Financial institutions are being disrupted on almost every front due to digital technologies, new competition, redefined business models and increasing consumer expectations. Increasingly they need to innovate, become more agile, utilize data and advanced analytics to support cost reduction and revenue improvement, and build partnerships with organizations who may also be competitors.
So, which of these massive changes pose the greatest risk to the future of banking? How should a financial institution play catch-up in an environment where being a “fast follower” isn’t fast enough? Where should a bank or credit union start in order to become more relevant to consumers and positioned for success in the future?
In reality, the biggest risk in banking is more cultural than structural. As mentioned in The Financial Brand, it is the inability for financial services executives and organizations to embrace change, accept risks and disrupt themselves. It is the risk of complacency, current successes, playing not to lose and of “being a banker.”
The Risk of Complacency
Perhaps the most significant risk for financial institutions today may be that of complacency, based on relatively short-term indicators. Even as the marketplace continues to change quickly around us, a steady string of positive financial results lulls many banking executives into a false sense of comfort. At the same time, the consumer is demanding more and appears to be increasingly accepting of alternatives to traditional banking.
The recession of 2008 — which was caused, in part, by an erroneous belief that the status quo would continue and the housing market would never decline — makes a good case in point. The same could be seen around the strong hold the banking industry once had on merchant POS transactions, short-term lending, P2P payments and even mortgage origination.
The Merriam-Webster dictionary defines complacency as “self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies.” Complacency thrives on the tendency to look for data that confirms currently held beliefs. For instance, perspectives on the risk of fintech firms, the influence of big tech organizations, or the usefulness of existing branch networks can be reinforced by research that will seem to support the impression that “doing nothing is OK.”
Complacency can also arise when a circumstance looks familiar from the past. Following the logic of the children’s story, “The Boy Who Cried Wolf.” bankers could ignore signs of impending trouble because previous warnings did not materialize. An example is the ongoing warning that consumers will soon demand account opening with their mobile device. The reality has been slow to develop, which has allowed financial institutions to delay investment in new digital account opening solutions.
People and organizations that assume the status quo will remain in place are setting themselves up to be blindsided, states Forbes. “If you stay in the safety of complacency without a notion as to what’s happening in the company or in your industry, your safety zone can become a danger zone overnight.”
The Risk of Current Success
Many executives and organizations are very successful today because they have mastered a key element that makes them valuable to others. For a financial marketer, it could be a targeting model that has continued to perform well. For a product manager, it could be a unique product that has gained broad consumer acceptance. For a financial institution, it could be the ability to serve a specific market well. The success achieved provides great reason for pride and recognition. Yet it also provides the foundation for future risk.
We have all heard the saying “If it ain’t broke, don’t fix it.” Success provides security — and security is one of the things that keeps us from taking risks. We tend to want to stick to the familiar and predictable — things that we can seemingly control.
Unfortunately, we can’t control the future, and change is occurring faster than ever. While previous successes can provide an excellent foundation for future growth, it can also inhibit our ability to take risks. The illusion of safety that success provides can actually blind us from the reality that surrounds us and that needs immediate attention.
Financial institutions and financial services executives must be willing to make mistakes, hold unconventional positions, and be willing to step out of comfort zones. Intelligent risk-taking considers the things that could possibly go wrong and determining whether or not to take a risk. When action is taken, the success achieved becomes the next stepping stone allowing you to be better prepared for the future.
The key to long-term survival is constant and never-ending improvement (CANI). According to Sonia Wedrychowicz, Managing Director and Head of Technology Transformation at JPMorgan Chase, “If you are successful and comfortable – don’t allow yourself and your company to fall into the trap that it will last forever … that’s the best time to transform and change!”
The Risk of Playing to Not Lose
Many executives are familiar with the Myers-Briggs assessment tools that discover personality attributes and help to determine performance. One of the outputs of this test was the ability to group people and predict performance based on whether a person was promotion-focused or prevention-focused.
Promotion-focused people concentrate on advancement and the rewards that can accrue from taking risks. They are eager and “play to win.” True, errors can occur because of thinking big but not always thinking everything through. However, these people will pay that price, because, for them, the worst thing is a chance not taken, a reward unearned, a failure to move forward.
Prevention-focused people, on the other hand, view goals as responsibilities, and usually take the safe route. They are more worried about what might go wrong. Consequently, they will “play to not lose” – maintaining the status quo.
A mix of promotion-focused and prevention-focused people are important for every organization, despite the communication challenges that can occur. Banks and credit unions need to have a mix of people wanting to innovate and move forward as well as those who will use past learnings to help build the foundation for growth. Most importantly, management must encourage trying new things and not holding onto the the past.
According to the book, “Top Dog”, by Po Bronson and Ashley Merryman, “Competitive fire will never ignite, or be expressed, when our orientation is just to get through the day. Competitive fire will flourish when long-term goals are high, and when it’s accepted that risks and mistakes go hand-in-hand, and we are free to let ambition reign.”
The Risk of ‘Being a Banker’
In a behavioral study done among international bankers, it was found that bank executives take significantly less risk when reminded of their role as bankers. In the study, they invested about 20% less in the risky asset category relative to the control group. In other words, when they were ‘acting in a ‘banker mentality’ – reminded about banking, and their bank, and their banking careers – they will be more conservative than they would otherwise be.
When the same people were not reminded of their banker role, they took greater risk, indicating that the risk in banking doesn’t come from culture but from structure. The question become, is there something about the culture and structure of banks that makes bankers risk-averse? Or is this something that is just evident now?
From my perspective, I have seen that “bankers being bankers” tends to result in lower acceptance of change; an adherence to legacy policies, processes, and thought patterns; and the resultant risk of not being able to keep up with consumer demands.
It’s Time to Disrupt Yourself
Change in business or on a personal level is scary. As opposed to waiting for something to happen, successful executives and companies must take the proactive shift necessary to deal with today’s increasingly rapid pace of change. Instead of a “don’t fix what isn’t broken” attitude, you must adapt to the change around you or face obsolescence.
Banking executives and financial institutions must deliberately disrupt themselves … before the marketplace does it for you. Proactive disruption isn’t optional, because the change that is happening in banking is occurring through all sectors of the economy. It is time to eliminate complacency, stop resting on the laurels of previous successes, start playing to win, and stop being a “traditional banker.”