Why jack-of-all-trade banks will go the way of the dinosaurs
Doing a number of things to an average standard is no longer tenable for banks. They need to jettison legacy systems and old thinking, and embrace multiple partnerships with fintechs that do one thing brilliantly – or face obsolescence. By Chris Skinner.
The imperative for banks to change their business model to leverage fintech gets more and more pressing every day. The challenge is a major one but not insurmountable.
First, banks must move their organisational structures from being locked in, proprietary and tightly coupled to being open, partnering and loosely coupled. It’s all about plug-and-play, open sourcing technologies based on apps, application programming interfaces (APIs) and analytics. Banks have a strong position in this area as they own the marketplace today, and they should be building the platforms to allow their customers great experiences by connecting with the best-in-class APIs out there.
Advantage of trust
From an open API viewpoint, there are thousands of start-ups focused on doing one thing really well, from making a merchant payment (Stripe) to borrowing money (Prosper, Zopa) to investing (eToro, ZuluTrade). The thing is that, as a customer, I have no idea which of these companies I should choose to use out of the thousands of firms doing one thing well. Equally, how do I identify which of them, if any, to trust? But I trust my bank and, over time, would expect my bank to be partnering with the firms it believes do these things the best, and bringing them to me through curation.
After all, if thousands of new, shiny fintechs are doing one thing well, how can a bank compete when they are full of legacy and heritage systems that means they do 1000 things in an average way? The answer is to reboot through co-creation and partnering, and gradually reshape the bank for the 21st century by replacing the bits that don’t work with a partner’s capabilities that do.
The real challenge in this is that most banks’ leadership teams are flawed, as they are run by people who understand banking but not technology: 94% of bank C-levels are bankers; only 6% have any technology experience. As a result, many bank leaders have avoided the legacy replacement question for decades and spent their career believing that fast following is ok. There has even been the false belief that banks are immune to technological changes, and that digital is just rolling out a mobile app. This is wrong and is the reason why many banks are stuck down the tightly coupled proprietary avenue – but banks that get this want to move to the open source future.
Good leadership is crucial
The first things they need to grapple with in developing their digital transformation are culture and leadership. They need leaders who can articulate and communicate what’s going on to staff in a non-threatening way. Unfortunately, I heard one bank CEO recently talking about thousands of staff being replaced by robots – not the most sensitive way of articulating the message.
I would rather it had been said more delicately, as Piyush Gupta puts it, and shown people that they have a great opportunity to be part of a change to make the bank digital and, in the process, explained that they are allowed to experiment. They are allowed to try things and, more importantly, they are allowed to fail.
After all, there are two massive mountains to cross to achieve going digital: the first is to get people on board; the second is to replace the legacy. Core systems replacement, if the systems are based on legacy vendors or legacy architecture, is essential. The customer will notice.
But if you are working for a bank run by a bunch of old guys, they may feel that a digital transformation of the bank’s culture and replacement of core systems is just too big an ask; it is not needed – we can still keep things basically as they are and the customer will not notice. Wrong.
The customer is bound to notice because there are all these really cool, new firms doing things differently. And guess what? If those new, cool firms who do one thing really well all start to group together to do hundreds of things well together, how would a bank compete?
If banks are average in doing 1000 things, are cemented to their past and are not agile enough to update daily and refresh their core regularly, they will be outsmarted by those who can. And those who can will recognise that banks are doing 1000 things mediocrely – and will naturally come together to do 1000 things brilliantly.
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
