I found cause for reflection in an interview in the MIT Sloan Management Review with Clayton Christensen, who was looking back at his “Theory of Disruptive Innovation” almost a quarter century after devising it. He explained the term “disruptive innovation” in this way:
“Disruptive innovation describes a process by which a product or service powered by a technology enabler initially takes root in simple applications at the low end of a market — typically by being less expensive and more accessible — and then relentlessly moves upmarket, eventually displacing established competitors.”
Disruptive innovation is the force behind the digital transformation we are seeing in all industries and particularly in financial services. When I talk about “digital transformation” with many banking executives, they focus on “digital” or “technology.” But as Christensen noted in the article, technology is an enabler — not a driver.
The second part of the phrase — “transformation,” a change in approach — often gets ignored. In banking, fintech firms are challenging incumbents with less expensive and more accessible business models, and technology is not the centerpiece.
The Key to Fintechs:
They focus on solving a customer problem and not on the technology they use to do it.
It’s not surprising that many attempts at digital transformation have not delivered the hoped-for results. In fact, 70% of all digital transformation initiatives globally do not reach their goals, according to an IDC analysis. Of the $1.3 trillion that was spent on digital transformation in 2018, IDC estimated that more than $900 billion was wasted. The main culprit for such waste is lack of understanding on how to transform.
Five Key Elements Necessary For Digital Transformation
To change a business model to accomplish digital transformation demands meaningful cultural change. That in turn requires five key ingredients:
1. Transformation leadership comes from the top. Buy-in alone is not enough.
If incumbents are going to compete with fintech firms, or even with other transforming institutions, leaders must think differently. They must drive the change themselves. If they lack the skills to do so, they can delegate. But those to whom they delegate must be empowered to act across the organization.
2. The institutions’ strategy must be revised to include market forces.
Often, we find there is a lack of clear purpose within banking organizations. Nearly all financial institutions say they lead with “customer service” and target everyone. But as Michael Porter said, “The essence of strategy is choosing what not to do.”
Developing strategy isn’t rocket science. As author Roger Martin notes, it is as simple as continuing to answer these interlinked questions:
- What are the broad aspirations for our organization and the concrete goals against which we can measure progress?
- Across the potential field available to us, where will we choose to play and not play?
- In our chosen place to play, how will we choose to win against the competitors there?
- What capabilities must be built and maintained to win in our chosen manner?
- What management systems are necessary to create those key capabilities?
3. Customer-centricity must be embraced and should inform strategic and tactical plans.
As noted earlier, fintech firms are disrupting the market by their focus on solving real-life problems. Financial institutions say they are focused on customers but they do not go beyond Net Promoter Scores. Neither a fabulous or terrible score gives any direction on what customers value or what problem they are trying to address.
Organizations become customer-centric by talking to customers deeply and often. What do they value? What do they struggle with? Who do they trust?
4. Decisions and customer experiences are based on data insights driving quantifiable business and user outcomes.
Digital transformation results in new business models, enabled by technology as the engine, but fueled by data. Managing customer and operational data at scale is required if organizations want to be customer-focused and move at the speed of change. Those companies that generate valid and accurate data, mine it for insights, and then translate these insights into business outcomes will be the winners.
5. Design thinking principles are applied to define problems and solutions to customer needs.
This approach is all about understanding the customer, then defining the problem and solution to their needs.
McKinsey says companies that follow design thinking practices generate roughly 32% more revenue and 56% higher returns.
- Digital Banking Transformation is a Journey, Not a Destination
- Lack of Digital Maturity Threatens Survival of Banks Worldwide
- To Achieve Big Transformation Changes in Banking, Think Small
- LendingClub (Now a Bank) Aims to Become a ‘Financial Health’ Brand
Get It Right Or Get Left Behind
Digital transformation of banking has been going on for at least a decade. Prior to the pandemic, transformation appeared to be accelerating. COVID-19 and the resulting impact on business models have supercharged the changes impacting the market.
Clearly this isn’t the time to delay transformative work. Banking executives need to show leadership and adjust their strategy to compete with fintech firms and the largest banks that have continued to innovate.
Some difficult times lie ahead. But those who think it is time to hunker down should consider this quote from Orit Gadiesh, Chairman of Bain & Co.:
“With the level of uncertainty we see today, more people are asking, how can you develop a strategy in a world that keeps changing so fast? They are afraid that a set of rigid principles will hinder their ability to react quickly. I argue that it is precisely at such times that you need a strategy.”