Traditional banks are familiar with reports of their impending demise. And yet, they’ve survived; some have even thrived.
The reason is that banks never stood still. True, many are IT behemoths. But with innovation-minded regulators nudging them toward open banking and fintechs hot at their heels, banks sped up their digital initiatives.
The acceleration of digital transformation occurred on both internal and external fronts. Banks streamlined the user experience and joined or created ecosystems with non-banking partners. Internally, data modernization initiatives led by compliance teams are helping them to know their customers better. More forward-looking ones are reimagining their core applications for a digital-first era.
Still, traditional banks have one prominent blind spot: they think in product silos. Neo banks, including virtual banks, digital banks, and non-banking financial services platforms, don’t.
The oncoming fragmentation deluge
Product thinking has created what McKinsey & Company called the “fragmenting” of the banking relationship in its report “Rewriting the rules: Succeeding in the new retail banking landscape.” It is common for banking customers to have different relationships with multiple banks based on products. Digital adoption, the consulting firm predicted, will only speed up the fragmentation.
It is precisely what neo banks are looking to solve. With a single platform approach, they are looking to “de-fragmentize” this relationship. Imagine the appeal of having a single platform for all your banking needs and having detailed visibility of your various relationships.
For example, virtual banks in Hong Kong highlight how well customer experience and aggressive pricing can drive deposits and loyalty. While many admit they are niche players riding on curiosity, their ambition to roll out new products and services in other areas is never far away.
So, why are technology-savvy traditional banks with data lakes filled with valuable customer data threatened? Kalyan Madala, chief technology officer at the technology business unit at IBM, sees the approach as the problem. As he put it, it is not what technology they use; it is how it is used.
“Banks historically faced customers with a set of products. These were implemented on a number of platforms,” says Madala. The result is IT silos defined by the product and services.
The silos don’t end there. It permeates into the organizational structure and even remuneration creating a challenge when looking to monetize opportunities, points out Madala. He also pointed out that this product-centric approach has led to a “disjointed” banking environment. Integrating the various platforms continues to be a significant headache.
Neo banks are more focused on building out their single platform. “A platform-based approach is more based around an ecosystem that extends beyond the bank. It then allows you to create a number of products instead of starting with the product and figuring out its implementation. It is flipping the equation,” Madala explains.
It also shortens the time-to-market (an increasing concern for traditional banks) while allowing neo banks to nimbly target new opportunities with products, services, and promotions.
Crossing the chasm
To some extent, traditional banks are a conglomerate of IT platforms defined along product lines. Most of these platforms are also internal facing, with customers seeing only a portion of it.
A significant reason for this is regulations and data privacy. The drive for data sharing and open banking is relatively new. Very few banks have successfully reimagined their entire business as a single platform; many still don’t see a clear use case. Even with neo banks nipping at their heels, they believe that they are too small to matter.
Yet, Madala believes that it’s time for traditional banks to become platforms. He sees this as part of “continuity.”
“Typically, banks imagine products as centers of the universe, then build channels around it. The way I see it is that you have a platform that delivers a set of services to your customers, then you plug things into that platform,” he explains.
It is not an IT exercise either. Madala notes that successful banks who reinvented themselves as platforms thought about platforming as an organization-wide concern. “The bottom line is that it is not a lack of access to technology or access to funding. Rather it is how you orchestrate and organize as a business,” he says.
Madala believes becoming a platform is as much about the technology as it is organizational readiness. To fully leverage becoming a platform, banks need to alter their approach to running a bank.
Admittedly, becoming a platform is a tall call. “The challenge is that in banks, different functions or services are owned by different people. The organizational structure seems to dictate what they do and how they do it. This gets codified in the systems. The platform-based approach is about holding it together and then asking what other bits you want to build there,” Madala says.
To compete, traditional banks need to look at “instrumenting every part of the ecosystem and every client interaction while driving a holistic view of the clients' needs, context, and desires by leveraging internal and external data is a critical capability in the platform era or progressing towards a platform mindset,” he continues.
Banks are sitting on a mountain of under-exploited data and data acquisition opportunities, which is a substantial competitive advantage over neo banks. “This is an area of advantage that needs to be exploited, but organization silos and funding or ownership issues within banks are barriers in these spaces,” Madala explains.
He also admits that while becoming the platform may be the goal, traditional banks need “time and space.” It is where integration and automation have a considerable role to play. “Also, in the platform era, integration and orchestration across a bank's platform and partners is going to be critical,” he adds.
The old days are never coming back
Madala felt traditional banks holding onto the past product-defined business models will soon face immense challenges. The pandemic shifted customer behaviors drastically; even the older generations now have a taste of digital convenience. Soon, they will expect personalization and digital agility from their banks.
He believes it is time to forget about the digital debate. “I think the notion of digital versus non-digital is no longer valid; everything ought to be digital. So even if I have a relationship manager, I will still want to see my banking data for myself.” Essentially, end customers will want visibility and cutting out the human intervention where they do not see the value. It is a promise that neo banks are exploiting.
The shift will be more significant with the next generation of end customers who became proficient with mobile phones before they learned to walk. It requires banks to become mobile-first. Else, they will lose loyalty from a customer base that isn’t shy to swipe away and switch their entire banking relationship. The prevailing low-interest environment is also not helping.
However, becoming a platform has its challenges, advises Madala. Dilution of brand equity and the evolution of trust are two major ones. It can also send customer expectations skyward very quickly. For example, when was the last time you waited two days to answer suspicious credit card activities?
The bank’s culture also needs to shift with the platform approach. “If you're going to survive in a platform space, your culture has to change. I think that's the starting point used by the successful banks,” Madala adds.
Whatever the challenge, banks have little time to waste. “What I'm saying is that we're bound to have some challenges with platforms; we're bound to have challenges for us as we evolve. But that should not stop you,” he warns.
That is because becoming a platform will become a prerequisite as the banking industry competes on the next frontline: AI banking.
Winston Thomas is the editor-in-chief of CDOTrends, HR&DigitalTrends and DataOpsTrends. He is always curious about all things digital, including new digital business models, the widening impact of AI/ML, unproven singularity theories, proven data science success stories, lurking cybersecurity dangers, and reimagining the digital experience. You can reach him at [email protected].
Image credit: iStockphoto/BlackSalmon