By Sudeepto Mukherjee, Senior Vice President, Financial Services, Publicis Sapient
The 21st century will be remembered as the age when digital technology transformed our society in arguably the same way as the industrial revolution and electricity defined progress in previous centuries. The advent of smart phones, cheap cloud computing and advances in telecommunications to name a few have revolutionised how organisations operate and deliver services to consumers. The likes of Amazon, Netflix, Uber and Airbnb have demonstrated how a digital first model can transform traditional industries like retail, media, mobility, hospitality and create commercial success by leveraging technology to create superior customer value.
So, what does a digital first future look like for banks? Are banks ready to make the transition or will the leader emerge from new Fintechs? Based on responses from over 1000 banking executives globally, a recent study provides some useful insight into how the industry assesses its digital transformation journey. It uses a simple measure to define digital maturity – the ability of banks to create better customer experiences and higher operational efficiencies using technology. However, to visualise what a digital future might look like, let’s define the different levels of maturity that banks need to achieve to be leaders in this digital centric world.
At the most basic level, banks need to provide access to their services via mobile/web efficiently. In retail banking, this would imply that not only basic services like checking balances and making payments but also more complex transactions like mortgages and lending should be available through digital channels without manual intervention. The next level of maturity would be the ability to innovate on products and services using digital. The most obvious example would be to leverage in-house and 3rd party data with consent to personalise products and services like proactively taking action to help a customer in financial distress or offering a bespoke loan/mortgage offer during the purchasing journey. Other levels of innovation could be offering more attractive services in partnership with others like we have seen the likes of Klarna, PayPal and Laybuy do successfully in the Buy Now, Pay Later model. For firms to achieve digital leadership, they also need to create the ability to continuously drive such innovations at speed to meet the evolving nature of the consumer and competitive landscape. That’s why agility is such a fundamental requirement for digital leadership.
So, how are banks faring in their quest to achieve this high level of maturity? The survey found that only 40% say that they have made significant progress in meeting their Digital Transformation goals. This is in stark contrast to start-ups like Monzo, Starling and Revolut who have demonstrated their ability to achieve a high level of Digital maturity by creating digital only propositions at speed and innovate on the product cycle in their area of specialisation. Arguably these fintechs have much smaller product portfolios/customer segments as well as no legacy that makes a digital led model easy. But the large customer/geo footprints and diverse product portfolios are also advantages that incumbent banks can use to reclaim a leadership position with their customers. In some areas we have seen great progress. Most banks have now invested in a robust mobile platform to access basic banking services. We’ve also seen innovative products like HSBC’s global money account and Citibank’s global wallet that take advantage of their global liquidity positions to offer a competitive multi-current account to their expat and more global customers – directly competing with the various Fintechs in this very lucrative market. However, it is also evident that more needs to be done to achieve this digital first model across the entirety of their business. Complex transactions like getting a mortgage or taking out a secured loan are still not digital enabled and the degree of automation for back-end processes is still high as evidenced by the high-cost income ratios of most incumbent banks especially in Europe. So, what’s holding these larger incumbents back?
Here, the study lists lack of investment in skills/technology, the pandemic and the change in culture as some barriers to progress. However, in order to overcome these barriers, banks need to look at the underlying issues creating this organisational inertia against change. The strengths of incumbents around the size of their customer base and the strength their capital position can also create additional complexity and regulatory scrutiny that slows progress. Conflicting priorities like how to modernise while balancing the need to maintain existing legacy; how to enforce a strict controls regime while continuing to increase agility or, how to strike the right balance between investing in human capital versus automation using technology can create competing priorities that make transitioning to a digital future more difficult.
The good news is that this inertia can be overcome. The pandemic has shown that with a strong imperative, incumbent banks can move incredibly fast as most did to support customers with no access to branches. Companies like Goldman Sachs have demonstrated the opportunities to create new areas of growth in areas like retail and transaction banking using a digital first model while still maintaining their traditional trading revenue.
There is a huge opportunity for banks to leverage the full power of technology to create unmatched customer value and win the race against FinTechs. By defining a clear strategy and a will to overcome this organisation inertia via the right incentives and operating model changes, banks can create a digital first future that will benefit both customers and shareholders.