Bank 4.0

by Brett King

  This explains why in China, companies like Alipay and Tencent WeChat are actually trusted more by the majority of consumers than traditional banks. In a survey conducted by E&Y and DBS in 2016, they found that this was a huge contributing factor to the rapid adoption of non-bank services in China6. As the interface between the consumer and the brand shifts more and more to daily technology interactions, the primary thing that needs to work is that technology and the utility associated with it. A bank’s adherence to regulations to maintain its banking license has very little correlation with customer trust if its technology fails.

  Let me illustrate it this way. Imagine you are a global, top 50 bank with billions in assets and locations around the world, and your in-house core system mainframe fails due to some random technology glitch and it takes you a week to get it sorted out. Let’s say that fault repeats itself three or four times over the space of a few months. Consumer and small business stories start emerging about individuals having massive issues because they’ve not been able to pay their bills or employees due to your technology issues. How much is the fact you’ve got a banking license or you’ve had a branch in that town for 50 years going to matter in the consumer trust department?

  The fact is, that on newer technology stacks, with more agile cloud-based architectures and an entire business built with technologists at the core, newer players are statistically less likely to have technology driven failures at the customer layer.

  4. Despite negative customer sentiment, business practices aren’t changing fast enough

  Whether you buy into the metric or not, Net Promoter Scores offer an insight into how positive customers perceive the average bank. NPS scores range from -100 to 100. A score over 50 is generally the target, being considered very good to excellent from a customer’s likelihood that they’ll recommend or “promote” your business. When it comes to banking, NPS averages range from -17 through to 34 globally (depending on geography). But most large banks rank below 20. Amazon, Apple, and Google all perform consistently well above the best banks on NPS.

  In recent years, more and more bank CEOs are talking about customer experience as a core competency or driver, but as yet the rubber has not hit the road. Startups like Transferwise, Monzo and Starling in the UK; Betterment, Venmo, Simple and Moven in the US; Revolut and N26 in Europe; Alipay, LuFax and WeChat in China have all grown market share almost exclusively through customer referral and network effect, as opposed to traditional marketing approaches. This shows that these startups still have a basic customer experience differentiation that directly contributes to growth and competitive posture. In the recent British Banking Awards, Monzo and Starling won the awards for best bank based on their superior front-end experiences.

  At the core of non-bank, shadow bank or alternative financial services adoption is fundamental changes in distribution mechanics, and it’s the biggest concern for incumbents. If you are essentially limited to acquiring customers in-branch, or even if digital acquisition is still less than 30 percent of your revenue pipeline, this is a pretty fair indicator of risk.

  This new period we are entering is not so much about production anymore—how much is produced; it is about distribution—how people get a share in [and access to] what is produced. Everything from trade policies to government projects to commercial regulations will in the future be evaluated by distribution. Politics will change, free-market beliefs will change, social structures will change.

  —“Where is technology taking the economy?” McKinsey Quarterly, October 2017

  If you examine it systemically, books, music, retail, taxis, airlines, hotels, etc have all moved to online distribution over the last 20 years. We are now talking about augmenting that with voice commerce and other embedded technologies. This is a fundamental, global shift in behaviour and distribution mechanics, away from reliance on physical points of sale. While banks like to imagine they will be the sole industry to buck this trend, the reality is book stores, record stores, retail outlets, travel agents are simple forecasts of what will happen to branching. At this stage, there is zero evidence to support the assertion that banking is demonstrably different to other sectors in respect to engagement requirements, particularly with the shifts we’re already seeing in relation to branch utilization.

  As we start to more effectively deploy internet access in the developing world, most of the two billion or more unbanked consumers will come into the financial system almost exclusively through digital. All this adds up to the fact that by the middle of the next decade more account holders globally will be digital first or digital only than banking via a branch (more about this below). Thus, by 2030 it is highly unlikely that a new Gen-Z customer will be thinking about walking down to the high street to visit their branch to open an account, especially when we’ve had another 10 years of focused development of frictionless onboarding for account opening.

  We’re talking about roughly the same period of time between when the iPhone launched and today. Within that timeframe we will see the disappearance of banks that are reliant on branches for account opening, unless they are some esoteric brand catering for a very small segment of hipster customers. How many of those can survive? In the United States, maybe 50 percent at most. How many of the thousands of community banks and credit unions in the US today rely on branch-based account opening to survive? At least 95 percent of them. Do the math.

  Oh, and the regulator can’t save you. Just ask the recording and movie industry, which spent hundreds of millions over more than a decade in an attempt to stop downloads.

  5. Industry press and seasoned players can’t stop talking about disruption

  Here are a few recent headlines in industry press:

  •CIO Magazine: “The FinTech Effect and the disruption of Financial Services”

  •World Economic Forum: “Big Tech, not FinTech, causing greatest disruption to banking”

  •Forbes: “The race is on to disrupt traditional banking”

  •Business Insider: “Banks face ‘Kodak Moment’ as FinTech disruption builds”

  •The Business Times: “Disruption is the new norm for FinTech”

  •The New York Times: “FinTech start-up boom said to threaten bank jobs”

  •Financial Times: “Bankers fear they will get Amazon-ed in tech disruption”

  It’s pretty clear that there is a significant shift in the dialog in the space. When everyone is talking about disruption it’s probably already happening.

  6. Bank executives are responding

  According to research from the Economist Intelligence Unit, more than 90 percent of bankers project that FinTech will have a significant impact on the future landscape of banking7. Almost a third expect that FinTech will win an equal share or even dominate the market. Sixty-five percent of CEOs see disruption as an opportunity for their business according to KPMG’s 2017 Global CEO Outlook. In that same report, CEOs said agility in responding to disruption over the next three years will be more important than the last 50 years!

  A Mergermarket survey of 2016 also revealed that regional and community banking executives in the US see future collaboration between the FinTech and banks as essential for survival, with 54 percent of bank respondents calling FinTechs a potential partner and 89 percent believing that partnerships between the two will be the norm over the next 10 years.

  7. The way we bank is fundamentally changing

  Fundamentally the biggest shift in banking is that “banking is no longer somewhere you go, it’s something you do”. If you’re a Millennial or Gen-Y, chances are you already do the majority of your banking online or via mobile. If you’re under 30, chances are you visit your branch as little as possible, by choice. PWC research last year identified that this trend has created a new, dominant class of behaviour they classified as omni-digital: that is, customers who use a range of digital channels for most of their banking activity.

  Figure 4: The trend towards digital-first banking is extremely clear (Source
: PWC Digital Banking Consumer Survey).

  While there are some demographic differences here, the overall trend is clear. Given that a large part of the operating expenses traditional retails banks face is the upkeep of their bricks-and-mortar distribution channels, this reduces investment by incumbents in digital out of both fear of cannibalizing their existing business, and purely in budget terms. Challenger banks, which are all essentially branchless, might have smaller market shares today, but the savings they make by not maintaining expensive branch networks can translate directly into R&D on new services that will further cement their ability to capture market share.

  In that same PWC survey mentioned earlier, only 25 percent of customers said they wouldn’t bank with a bank that didn’t have branches. That means that 75 percent of customers would bank with a “bank” that didn’t have branches. It’s clear that while branches will remain with us for many decades to come, they are no longer considered essential for access to banking.

  Key survival techniques

  The average lifespan of a company listed in the S&P500 has decreased from 67 years in the 1920s, to less than 15 years today.

  —Richard Foster, Special Advisor to the President on Healthcare Innovation, Yale University

  It’s pretty obvious then, at least to anyone paying attention, that disruption is now reshaping the banking and financial services landscape, just as it has other industries. Disruption is hitting the banking sector differently for different types of banks, but there are signs of it everywhere. In the United States the number of community banks in 1984 was 17,401; in 2017 only 5,2788. Yet the largest banks in the US have grown their asset base considerably over the same period—$31 trillion of lending has moved to the so-called shadow banking system9 (including FinTechs), and that’s more than three times the credit banks provide in the US. European Central Bank data shows that the number of lenders in the EU is already in decline, having fallen from 8,237 in 2010 down to 7,110 in 2015, and further consolidation is expected10. India has announced it will reduce the number of PSBs (public sector banks) down to roughly half what it is today. The GCC region and China are also expecting significant consolidation. In China, Japan and Korea the pressure on smaller regional banks is acute as technology players get traction.

  It might be stating the obvious, but the first thing that needs to change in response to how we handle this level of disruption is the way organisations and leaders think. Adapting to change is becoming a survival skill in this disruptive age, where technology changes are speeding up, not slowing down. Some organisations say they’ll see where the disruption goes and then they’ll be a fast-follower, copying the innovations of the FinTech leaders.

  Figure 5: The problem with a follower strategy in an industry facing disruption (Image Credit Marketoonist.com)

  As Ron Shevlin pointed out in his excellent post “The Fast Follower Fallacy”11, if you wait to follow when faced with industry disruption, you will inevitably lose market share. He says fast-follower is just another name for “late mover”, especially at the speed first movers are adapting to change. There are a few reasons for this assertion, but the most critical one is that the lack of technology pedigree in incumbent players means by the time an innovation is showing significant traction, a follower is still two to three years behind the leader who introduced that innovation, with another two years of development time ahead of it just to catch up. That’s probably half the time you have left to turn your ship. If you are facing two or three major disruption technologies in a relatively short timeframe, your future as an incumbent is now clearly in jeopardy.

  So, what can you do to respond? One key answer is a relentless pursuit of great customer experiences at the core of your mission. This will drive the organisation to remove friction, try engaging the customer with new experiences, and force innovative workarounds that break current policy and process strangleholds.

  Here’s what Tiffani Bovi, former Gartner VP and now Salesforce.com’s Global Customer Growth, Sales and Innovation evangelist says: “Looking at it from sales and growth specifically, the biggest trend right now is how important customer experience is in developing and supporting a brand and improving sales performance. The customer decides when and how they want to interact with brands, and this impacts the way companies sell to their customers. Big macro trends, such as social, mobile, cloud, big data, and IoT help create different experiences, but ultimately the customer is becoming far more disruptive than the technology itself and shaping entirely new industries12.”

  IBM research in 2015 showed that 65 percent of banking executives thought they delivered excellent customer service, but only 35 percent of their customers agreed. This perception gap is likely to grow as challenger banks, TechFins and technology majors extend their user experience lead on technologies like mobile apps, voice-smart assistants, augmented reality glasses, and so forth.

  But there are a few other tactical things you can do to start transforming your organisation’s customer alignment, agility and adaptability.

  1.Put technology people on your board

  For community and smaller banks in particular, having a board that came through the local community over the last 20–30 years was a strategy that worked when knowing the community was at the core of meeting their customer’s needs. Today, meeting customer needs is much more down to technology delivery than it is understanding what the local retailers and farmers are concerned about, or whether the central bank is going to raise interest rates.

  The sort of technologists you need are those that are well networked on the newer technologies, have had their own startup in the space, or that have dealt with digital transformation at an organisation like your own. The objective here is to get a top-down view to inform the executive committee better. Identify which technologies you should be prioritising—and for smaller banks who rely solely on vendors to provide their platforms, which partnerships are going to be key to an agile experience. VCs that have large FinTech portfolios could be useful, as they may be able to get you introductions to prospective partners that could give you a technology edge.

  Chris Skinner in his blog13 recently highlighted this problem, where he pointed out that banks might say they are “becoming technology companies”, but the reality is that their management structures belie those claims. Accenture analysed the background of around 2,000 executives from 100 of the top banks by assets globally to assess what technology experience they brought to the table14. The results were appallingly dismal:

  •Only three percent of CEOs of leading banks have professional technology experience

  •Only six percent of board directors have professional technology experience

  •40 percent of banks have no board members with any professional technology experience

  2.Hire lots of Millennials and Gen-Zs (if you can)

  Millennials (those born between 1980 and 1995) recently became the largest segment of the US labour market at 34 percent, and the greatest share of the US population (24 percent). Gen-Z, born after 1996, is growing both in numbers (21 percent of US population) and consumer purchasing power. By contrast, key senior management decision-makers and corporate board members tend to be from those groups born before 1980 (Boomers: 22 percent; Gen-X: 21 percent). In China, 31 percent of the population is made up of Millennials (九零後 or “jiǔ ling hòu”) and it is regularly noted that they’re “more entrepreneurial, individualistic and open minded”15 than their predecessors. In less than 10 years Millennials will make up 75 percent of the global workforce. They need to be informing the future priorities of your bank.

  You need Millennials within your teams—but hiring them is tough, unless you have a culture that attracts them. ESG (environment, social and governance) values are becoming core imperatives for Millennials as a group—for many of them addressing social issues, environment concerns, income inequality and finding their voice as a generation are critical. If you don’t have a formal position on these issues in yo
ur company, expect to be asked about it during the hiring process. Think about the likelihood of attracting a Millennial to start building a career in banking as a teller today. That’s just crazy talk given the above perspective.

  Passion projects are increasingly going to become important to the next generation. Most importantly you need a culture that says something positive. Financial inclusion, promoting renewables, promoting lower crime, greater equality—find a cause that your organisation can get behind. Profitability for shareholders isn’t going to motivate these candidates. As one commentator put it: put the “why” in work.

  3.Get agile

  Easier said than done. How do you move like a speedboat when you are a supertanker? There are some large organisations who are agile today, but the most consistent places to find them are technology leaders that started as startups and became large players. The likes of Google, Uber, Facebook, etc have maintained agility despite being larger employers than most of the banks in the world.

  I’m not talking “lean startup theorem” here. I honestly think that’s a distraction within a bank; but I am definitely talking about the ability to change your organisation’s process and policy rapidly.

  There are five core characteristics of Agile banks:

  Table 1: The core characteristics of Agile banks.

  Lack of agility can also negatively affect the capacity for banks to take on partnerships with FinTechs and technology firms that are more agile. If a startup is releasing versions of their new app every few weeks, and banks have three-to-six monthly product release cycles, the culture clash is going to be severe. In most cases the organisation is just not equipped to work faster, and thus the benefit of a partnership with an agile organisation could be largely lost, or worst—the partnership could fail.

  I know we could write a great deal more on agile organisation structures, but that topic is so large, you need to do some specific research if you’re heading down that path. I will say that if you are going to do “transformation”, at some point you’ll have to tackle the organisational structure as we identified earlier in the book.