For the legions of Chris Skinner fans, don’t worry. He hasn’t gone soft. The veteran blogger and author of Digital Bank, ValueWeb, and Digital Human still believes the traditional banking model is broken. As he has said many times: In a globalized world of the digital distribution of data through cloud-based software and servers — in which teenagers who can code are creating the new world of finance — “the banking model is completely turned on its head.”
Banking executives who ignore these trends, thinking they can just keep things as they were, “are going to fail,” Skinner insists.
But over the past year the creator and writer of The Finanser daily blog and Non-Executive Director of 11:FS, has developed a contrarian view on the typical fintech-disruptor take on the future of banking.
“I got fed up with people bank bashing and saying banks are dumb and stupid and don’t get the idea of digital,” he tells The Financial Brand. That conviction prompted him to start research for a new book with the working title, “Doing Digital.” Scheduled to be published next year, it will profile the handful of banking providers in the U.S. and overseas that are doing digital transformation well.
‘We Know We Must Change. Tell Us How’
Many traditional banking leaders know they must change fundamentally, and Skinner acknowledges that doing so is not easy. “It’s difficult to break the shackles of old business models.” Over the past year, Skinner has been talking with financial institutions that have done just that, or are far along the path, to find out what they have done and share the lessons with the majority of institutions that are trailing.
These digital transformation pioneers may well prove to be the toughest competition for the rest of the banking industry, especially as they embrace the open, platform-based business models used by nonbank tech and e-commerce firms.
In other words, JPMorgan Chase, not Amazon, may become an even more formidable competitive threat to many banks and credit unions, particularly the mid-sized and regional institutions that haven’t yet moved to change their strategy.
Chase is one of the banks Skinner is focusing on in his upcoming book. Others include BBVA and ING. He also says Capital One and USAA stand out in the U.S. as digital leaders, as well as Goldman Sachs Bank and its Marcus brand.
“If you look at the banks I’ve been talking with that are doing digital well, they all think the same way,” Skinner states. “They’re all changing organizational structures and moving infrastructure to the cloud. They’re all moving towards being completely flexible and agile — studying the organizational structures of the Amazons and Alibabas of the world. They are nothing like traditional banks even though they are traditional banks.”
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You Can’t Delegate Your Institution’s Future
Becoming a digital bank is a long journey for most traditional banks and credit unions. Skinner describes the four stages of transformation as:
- What do we need to change
- How do we need to change it
- Change it
- Do it better
He has already collected many lessons relating to each of those stages to be presented in the book. But the process actually begins before the first stage.
“The real starting point is to have executive leadership of the institution completely understand what digitalization means and that it’s an organizational mindset and culture change and not just a project they should invest in,” Skinner states. While that may seem obvious, it is not commonplace.
“Whether I’m speaking with a small bank, thrift or credit union, a mid-sized regional bank or a large bank, if someone says to me, ‘Oh here’s my chief digital officer,’ I respond, ‘You know what, you’ve delegated this job. You can’t delegate the future of the bank to someone who is not in the leadership team.”
A big part of the problem for traditional financial institutions, Skinner stated in a speech, is that “94% of people in banking C-suites have never had any tech experience in their professional life. How can they create a digital vision?” Banks have all the “fin” but not enough “tech,”’ he believes.
By contrast, at BBVA, the big Spanish bank, half of the leadership team — executive leadership — are digital technology people by background, Skinner points out. That includes Francisco Gonzalez, Chairman, who spurred the bank’s digital transformation in 1999, when he was named CEO. The bank doesn’t have an IT function, Skinner notes. It has integrated IT into all business units so that every function — even Audit and Compliance — has designers and developers working in small groups to deliver change.
Skinner says the bank even has a pair of “Chief Cannibal Officers.” The title — coined by Skinner in one of his blogs — is fictitious, but the position is real enough. The two officers — one focused externally, one internally — have the job of figuring out how to destroy the business. The idea: Identify the bank’s weak points before a competitor exploits them.
This One Measure Is Key to Truly Transforming
In the year he’s been researching his new book, Skinner says a critical point emerged from the conversations he had with digital-banking leaders. To Skinner this point is as important, if not more so, than having tech-experienced people on the executive team.
In more than one instance, both chairman and board of the financial institution starting down the road of digital transformation has made it quite clear to investors, shareholders and to the leadership team that the board was 1,000% behind the change. Further — and this is the key point — they communicated that the directors would “shield the leadership team and the CEO during the change transformation period from investor and shareholder focus.”
“You cannot transform an organization fundamentally from physical to digital if you’re continually looking at quarterly shareholder returns.”
— Chris Skinner, The Finanser
“You cannot transform an organization fundamentally from physical to digital if you’re continually looking at quarterly shareholder returns,” Skinner maintains. The financial institution must focus on how to serve the customer better with digital platforms, digital services, apps, APIs and analytics. “That intense focus on the customer and on digital change, rather than on shareholder return, is very difficult to do if you don’t have that shield — that protection,” Skinner states. “Without it, management will probably never get the breathing space to make change happen.”
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Details of Chase Bank’s Digital Journey
The job of C-suite leaders at banks and credit unions is not managing technology, but curating it, according to Skinner. So when considering use of the cloud, open banking, open APIs and marketplace and platform structures, a curator focuses on “How do I get these external technologies to work with my teams and our internal capabilities to deliver the best results to the customer?”
“That’s a very difficult act to manage,” Skinner observes.
JPMorgan Chase CEO Jamie Dimon is doing pretty well at it, in Skinner’s view. Many people may not think of Dimon as having a technology background, but Skinner points out that the CEO grew up in the trading room at Citigroup in the 1980s and recognized the power and competitive advantage of technology.
( Read More: Chase Commits to Long-Term ‘Digital-Everything’ Strategy )
Currently Chase is investing $10 billion a year in technology of which $3 billion is going into new projects and $7 billion is for managing and changing the infrastructure, according to Skinner. He adds that the 70% spend rate on existing technology is down from 80% a few years ago and the bank is targeting 50% a few years now. “When you consider that half of a $10 billion technology budget will go into innovation, you can see that these guys [Chase] are really going to be doing something different,” Skinner observes.
They already are. The bank is using massive investments in artificial intelligence and other initiatives to reduce the need for people to handle routine work. This has contributed to the reduction in total employees from 235,000 in October 2016 to 165,000 people in 2018, Skinner states. The bank’s market value increased by 50% over the same span.
So far, Chase hasn’t reduced its total branch count. In fact it has added branches in several markets where it did not have any. But Skinner says Chase is rethinking its physical distribution approach to embrace smaller-footprint structures within a wider reach than it has had historically.
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‘Yes,’ To Branches, But For a Different Reason
Among the fintech influencer crowd as a whole, bank branches are regarded in the same light as a pocket calendar. Skinner, by contrast, expects branches will be around for the long term: “I do not see them going away.”
The reason, however, is not exactly mainstream thinking within the industry. Physical facilities may be used for advice, service or even for transactions. But these are not their primary purpose, Skinner maintains. Within the context of a digital bank, “the only reason why physical access sits in a digital structure is for trust — trust in the institution that has your invisible money.”
“If suddenly my app says I have $0 in my account, but yesterday I had $100,000, I’m going to go bang on someone’s door. I don’t want the chatbot.”
— Chris Skinner, The Finanser
“Consumers are very happy to use a banking app,” he says. “But if suddenly my app says I have $0 in my account, but yesterday I had $100,000, I’m going to go bang on someone’s door. I don’t want to try to get through the app to the chatbot.”
Skinner says his favorite statement about branches comes from his friend Roberto Ferrari, former CEO of Italy’s CheBanca!, a digital bank Ferrari created in 2008. When Skinner visited, he noticed that the branches CheBanca! was actively adding were mostly “all screens,” with people only available by appointment or by video. When asked why that was, Ferrari said that where he has a branch he gets twice the assets of where he doesn’t have a branch. “So I’m investing in these branches because of trust, not for service or advice. It’s my marketing budget.”