It is clear to most business leaders in financial services that digital disruption in financial services is a game changer, although some continue to try to deny it. What is far less clear is how to successfully adapt financial services organizations to the new digital reality and to change the industry’s typical slow motion mentality and defensive incumbent behavior.
In the book, The 7 Habits of Highly Effective People, author Stephen R. Covey presents an approach to being effective in attaining personal goals by gaining alignment with proven principles. Emphasizing the need for a paradigm shift, each chapter focuses on a habit, starting first with three internal imperatives, followed by three external imperatives, and then an overarching habit to sustain growth and improvement.
Some of the key lessons and insights of this book can be adapted and reapplied to banking as we hope to reshape our organizations to make them successful as we face digital disruption. Taking inspiration from the book, there are 7 key habits that have worked in our organization’s transformation.
Three of these changes are ‘internal’ behaviors for the organization to help it grow. Three of the new habits are ‘external’ to an organization, impacting the way it interacts with the environment and the market as a whole. As with the best selling book, the final habit is a rule for continuous improvement.
The 7 habits of highly successful digital bank are:
- Be customer centric
- Eliminate silos
- Be a challenger
- Embrace cooperation and coopetition
- Work with Fintech startups (or buy them)
- Build an open IT architecture
- Strive for a faster innovation planning cycle
Traditional incumbent financial institutions tend to play it safe and in a closed fashion, protected by regulation demands, high entry barrier and very high customer inertia. The digital disruption, lowering entry barriers and changing consumer habits are challenging these paradigms. Regulation is getting tougher for capital, risk control and liquidity requirements, while also demanding higher transparency, pushing for customer account number mobility and heightened competition.
In short, the competitive landscape is changing with the coming of Fintech firms and the transformation of financial service delivery.
1. Be Customer Centric
This may sound obvious but: a) it is not always true for a traditional incumbent; b) it carries along some key components that are often under evaluated. Being customer centric means that you:
– Change your mindset. You need to build a digital, customer-oriented culture inside the bank. Not just profits, but profits as a result of a successfully differentiated and long term sustainable customer strategy. Marketing is not just about spending, but should relate back to its original ‘go-to-market’ meaning.
Being ‘digital’ is not just something trending, but is going to be forever and a core part of the organization. Implementations should not be a second level job execution, but must be smart, agile, smooth and consumer-oriented and designed. Start thinking about the right organization structure and interactions, with the right people to digitally lead the change with customers in mind. Find the right skills.
– Reengineer your business to consumer processes. Start with the end in mind, using overall customer experience you want to achieve as opposed to starting from a legal and regulatory constraint perspective. This may sound impossible in an over-regulated industry, but if someone tells you “this is impossible to do,” you can always find a way.
In addition, you should inject a “Yes we can” culture. Engage your legal, compliance and risk managers upfront in the process and product design, making them work with others on the team toward the solution. They will become part of the solution instead of a hurdle.
– Win customer preference. Do not start with market share or business objectives. Start with how to get the customer preference you need in order to achieve your business objectives, and make the objectives compatible. Competition will only become more intense going forward, so don’t forget your brand image and values.
Trust is key in financial services, and trust is determined first of all by reputation (brand image and customer experience) that is becoming more and more digitized. Improving your reputation and satisfaction scores will bring you additional clients at lower costs. It is not enough to say that your bank is ‘solid’ or ‘local’, or ‘global’. You need to work on your brand strategy to attract customers. This has to be part of your competitive advantage.
2. Eliminate Silos
This is organizationally key for a digital bank. This is not just important from the legal or risk perspective. This must be extended to the whole organization. Some keys to eliminating silos:
– Eliminate staff and business departments. From the most obscure back office department to state of the art front office deployment, it is important to deploy agile across functional teams. Cross fertilization and mutual understanding of the agile concept will help to achieve your business goals.
– Build objectives and incentives from a multichannel customer perspective. Find a way to align objectives across channels and neutralize organizationally driven internal competition. Break the conflicts.
– Make IT the center of your strategy. Put your COO and CIO at the heart of your business, working alongside finance, marketing, etc. Since IT organizations are usually built in silos, break these silos – making them work agile – in teams. Make sure innovation teams are not logistically miles away from who runs the daily business.
3. Be a Challenger
Challenge your own business model and your traditional way of working. Firms that failed to challenge their incumbent businesses include Kodak, Blockbuster, Nokia, Blackberry and many others. Incumbent managers and organizations tend to defend their own profit sources, and their well-proven (in the past) business models.
Financial service barriers to entry are falling and newcomers are already making inroads, encroaching on traditional lines of business. While the size of newcomers may look small and banking may still feel safe, you need a long term competitive perspective. This is a business revolution not just a technological evolution.
It is time to start thinking about ways to evolve your business model … speeding up innovation and behaving like a new entrants. If you were a FinTech how would you behave? What business model would you build to destroy an incumbent? How would you attack the most profitable sources of your business. Use a challenger mindset if you want to survive in the long term.
4. Embrace Cooperation and Coopetition
It is time for a complete rethinking of the banking business model, IT architecture and systems, since digital banks will mainly serve as IT companies dealing with customers’ money in the future. Banks will need to be much more open and ready culturally and infrastructurally to share business, clients platforms and solutions with external partners.
The time where banks could run their business in isolation, with very little sharing of cross-industry platforms is over. Banking is under a massive attack from internet giants and legacy-free Fintech startups, creating the need for systematic cross-industry alternative digital solutions.
One very good example of how the banking future should be reshaped is given by the UK-based Paym P2P payment network. Forced by the Payments Council, it has reached a coverage of 9 out of 10 current accounts and processed nearly £44 million in less than one year. As a result, banks and building societies in the UK have been able to work together to develop a new fast payment solution that will make the life harder for new entrants.
This is the new way forward. Building new digital common platforms, with competition based on customer preferences around branding, customer experience, value propositions and add-on value propositions. This is what is happening in the auto industry and will eventually happen in banking.
5. Work with Fintech Start-Ups
Incumbent banking organizations need to streamline their operations and narrow business and product development focus. They can’t be all things for all people, but instead, need to cut oversized operating and distribution costs.
There will continue to be smarter and faster players in a better position to deliver state of the art vertical solutions and user experiences … eating away at the edges of incumbent organizations. With regard Fintech start-ups, it may be better to partner than to compete. In other words, part of the product/service development of a successful digital bank should be outsourced.
As with many of the 7 habits, this is a complete change of mindset. It is not just about setting up an incubator or even a $100m VC fund. It is about integrating third party customer solutions into your offering. Or, if you want and can, it is about buying them entirely and having their solution as a key part of your own business proposition. An example of such a partnership in the U.S. and overseas is with Apple Pay.
6. Build An Open IT Architecture
If you want to build your competitiveness on agile web-scale innovation and open up your offering to partners and third parties, you need to completely rethink your IT architecture. Openness is the key word – you need an open programmable, agile architecture.
You need an API-centric platform capable to deliver:
- Consistent omnichannel experiences
- Dialogue in a plug and play scalable manner with third parties software solutions
- Hosting for new outsourced marketplaces
- A new digital CRM that will enable you to interact and learn in real time with your customers
There are already new digital banks set in this way. Fidor Bank is a good example, as is the way Moven is building their network outside the U.S.. This will become more of the norm in the next 5-to-10 years. There will not be an option for traditional banking organizations wanting to become digital banks.
7. Strive For a Faster Innovation Planning Cycle
The seven habits book ends with a discussion around the capacity to continuously improve, balancing and renewing resources for long-term well being. Successful banks in the digital word need to do the same … striving for continuous improvement and renewal. In order to do so, organizations need to get much much faster in the way they learn, act and react.
Many recent presentations by large banks show their new innovation labs, teams and work-plans. While impressive few are producing game changing innovations … quickly. The standard approach to innovation continues to include internal debates, committees, small pilots, more committees and so on.
Using traditional new product development and approval processes is a non-starter in the new digital world. The innovation planning cycle is far too slow for today’s high speed digital banking environment.
Today’s big digital players in other industries test and learn as part of an iterative process. They are not afraid of renewal and failure in doing so. They are agile and experiment in real time with their own customer base. The decision making process is much faster and the roll-out is fast … very fast.
There is one fantastic sentence from Jacques Séguéla, the famous advertising man behind François Mitterrand’s successful electoral campaign in 1981. In one of his books, when talking about market research, Seguela wrote: “less tests, more testicles”.
That says it all. Let’s keep it in mind.
Roberto Ferrari is the General Manager at CheBanca!. Launched from scratch in 2008, CheBanca! is a new generation multichannel and digital bank. With award-winning customer centric service and product offering, CheBanca! already has over 500K clients. In 2013, 2014 and 2015, CheBanca! has been recognized as the Best Digital Bank in Italy for customer satisfaction. Ferrari writes on his personal blog.