The Inevitability of Banking’s Demise

Digital banking is old news. Incumbent banks have been discussing, debating and arguing its finer points for over a decade. But the best efforts are still only good approximations of what customers expect.

It seemed regulators across the region had enough of the talk. They announced a raft of virtual banking measures across the region, with some regulators prescribing a digitization path while others suggesting digital business models and plans for open banking.

Incumbents, especially those whose digitization was only skin deep, saw the writing on the wall. With neo banks and challenger banking consortiums getting ready for a piece of the lucrative banking pie, incumbent banks started working together with fintechs and accelerating their own grand digital transformation schemes.

COVID-19 pandemic put a pause to many of these plans, with many regulators delaying virtual banking licenses. Incumbents sighed a relief as consumers looked at them as lifelines. But is the temporary reprieve just an illusion?

For Riddhi Dutta, regional director of Asia at Backbase, it is.

“People will want to play it safe, and legacy banks will have a breathing space as a result. But if [the incumbent banks] think this will be the future, they are mistaken because no one knows what the new normal will be,” says Dutta.

Deciphering the code word “legacy”

So why the reluctance to embrace digitization? After all, banks are never shy about cutting edge technology.

While many incumbents point to their legacy, a large part of the problem is not the technology but legacy attitude. Simply put, incumbent banks are not wired as an organization for digital banking.

“It is their legacy view of their entire value chain. Banks have not been able to take advantage of the potential ecosystem play. They want to own everything and do everything on their own,” says Dutta.

Neo and challenger banks take a different path. They get superb at solving specific problems, and then work with partners or an ecosystem to offer the rest of the value proposition. Never do they try to do all or be all for everyone.

Another issue is how banks look at product development. For many, “they still want one single white elephant to come out of the room after 12 to 18 months,” says Dutta.

While banks understand the concept of a minimum viable product, many are not ready to embrace it. A minimum viable product forces developers to focus on the features that offer 80% of the functionality and deliver the rest in incremental updates. For banks, perfecting imperfection just does not tally with their balance sheets of how to launch products.

“So many banks come with a very traditional view saying that these are my list of requirements and ask how long it will take [for development],” says Dutta.

Winds of change

Banks understand they need to change. Good examples include RBS and DBS Bank, which have changed their approach to development. But many do not.

Part of this reluctance to become agile and embrace digital as part of their DNAs has to do with the way many are organized.

“In emerging markets especially, the top banks are very silo-ed,” says Dutta. This creates immense inefficiencies.

He cited an example where one bank ran four different procurements at the same time, one for customer onboarding, another channel self-servicing, a third for digital marketing and last one for customer support.

“But what we are talking about is actually different phases of the customer lifecycle or journey,” says Dutta, adding that these can be done on a single platform.

Silos or what Backbase calls as channel islands, block transformation. “Because when we talk about digital transformation, it is not just about technology but how prepared are banks to transform their organization,” he adds.

Roots of resistance

Nigel Kersten, field chief technology officer at Puppet understands this well. He has seen a dramatic shift in bringing development in-house. Incumbent banks did this to gain some control over their development process and ensure they manage customer expectations and not end up managing different outsourced development houses.

“There is a huge appetite for DevOps. There is a pressure to evolve, and to improve their software delivery process. It is about working out how to deliver value to customers in a secure way,” says Kersten.

Again, while the intentions are commendable, reality becomes a hindrance. “Large enterprises have legacy environments and these power the business. Pivoting and changing a large organization with a large legacy environment is difficult,” he describes.

And it is not just legacy software written in archaic COBOL and the venerable mainframe environment. In fact, a big part of the problem lies with old processes that have been highly automated but have not been re-evaluated since.

“This means you can be hamstrung by change management processes,” says Kersten.

Another issue is what Backbase’s Dutta alluded to: silos.

“One big mistake FSIs make is sending changes up the chain for approval or sending them to a different team,” says Kersten.

The person approving the changes may not be aware of the context. So, the person requesting the change will have to communicate the context.

Kersten sees pushing autonomy down the chain and make them take full ownership is a better approach. It allows changes to be carried out quickly and efficiently.

But it also means that person down the chain has to collaborate and cross different organizational boundaries.

“And what we found out is that the more organizational boundaries you have to cross, the less success you will have with DevOps,” says Kersten.

Will banks survive the endgame?

So, should incumbent banks change reboot their organizational structure for organizational agility? It is a question that every bank needs to answer.

While COVID-19 may have offered a reprieve and delayed the upcoming takeover of digital native competitors, as Thanos mentioned in Avengers: Endgame “it is inevitable.” Banks may end up waking up to a new normal where 50% of them ceased to exist. 

Photo credit: iStockphoto/DanielVilleneuve