at large, treat individual data. In recent years across banks, the term ‘doing what is right for the customer’ has been adopted as the best-practice role model vocabulary, translating into the right behaviours. Now such language will need to be adopted by the newcomers.  The usage of some of the more sophisticated new technologies will need to evidence that ‘sales’ or ‘solutioning’ advice is backed by the right level of client insight and expertise. So will ‘certification’ re-emerge as a growing theme in the future finance landscape? Quite likely, with the number of cases of mis-selling still very fresh and the already well-established hard lines drawn around investment and foreign exchange advice now industry norms.

GDPR represents a game changer.  Might it bring fintechs into the fun world of regulation – and doing the right thing?

So it would not be a misplaced view to see the adoption of better data protection environments helping incumbent banks defend their patches. Own goal for the regulators perhaps?

Thirdly, and finally, there is perhaps a more genuine concern surrounding the continued health and success of banks. Design thinking has been a pivotal discipline rescuing many a household name (Procter & Gamble being a well documented case in point)[3] across a number of industries. In banking, outside of the relatively small confines of digital circles, the term and what it means is not understood. Putting the ‘customer at the centre’ and ‘driving innovation’ are well-worn platitudes, but without a major shift in cultural ability realizing true innovation around clients is unlikely to happen – and certainly not on a sustainable basis.

Corporate history shows sustainable advantage is about thinking differently – and the CEO’s job is to lead that change.

Digital transformation is not easy: McKinsey reports that 74% of such transformation programs failed in 2018. Worse, employees are not committed to such programs: only 55% of corporate employees devoted themselves to the new paradigm, as opposed to 68% in 2014. The use of best practices such as senior-level ownership, prioritization and transparency has also declined from 2014.[4]

How, then, do we want to see banks to nurture the innovation pipeline?

Well, in all honesty, the tone will need to be set from the top.

CEO’s and Group Executives will need to look at their business problems very differently beginning to feel far more comfortable with abandoning logical historically driven insights. Banking tomorrow will be driven by leaders who have a strong sense about what that future state will be refining mysteries into better honed heuristics that bank staff can begin to work on. Leaders themselves will need to be very finely tuned listening agents with immense acumen in accurate diagnostic processing – clarifying what the external environment is saying and where the likely behavioural nuances and trends are settling.

This cultural challenge will demand empathetic leaders but with the uncompromising belief in their convictions. One can only be reminded of the three key tips that Steve Jobs gave Indra Noori when she requested a session with him before taking or her role as CEO of Pepsi Cola: (1) Stick to your guns, (2) Don’t be too nice and (3) Own your own legacy.[5]

In future, if banks really want to ‘do what is right’ for the customer they will need to truly walk in their shoes – Design Thinking 101.

[1] Over 26,000 at time of writing compared with just a little over 10,000 on 29 September, 2008.

[2] “Making Banks Work Harder for You,” Competition and Markets Authority (CMA), 9 August, 2016.  See press release “CMA paves the way for Open Banking revolution”, https://www.gov.uk/government/news/cma-paves-the-way-for-open-banking-revolution

[3] “How Procter & Gamble Designs Change,” Peter Cohan, Forbes magazine, 12 May 2012, https://www.forbes.com/sites/petercohan/2012/03/12/how-procter-gamble-designs-change/#74fc3fd55dd7

[4] “How the implementation of organizational change is evolving,” Blake Lindsay, Eugene Smit, Nick Waugh, McKinsey, February 2018.
https://www.mckinsey.com/business-functions/mckinsey-implementation/our-insights/how-the-implementation-of-organizational-change-is-evolving

[5] “Steve Jobs to PepsiCo’s Indra Nooyi: Don’t be too nice,” Ruth Umoh, CNBC, 6 August, 2018.  https://www.cnbc.com/2018/08/06/3-things-pepsico-ceo-indra-nooyi-learned-from-apple-founder-steve-jobs.html