Decomposing Banking — A Structural Move From Monolithic to Modular
What is it like to be in the C-Suite of a Financial Institution today? I mean really — how do you begin to assess your priorities in an industry where everything… is changing? “Start with the customer!” some cry, which may be sage advice while others scream “Self-Assessment!” which may be true as well. The simple truth is C-Suite executives have to do both, and everything in between. They have to imagine future customers, image future markets — and imagine what future technology may mean for future strategies. No short order. So where does C-Suite begin to imagine the future — while at the same time addressing the present?
From Monolithic to Modular
Incumbents will need to make clear choices, business-by-business, about the future for their organization and where they’ll play in emerging industry eco-systems. And they will then need to align their over-arching operating model with those choices, including capabilities and investments. In some cases, this will mean offering competitors’ products and services on their own distribution platform. In other areas, Financial Services Institutions (FSIs) will decide to be an extremely efficient supplier in a larger ecosystem. In this scenario it becomes important to develop partnerships, focus on product excellence and reduce friction in how all technologies plug into other larger solutions. Ease of partnering will become a key capability.
“The process of moving from monolithic to modular has been pretty freeing for a lot of my customers. They’re ceasing to look at themselves as an integrated organization and much more as a sum of parts.” reports Anthony Lipp, IBM Global Strategy Lead. “Using this new lens, banks are really thinking about where they feel they can thrive, and which markets it may be time to exit.” And make sure at decision time you are measuring your traditional businesses versus new models rather than legacy fee-based structures. Strategists today will be better served looking at key business areas using future revenue flow models based in part on digital disruptors.
“The process of moving from monolithic to modular has been pretty freeing for a lot of my customers. They’re ceasing to look at themselves as an integrated organization and much more as a sum of parts.”
When Assets Become Liabilities
FSIs are also increasingly open to ‘buying the outcome’ and asking themselves, “What can I consume rather than run by myself?” When dealing with non-value add services, banks want troublesome words like infrastructure, applications, networks and processes — to go away. All of the capabilities offered by a bank should be assessed through the lens of a consumption model such as this. Leading banks are taking this evaluation opportunity to also examine where within a business, innovative and cost saving technologies like Blockchain, Cognitive and Digitization can be administered. Redundancy, paper and high human touch have got to be eradicated at every possible turn to compete with lean new entrants. Even though in most cases these cost reductions will have to be returned to the customer due to the transparency offered by competitors, cutting outdated processes is a must do just to stay in the race.
Decomposing Banking
The concept of outsourcing certain capabilities by banks across the industry is not a new one — but it has been given new life. Today, with automation, robotics and cognitive computing, the ability to create industry wide utilities is finally feasible in cost and at scale. The dangling question is; How will banks, and regulators deal with compliance and utility platform providers? If a bank in the future hands over a function to a provider who is offering a compliant solution, who is liable? The Bank or the provider? We are presently watching players on both sides of the industry grapple with these grey areas as regulators sprint to keep up with the start-ups.
Innovation vs Regulation
“My clients are combing through their business lines and asking ‘Do I need to be part of a regulated entity to do this business? Do I want to have to comply to banking regulation to lend money? Perhaps I should just facilitate those transactions without having to create a safe place to store and insure money, like FinTech start-ups,” continues Lipp. “With these thoughts in mind, FSIs are re-organizing to keep regulated, high cost financial services in one bucket — and letting other businesses go free. Having an innovative, smart response to regulation will be key.”
“My clients are combing through their business lines and asking ‘Do I need to be part of a regulated entity to do this business? Do I want to have to comply to banking regulation to lend money? Perhaps I should just facilitate those transactions without having to create a safe place to store and insure money, like FinTech start-ups”
But convincing banks to let go isn’t easy. Even though the future of carving out redundant, expensive processes to someone who can do them more efficiently and at a lower cost is supremely seductive, the reality is that most banks still have to keep their monolithic infrastructure chugging along, at least for now. This means that tomorrow’s cost savings are today’s investment dollars and in a time of declining returns, no one wants to take expensive experiments up the ladder. Fighting the good fight, however, to reap future savings and efficiency has probably never been more important.
Conclusion
“My mantra to clients is ‘W.I.N., What’s Important Now.’” explains Ian Macmillan, European Strategy Lead for IBM. “What’s needed is a practical understanding of the possibilities of where new technologies will play a significant role in the future, but a present concentration on the challenges of the day. It is future technology plus the client’s current business problem. There cannot be one without the other. Today, everything has to show up mobiley with embedded AI, for ease of use and low cost, but what comes after mobile? The creation and application of technology is an unending cycle. Assume it will be created, optimized, and then super-ceded, endlessly. Accept the fact that we are in a constant state of re-education,” continues Macmillan.
“People must remember. Banks were not ready for the internet. It took financial services over 10 years to produce 4th and 5th generation web-sites that actually added significant value. And now here we are with cognitive mobility. It’s the whole thing all over again. The difference however may well be the caliber of competition from new entry Fintechs, who are effectively able to take away pieces of the relationship banks aren’t satisfying. And that’s not just at the end user layer in retail banking. It goes for all lines of business, back middle and front office. Decide if you are going to provide an exceptional user experience, to employee or consumer, cheaply, with security and simplicity, or kindly move out of the way so someone else can. At scale,” says IBM’s Pablo Suarez.
Still Bullish on Banks
So the financial services industry is on a wild ride that doesn’t show signs of slowing or smoothing any time soon. And yet the world’ s financial institutions are not a meek bunch. The network of people, places and technology that is the global financial services industry will not wither on the vine and fade away overnight. The truth is that most people feel safer with their hard earned cash in a bank where it is (to some degree) protected and insured. They like to feel that if there was ever a cyber security issue, a large, sophisticated organization would have the knowledge and the technology to solve it — or at least the capital reserves to make them whole again! Can your local fintech bring you that?
And importantly, you can’t ignore the size of the breadth of FSI customer bases. As Suarez puts it, “Banks are not going away any time soon. The retail businesses of some of my clients is the size of the GDP of many countries. Think about their corporate business. How do you execute multi-billion dollar transactions with global firms affecting millions of people in hundreds of countries without their networks, as dated as they may be?” And yet no one can deny the clock is ticking. Greenfield competitors can engineer solutions faster than incumbents can re-engineer, which leaves traditional players relying on regulation and historic customer bases to buy the time to transform.
Focused and Flexible
As we have seen, the path forward will require a keen commitment to focus, while at the same time, the ability to allow change. Some things are known; forward thinking strategies, shared data, enterprise analytics, an incredible interactive experience, sleek modular structures, cost cutting through the use of emerging technologies will all be needed. And yet other things will challenge our greatest imagination; endless data, incessant reinvention of daring digital design delivery and the ability to swim in an eco-sea of partners and providers to achieve ultimate options. The goal — propping the door open for a plethora of potential opportunities by assuring the longevity of the customer relationship through fortifying their holistic financial health, to start.
The Journey is the Destination
The intersection of financial services and technology is changing every day, and changing lives with it. FSIs have an amazing opportunity before them. The ‘Renaissance of Banking,’ if you will. The truth is that money is central to many decisions we make day in and day out and if our FSIs could really show up — what a beautiful world that would be. But make no doubt about it. The type of transformation required here would mean a 3 -5 year journey resulting in a unrecognizable organization. The only thing that will deliver FSIs into the next era is deep conviction and complete commitment from the board level to the investments and restructuring required. “There is more transformation going on in this industry today than I have seen in my 30-year career”, says Macmillan, “Every 6 months we find we are having to shift our strategy to keep up with emerging ideas and proofs of concept. C-suite execs are working harder than ever to stay ahead on the edge of the wave.”
“The intersection of financial services and technology is changing every day, and changing lives with it”
As Technology Unlocks Strategy
And what about the board level? What is becoming abundantly clear is that for banks to succeed in an increasingly digital, cognitive world, the leadership team needs to be technologists at heart. And yet studies show that less than 6% of boardroom members and 3% of CEOs at the world’s largest banks have professional technology experience. According to Celent, close to 75% of 2016’s $360 billion global banking IT budget was spent on fixing old systems leaving only 25% to invest in new technologies.
With many of the biggest challenges now confronting FSIs intimately connected with technology, many are asking, ‘Do our boards have the experience they need to set global strategies in this industry? And if not, how do they get it?’ New board seats for technologists, tech mentors for execs and tech committees to inform boards are on the rise. “My clients say to me, ’There is no such thing as a strategy consultant without technical experience anymore. If a strategy consultant approached me with no technical experience, I would say thank you, but no thank you. We are experiencing the rise of the StratTech consultant.” concludes Suarez.
As Confucius Says
As Confucius says, “Real knowledge is to know the extent of one’s ignorance.” Warren Tomlin, IBM’s Chief Innovation Officer, sums it up well. “We’re really not sure exactly what the future will bring. What if everything old were new again? What if the follow-on, next generation form of provider ecologies creates small business hubs from old bank branches? What if these hubs bring the best in digital tools and services — but also gives folks the opportunities to make potentially valuable business relationships? Everyone said e-cards would kill the hand written note. Which do you appreciate more? The fact is we just don’t know. And time has taught us that we can’t perfectly predict the future. Challenge your foundations, cannibalize your customers, learn from other industries. Stay lean. Stay focused. But open the mind. Prepare to invest, and start the journey now.” Sounds like good advice to me.
