Almost every financial institution worldwide has digital banking transformation as a top priority. From improving data and analytics maturity, to fostering an innovation culture and modernizing back-office technology and operations, banks and credit unions are trying to improve their operational efficiency and customer experiences. In the process, legacy business models are being rethought and workforces are being reskilled.
The question is, are leadership teams within banking adequately prepared to keep pace with the changes in the marketplace? Are they embracing the change that has disrupted the industry, and taking the requisite steps to become more digitally savvy, or are they simply standing on the sideline hoping that others will accept the challenge of leading their organization that has encountered a massive paradigm shift? Either way, it is clear that the presence of digitally perceptive leadership is no longer a luxury in banking … it is a requirement.
According to research discussed in the MIT Sloan Management Review, large enterprises where more more than half of executive members are ‘digitally savvy‘ outperformed comparable companies without such teams by more than 48% based on revenue growth and valuation. For the research, the definition of being ‘digital savvy’ was, “having an understanding, developed through experience and education, of the impact that emerging technologies will have on business success over the next decade.” One of the key elements of success is the ongoing sharing of this understanding across the entire management team.
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Digital Savviness Is Lacking in Banking
In the past, financial literacy and banking experience was a baseline qualification for top executives in financial services. With the massive changes in the marketplace, it is now equally important to include technological and digital literacy as additional qualifications, according to research by the Harvard Business Review. The challenge is that there is a significant gap between supply and demand for digitally savvy leaders. As a result, less than 10% of organizations across industries have digitally savvy leadership teams, a scenario that will inhibit digital banking transformation progress and impact the ability for banks and credit unions to be future-ready.
What has also been found is that many organizations are only looking for digitally savvy leaders in a relatively minor sub-set of roles that are directly related to digital banking transformation. Instead, financial institutions should be broadening the scope of their talent strategy. As we have found in research by the Digital Banking Report, succeeding with digital banking transformation requires an understanding of digital functionality and emerging technologies across all leadership roles within an organization. This includes, but should not limited to, leadership involved with technology, information systems, marketing, sales, human resources, operations, customer service, delivery channels, and the board of directors.
Digital Skills Gap:
Only 12% of top team members are digitally savvy in the finance and insurance industry, underscoring its vulnerability to disruption by more agile fintech startups. – MIT Sloan
Research by MIT Sloan School of Management’s Center for Information Systems Research (CISR) found that digital savviness of top executives varies widely by role. For instance, only 23% of CEOs, and 12% of CFOs, could be considered digitally savvy. Even in areas that would be considered integral to digital transformation, the level of digital understanding was lacking. Only 47% of CTOs and 45% of CIOs were considered digitally savvy, with 23% of marketing leaders and 24% of operation leaders having a basic level of digital expertise.
Correlation Between Digital Understanding and Results
Despite the reality that the vast majority of organizations across industries lack digital savviness within their leadership ranks, research indicates that those firms with higher levels of digital and technology awareness at the top perform better financially than the norm. Even if only half of the management team is digitally savvy, the revenue growth premium can be close to 50%, with 15% higher net margins also being evident.
What was interesting is that it is not an ‘all or nothing’ game. The MIT Sloan research found that as the percentage of digital savviness on top teams increased by 10%, there was a measurable increase in profitability and revenue growth compared to industry averages. And the impact was greater if this savviness was in the role of CEO, CFO, head of marketing, head of corporate communications, or head of compliance/legal. The ‘best combo’ was if both the CEO and CFO were both digitally savvy.
Leadership Style Transformation:
Digitally savvy top teams lead differently. They have moved away from the command-and-control leadership model to a coach-and-communicate approach.
It was also found that digitally savvy teams have the biggest impact on innovation, cross-selling, and business transformation. These teams tend to embrace test-and-learn experimentation, agile business practices, and the use of APIs to support innovation.
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Upgrading Leadership Ranks
It is clear there is a digital performance gap across the leadership ranks of banks and credit unions that must be addressed to achieve the level of digital transformation desired and the financial results needed to compete. This will necessitate major changes to talent strategies in place and will often require a combination of a reskilling and a restaffing effort. In some instances, this could alter legacy promotion pathways that have been standardized over decades.
A strong case can be made to revamp and even expand job rotation programs within financial institutions. In the past, rotation programs were usually used for new management trainees to understand the ‘way things were done’. Today, rotation could provide an opportunity for new and established employees to experience not only operational areas of the bank, but technology and digital departments as well.
This expanded and redefined rotation can provide critical skills and experiences not developed in the past. By selecting both new and existing employees to better understand and practice the skills desired in the future, there is a better chance of eliminating iconic practices that support historical ways of doing business.
Obviously, executives must be willing to embrace change, take some personal risks and become digitally savvy. If a set of leaders are unable or unwilling to shift with the demands of a digital banking organization, there may be a need to replace key players and search the external labor market. Unfortunately, the imbalance between supply and demand has decreased the availability of needed talent, increased the cost of the talent that exists and put many financial institutions at a market disadvantage due to the perceived lack of exciting opportunities in banking.
The pandemic quickly exposed the organizations that were not prepared for the digital future. Some organizations have the leaders in place to move institutions to where the marketplace is heading. Other organizations have serious performance gaps in the area of digital savviness. We are already seeing executive turnover within financial institution leadership ranks as both traditional and nontraditional financial firms position themselves for the future. This marketplace disruption will only increase as firms search for leadership that understands the potential of digital transformation.