Digital games banks got to play – part 2
Today, most banks want to be digital leaders because that is where the customers are! This has brought in a change in the attitude of many traditional banks. Arun S. Padaki, a seasoned corporate banker, credit risk and business process management consultant, explores what it takes to become a digital leader and who is already ahead in the game.
This part 2 of the article. Click here to read part 1.
Bank shakes on the menu – get the entrepreneur mojo going!
Banking has been in existence in different forms for over thousands of years. The formal bank, with its set rules, still has the basic principles intact – and shall stay that way for a long time. Yet this business in now on the cusp of an overhaul unimagined even a few years back.
Addressing customer expectations as well as the changing role of bank branches and their staff require fresh thinking on the branch-based business models. In a digital bank, the bank’s IT is exposed to the customer’s needs. Branches will be centres with high levels of expertise, integrated into an omnichannel ecosystem. With rapid rate of disruption and the growing number of start-ups, innovation is inevitable.
This disruption also ushers in a more flexible organisation, both business and IT architecture. New technology and faster time-to-market calls for an agile IT set-up that is open to integration and playing with other applications. There will be severe stress on the front-end and this flows on to the core as well. Introduction of smart middleware is required and mainly stacked outside the bank, i.e. outsourced. Use of API (application programming interfaces) will be more common to achieve this.
Social, mobile, analytics, cloud and the internet of things (IoT) present both disruption (think payments providers such as PayPal) and opportunities (think collaboration and wearable devices that enable fast, self-serve employee interaction and training).
Entrepreneurial zeal has to come to the fore to cope with uncertainty, in addition to having a clear digital strategy in place. Different vehicles, like a venture funded entity, an R&D unit, a subsidiary or an incubator for that fintech touché that will go a long way into the distant horizon. Banks have installed apps from many companies, invested in start-ups and have held hackathons. Test and learn, failures and feedback processes will redraw the end-to-end digital entity. With all these, there lies a tougher task of changing the mindsets of the banking staff to embrace the changes dawning upon them.
This digital-all environment will throw a considerable challenge to management to bring the employees to learn and like working in such an environment. Banks’ digital leadership should see through the challenges banks will face through the 2020s and beyond.
There will be a complete cultural shift; CEO is now Chief Cultural Transformation Officer! He/she will also play the transformation manager role, bridging the gap between the new generation and traditional bankers, among IT, business, operations and compliance, and more critically, the traditional and neo IT units.
Innovation, new governance – IT transformation and digital penetration, and more interaction amongst cross functional teams have to be encouraged.
Digital skill sets will be critical and this will see a new and different set of skilled people with jobs in a bank, sitting alongside traditional bankers.
More focus will be on employee training on digital models, simulated software, test and learn approach, changing over to a new mindset, effective communication and continuous feedback of the digital roadmap and employee openness to understand digital models.
All these aspects play key roles in shaping up a great digital bank. And last but not the least, a new role of a digital ambassador!
The growth of smartphone use and rapid tech evolution will force the digital leadership to be nimble footed by focusing on technology disruptions and at the same time keep the traditional banking business intact.
The torch bearers are there already
The first steps have been taken a while ago. Tech-savvy banks have already made considerable investments and progress by having distinct strategies in place. Some of the best names in the business have shown the way.
ANZ has demonstrated a significant positive impact a strong digital leadership role could have – and has created a new senior executive post to spearhead the bank’s transformation – head of digital banking.
Nordea has set up a dedicated unit – Group Digital – to drive its digital banking agenda forward.
Over the past five years, Bank of America (BofA) has spent close to $700 million on mobile technology. It has also staffed its branches with Digital Ambassadors, who are trained to deal with online and mobile related queries. About 3,800 such ambassadors have been deployed across the US. The bank is, however, shrinking its consumer banking division by 8,000 people as it prepares to go digital.
South Africa’s Rand Merchant Group has set up Alphacode, a fintech hub in Johannesburg, to identify strategic key investments in the financial services industry and lead the fintech development in Africa.
India’s HDFC Bank has launched WatchBanking for the Apple watch – a pioneering effort in the wearable gadget category in the region. The bank has also introduced paperless ten-second personal loans and the disbursal of loans through ATMs.
Another major player in India, Axis Bank, has recently launched a fintech innovation lab, becoming the first domestic bank to do so in India.
The Reserve Bank of India (RBI) has put together an inter-regulatory working group to study the entire gamut of regulatory issues relating to fintech and digital banking in India.
In the Netherlands, the government has taken a cue of rapid disruption and is mooting an ambassador for fintech.
In Israel, banks regularly partner with fintech start-ups and allow their platforms to run banking apps.
Fintech accelerators and incubators are springing up worldwide.
Large populations in the emerging markets are still outside the banking network. Traditional banking models might be too cumbersome here, so the best bet to achieve financial inclusion is through digital banking. India, for example, has already made good progress for crediting money into beneficiaries’ accounts. The country’s unique identity card is tagged to beneficiary bank accounts and all payments are tracked.
Legacy and fast changing times
Banks will be cautious while being swayed towards a digital overkill without any due diligence. Most of the fintechs are small players, a reason good enough to tread carefully. A new trendy thing in the market may not last for too long and for it to gain acceptance, the proponents will have to be relentless in showcasing the benefits, to both internal and external customers. Also fintech outfits may not be experienced and have not seen a complete business cycle yet. And, last but not the least, it is important to consider whether certain fintechs make sense with the relevant banking regulations.
The structural issues for the financial services industry are well-known – poor returns, hardening stress-tests driving increased capital and liquidity requirements, inflexible core software, aggressive competition and a general talent drain. Industry players will look to re-engineer outdated and old systems and processes to reduce cost, use data in a far better way to demonstrate risks more accurately with associated capital and liquidity impacts. And with a hawk’s eye on the cyber risks all along.
The difference this time is that the speed of adoption is much faster and the ability of new entrants to gain a strong market position considerably enhanced. In very simple terms, the new digital bank requires long-term vision with short-term execution. Return on equity should be intact.
Having weathered many a storm, successful digital leadership should take banks to safe shores. Loan growth, deposit accumulation, efficiency ratios and net interest margins are still as critical as ever. With the harshest of the digital revolution hitting, banks still continue to be banks. And this is no end-game for them.