Digital continues to expand as an existential crisis for banks. Fintechs are distressing the banking stack and commoditizing previously profitable services with better pricing and a better user experience. Meanwhile, banks and their ability to respond to the digital age is hampered by factors like a lack of agility because of their heterogeneous legacy infrastructure. They are responding with initiatives like internal innovation labs, restructuring and ramping up digital spending.
By our estimate, banks globally will allocate upwards of USD 75 Billion on digital and transformative technologies in 2018. Yet, a majority of digital banking projects fail to deliver their intended benefits. Our read on this persistent age of volatility and complexity is very different from the standard narratives out there. Banks are surprisingly resilient but are let down by their culture. Fintechs are not the barbarians at the gate. They are the clever skeleton key that can unlock the bank’s innovation potential.
Banks have faced crises before but this time it’s different
Banks have been successful in regularly growing their top and bottom line. Any culture that delivers success becomes embedded in the organization. In the case of banks, they used to come up with a product, enabled processes and systems to support its go to market, get to users using their channels, and then it would go into stasis.
In the digital age, the end customer is everything. Products that are successfully customer centric start by studying the user’s needs, motivations and personal journeys. Only then are they designed, systems and processes developed to support them, and then the launch does not mean stasis, rather a feedback loop is activated which enables adaptation of product in real time or if needed fast failure. Culture is the most powerful force in any bank. What we are seeing is that it is genuinely hard for banks to move from a product-centric culture to an empathy-driven customer-centric culture despite their experience, exposure to and prowess with technology. This is not a time for retooling like before. It is a time for rewiring.
Don’t gang up on each other. Gang up on the problem
The technologies that started digital disruption namely internet, social, mobile, analytics, and cloud, have been around for some time. By now the conditions of victory for banks in the digital age are starting to be established. The main challenge banks face is cultural. A study of 48 European banks’ attempts to digitize their business focused on their technology, strategy, what worked, and what didn’t. Their learning showed that the number one enabler of success and failure was corporate culture. The least important was staff with experience in “innovation”, which is the route most banks take with the hiring of Chief Digital Officers and the like. Banks are not going anywhere but banks that thrive will share a few things in common and they all have to do with culture.
Firstly, they’ll need to open up, and this includes working with external technology agents like Fintechs. They need to move past the whole, Fintechs are here to steal the bank’s lunch, hyperbole. They need to believe that Banks and Fintechs are a powerful combination that helps a bank generate new ideas, gain new skills, optimize operations and identify avenues for growth.
They’ll need to gradually but relentlessly change their culture to enable external empathy and internal collaboration. Silos kill innovation. Banks have found success when they focus on the customer with a team of wildly different people with a diverse skill set. By doing cross-functional problem-solving internally and externally, they will see higher success rates.
Above and beyond the product, what makes successful Fintechs valuable is the scrum, like the approach of a fail-fast culture that powers them. It is difficult to implement in institutional banking cultures that are process and systems oriented.
Fintechs and Banks – collaboration, not competition
Banks have great resiliency, product depth, brand recognition, and extraordinary amounts of data on customers. Yet despite all this, they manage to appear asynchronous to engaging customers and creating an emotional bond for them. The way forward is clear.
Banks need to stop seeing Fintechs as competitors and cleverly use them to address their pain points, especially where their own culture is getting in the way. Key areas will be: going digital in a customer-centric way using mobility, improving, and targeting product offerings, increasing efficiencies, and lowering costs.
To do this, they need to restructure internally for innovation, strategically integrating systems and staff, and developing contractual agreements that focus on incentivization and not penalties to ensure success.