Can an incumbent bank spin up or buy a digital bank to get out of transforming itself?

I was recently watching an online poll that asked the best way for a traditional bank to compete with the new digital banks. Should they build a new bank, buy a digital bank competitor, or transform the old bank? The vote was split fairly equally between all three choices after more than 600 votes.

Whether to buy or build a digital bank or transform the old bank is a good question. I’ve asked it several times, and my conclusion is always the same: you cannot ignore transforming the old bank. Sure, you can buy a digital bank, as BBVA did with Atom and Simple; you can build a digital bank, as RBS has with Bó and Goldman Sachs with Marcus; but it still leaves the question: what do you do with the old bank?

Let it rot? Let it fail? Let it move into cryogenic freezing and move back over time?

Equally it raises a key issue, as evidenced by JPMorgan with Finn, which is: if you launch a new digital bank that competes with the old bank, everything fails. The new bank doesn’t get the support it needs to effectively compete; and the old bank creates a political wave of hate that is difficult to quell and maybe nigh on impossible, unless you completely change the whole remuneration and reward mechanisms of the old bank.

I’ve seen this many times and typically what happens is that any bank that launches a new digital bank tries to position it to target an audience completely separate from their old bank audience. That creates frustration for the new bank management, as they want to appeal to anyone who wants digital banking. It also creates frustration for the old bank management, who don’t want to see any cannibalisation of their customer base.

In with the old

So, what’s the right answer? You must transform the old bank.

Now doing that is really tough. How do you take a 200,000-employee bank built in the last century and transform it into a 20,000-employee bank fit for this century?

I’m not saying that every bank will lay off 90% of its staff, but if you think that most retail banks have branches with 10 people per branch and most investment banks had trading floors with 1000 or more people – well, most of that disappears in the new digital bank. Equally, when you consider that most old banks have strong, hierarchical structures of management, where middle management forms a large bulk of the employee population, while most digital banks are agile, flat organisations, where management is through dashboards rather than humans – well, most of the management disappears too.

This is why it is so hard to transform a bank. The fear of change is huge, the human resistance to change is massive, and the leadership and management are often unfit to deal with it, especially when most of the management are worried that it is their empire that will be cut.

Lessons learned

However, transformation can be done. It can be achieved. It is not rocket science, as companies such as Netflix, Amazon and Alibaba have done it. None of these companies began life as a digital entity. However, their advantage has been that they were born on the internet.

Therefore, most of the banks I’m talking to who are becoming digital are transforming by learning lessons from companies they respect as digital companies. They go and see how they work, how they manage, how they monitor, how they remunerate and reward, and they copy them. It takes time and leadership, but it can be done.

Finally, therefore, my prediction for the next decade is that the banks who have effective leadership to transform to digital will succeed. They won’t buy or build a bank, or if they do it is for reasons other than dodging the bullet of transforming the old bank. It might be to give them time to transform or ability to keep up, but it won’t be to avoid digital transformation.

Every bank must transform, because if you don’t, you die. You will be acquired. You won’t survive. That’s a promise.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.


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