Digital Transformation in Retail Banking: The Human Challenge

Retail banks understand the need for digital transformation. The real challenge is not adopting new technologies, but shifting to a digital culture.

Retail banking faces challenges from everywhere in these trying times. Low interest rates that are unlikely to grow seriously impact the revenue streams of banks in Europe and the US. Many banks have been focusing on cutting their cost-to-income ratio by reducing headcount and closing branches with mixed success, but are still not matching the lean and mean business models of the direct banks such as Russian Tinkoff Bank (5 million customers) or Japan Netbank (3 million customers).

Top 50 Banks in Top 1000 World Banks 2017Click to enlarge

Source: Extract from the Financial Times' Banker Database for 2017

There is an increasing competition from the fintechs that focus on payments, loans and personal finance. Again, with low-cost and streamlined offerings. For a retail banks to survive, it has to beat these new entrants at their own game by going digital. This is not merely a matter of new technology; it is a fundamental disruption of the banking business model, culture and relationships with the customer.

Banks Risk Becoming Irrelevant

For at least the last twenty years, banks have been driving their customers towards electronic banking for all the wrong reasons. The focus was on reducing banks’ costs, rather than offering a convenient, simple banking. Now that most customers of all ages across the globe have gone digital, it’s ironic how their banks are struggling to keep up.

Traditionally, bank customers had long-term relationships with their banks. Sometimes this was built on loyalty, but mostly it was due to inertia and the difficulty of switching banks. This allowed banks to become complacent and concentrate on pushing products, with little regard to the segmentation of their customer base. Trust in banks was gradually waning, which only accelerated with the 2008 sub-prime crisis, creating a major trust deficit between the banking customer and their primary bank. Retaining customers is no longer something that can be put on the back burner, but banks still devote most of their marketing budget to attracting new business, neglecting their most profitable customers.

The digital revolution has changed all that. Customers want ease of use, simplicity and responsiveness, and digital banking is what provides most of the solutions for everyday banking. This is not limited to Millennials: there is a broad spectrum of digitally literate consumers from 8 to 80 years old who want a digital and seamless access, and who will switch if they do not like what their current bank is offering.

Customer Loyalty in Retail Banking - Global Edition 2016Click to enlarge

Source: Bain & Co - Customer Loyalty in Retail Banking: Global Edition 2016

While most retail banks understand this, they are hamstrung by their aging legacy systems, and have to resort to bolting mobile apps and online banking onto their complex and siloed back-office applications. This is a short-term fix; this outdated architecture has to go and be replaced by a new, open digital platform. Before any sweeping technology changes are made, however, the bank has to undergo a radical transformation, and craft a new digital business model. This is the real challenge: a successful digital transformation is not about technology, it is about the customer, the bank's employees and the culture.

Defining a Bank's Digital Strategy

A successful digital strategy is very disruptive, and there is no painless way to implement it. It requires a quantum shift away from hierarchical structures, complex bureaucracy, and product focus to an agile and innovative culture where design is based on a deep understanding of customers’ needs.

It will require unbundling and outsourcing of areas where the bank lacks expertise, formation of new partnerships and values of openness and responsiveness. All this has to be managed without losing the grip on governance, compliance and protection against cyber-attacks. It all starts with becoming truly customer-centric.

Customer Experience is Paramount

"Putting the Voice of the Customer at the centre of everything we do". Miguel Uccelli, CEO and Country Head of Scotiabank Peru (p. 32 of presentation)

In order to ensure a good and consistent customer experience, it is necessary to understand and map the customer journey, as well as identify all the "moments of truth" in these interactions. Every customer journey is a new business process; it should be refined by removing all unnecessary interactions, business rules and hand-offs from the process. When the process of opening an account is viewed through the lens of a customer, it seems extraordinary how much waste has crept into this process. Redesigning each process will simplify interactions with customers, reducing costs, improving efficiency and creating a better customer experience. Once the process has been optimized, it can be digitized. Canadian bank Scotiabank, which has a large Latin American footprint, achieved radical improvements by following this approach. It was not an overnight fix, but still has made them one of the leaders in digital banking.

Improvements to legacy processes implemented by Scotiabank in Canada

Digital customer experienceSource: Scotiabank Digital Banking Update, February 2, 2017

Introducing the New Inclusive Agile Culture

Many organizations (not only banks), who have embarked on their digital journey, understand the building blocks that are required to digitize, but exclude the majority of their workforce from the trip. This is why so many innovation labs fail; while there should be a team of innovators applying design thinking to how the bank should be, anyone in the bank should feel that their input is valued, and that they are part of the team.

This requires much change management to engage and educate employees. Some banks have taken things further by changing to an Agile organizational structure, such as Nordea Bank, that describes how this is not an overnight change, but how employees do accept the challenge, and the bank reaps the benefits of improved productivity and a happier workforce. ING Bank too has used Scrum and DevOps to build a new way of working.

New agile organizational model has no fized structureSource: ING’s agile transformation

Banks will also have to search for the right talent for their digital businesses. This can be done by employing some key critical resources, such as data scientists, but it can also be managed by forming partnerships with companies that specialize in the much needed skills, such as mobile development and managed facilities. This is made easier where a digital platform has been implemented.

Don't Do It Alone: Partnerships and Alliances

One of the advantages of adopting the technology required for digital banking is the implementation of an open platform, which encourages the use of APIs to build integrations into the core platform. This opens the door for partnerships and alliances of all kinds, as well as complying with the European Union PSD2 (the Revised Payments Services Directive) requirement. Some banks have welcomed this approach, such as Citibank with Citiconnect, Scotia and Deutsche Bank, but most banks have yet to accept it, mainly because they are constrained by their current architecture.

"You can‘t innovate in isolation" – J. P. Rangaswami, Chief Data Officer at Deutsche Bank

There are several classes of alliances and partnerships available for such innovative banks:

  • Collaboration with universities and other learning hubs
  • Solid partnerships with vendors
  • Co-sourcing with specialist developers
  • New partnerships with fintechs (if you can't beat them, join them)

Scotiabank has made considerable inroads in all these areas. To explore the new frontiers of digital technology, it has enlisted the aid of several universities in various research fields from disruptive technologies to customer analytics.

Scotiabank's investment in academic research

Academic partnershipsSource: Scotiabank Digital Banking Update, February 2, 2017 (p. 84)

Scotia has also gone into partnerships with fintechs such as Kabbage, a small loans specialist. While many banks are reluctant to partner with fintechs, there is a good reason for doing so: no bank can claim universal excellence in what they do, and there are always some products or areas of competence that do not quite make the grade.

Many fintechs operate in such niches as regulation and compliance (these are known as "regtechs"). As statutory and regulatory compliance place a large burden on the bank, it could be a relief to outsource such work to a team with a dedicated focus.

Deutsche Bank has partnered with various fintechs as part of their digital strategy. You might have observed that, while they are ranked as the 21st on the global banking list (see the first diagram), their cost to income ratio gives much cause for concern, added to some recent mishaps that have affected their profitability in the last few years. However, they are gradually reducing this ratio by embracing digitalization with both hands.

Deutsche Bank Fintech PartnershipsSource: For the banking of the future – Deutsche Bank’s Digital Factory (p. 10)

Partnerships with vendors are nothing new. What has changed is the benefits of research available by vendors such as IBM, SAP, Tableau, Facebook and Google, through their own products, such as Watson and SAP Hybris.

Many banks still make the fundamental mistake of trying to accomplish everything in-house, especially IT development. While it is vital that all banks have a full-on IT complement, both for the old and the new architectures, it would be unreasonable to employ developers for every flavour of software out there. It would be a challenge to keep them regularly occupied with work and they would not be able to keep up with the skillset needed in their niche. For this reason, banks should find reliable partners who can provide such services as dedicated development houses.

For those who are sceptical about whether they need outside help, here’s a fact: Scotiabank has 89,000 employees and Deutsche Bank has nearly 100,000, yet they still willingly look for help from external sources.

Pulling it all Together: The Digital Factory

We mentioned earlier that innovation labs often fail. However, if the bank succeeds in its transformation goals, it needs a hub where employees, partners, customer focus groups and even total strangers can aid in the innovation process. It is no coincidence that both Deutsche Bank and Scotia have built "Digital Factories" where new theories and ideas can be tested and new products can be developed. These factories offer facilities for hackathons, where participants are invited to solve a particular problem. This is innovation taken to the extreme; winners have the opportunity to become a startup, providing their solution to the sponsoring bank. This is both a disruptive and exciting way to innovate: it brings new ideas to old problems, such as Scotiabank's last year hackathon to find a way to help customers manage their debts.

While many banks have a long way to go before they can even contemplate setting up a factory, they have an advantage in that they can follow the fortunes and misfortunes of outliers such as Scotiabank and BBVA, and learn from what they have achieved.

We have not even started to address the technology aspects of digital transformation; that is the subject of a separate article. Even this article only skims the surface of the human element in digital transformation, but we hope it has given you some new viewpoints on taking up the digital challenge.

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