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Banking giants slow to transform internal operations

Phil Wainewright Profile picture for user pwainewright August 23, 2016
Facing digital disruption, banking giants are investing in customer engagement and fintech innovation but remain slow to transform their internal operations

Businessman with laptop and digital bank concept © putilov_denis -
In their progress towards digital transformation, banks have been taking it one step at a time — and slowly at that. While they're all investing in online and mobile banking — at the same time keeping tabs on innovations in fintech — most limit their investments in next-generation IT to the customer engagement layer. Very few have begun to drive digital into the core of their operations.

Listen to leading bankers like Brian Moynihan, CEO of Bank of America, and you can sometimes get the impression they believe those first few steps are already enough. He recently told an audience in New York:

We are 15 years in a row, top online banking platform. I don’t think that [we’re] competing there, I think that’s dominating the thing, and for this year we’re number one in digital [in] a lot of the things.

Compared to where the banks started from, this is at least an improvement, even if much more remains to be done. The financial services sector has traditionally been very guarded at opening up to its customers in the way that digital engagement demands. Banks have been forced to respond to the changed expectations of customers, says Rohit Mahna, who became general manager of financial services at cloud CRM vendor Salesforce earlier this year:

Whether you're an insurance firm, a bank, or any kind of large institution, the model has always been, the bank is kind of the castle. That castle has a moat around it with a drawbridge, and they determine when that channel of access becomes open and available.

The reality is, whether you're a millennial, or really anyone in any age bracket, you're looking for a very different experience. You're looking for that drawbridge to always be [down], for the moat to be gone. Because you want to interact with the firm when you want, you want the ability for them to understand what your needs are.

You want it much more collaborative, you want access, you want to be able to ask a question and someone can actually answer it for you, or you can answer it on your own on the website. It's just a very different engagement model now.

End-to-end digitization

Our belief at diginomica is that digital transformation can never be skin-deep. It's not complete until it runs end-to-end, from that front-end engagement layer all the way through to the core back-office systems. That's a very different proposition than grafting online and mobile eye-candy onto an existing legacy edifice.

While the new generation of challenger banks can choose to build those end-to-end systems from the ground up — Mondo, which received a UK banking license just two weeks ago, has even built its back-office systems natively on Amazon Web Services — few incumbents have grasped the much tougher task of replumbing decades-old legacy systems.

Most of the transformation strategies we report on as part of our coverage of financial services and fintech sector are focused on front-end processes, whether it's HSBC's plan to lose 25,000 jobs through more effective automation or Wells Fargo's partnerships with fintech startups. Emerging markets mainstay Standard Chartered has gone further than most, but as CEO Bill Winters recently remarked, end-to-end digitization is massive project:

Those are big investments. They’re taking years, but we’re very much on track.

Multiple strategies

Even fintech startups focus mostly on the engagement layer rather than back-office systems, which leaves large areas of opportunity for disruptors to create more frictionless ways of doing business, suggests Mahna:

Digitization, I think we're still at the infancy in financial services. You could digitize the experience you have with the bank, but it's also about how the bank can use digital to automate workflows, document collections, the way you share information internally. There's a lot that could be digitized even there ...

$19 billion has been invested in fintech in the last year. 70% of that is only focused on front office, because there's so much friction on that customer experience side. What happens when they start going after the friction internally, behind the four walls?

At least the industry has realized a need to put a strategy in place, he says, with various approaches being pursued.

One [strategy] is, they're saying, what we're great at is that back office processing, because we've done it for so many years, we've got great systems, maybe we need to become an open bank and we provide that as a service to other institutions who just focus on the experience side.

Another approach I've seen is, banks have said, well, we'll just build our own digital bank, our own fintech bank, and leverage the bank's core capabilities, and just put a new group in the company to start there.

Others are saying, we should just partner. [Spanish banking giant] BBVA [in 2014] said, we're going to buy [US-based] Simple — because Simple was an online only bank that had a great experience, they said let's just acquire them.

It's exciting to see that there's three or four different strategies, that they're not dismissing it, they're actually proactive.

My take

I suspect the confidence of the incumbent banks in the excellence of their longstanding back-office systems may be misplaced. When Bank of America's Moynihan says that being "confident at checks" is an asset, it's emphasizing the wrong strength.

Any back-office processing that's been done the same way for many years is inevitably more convoluted and laborious than it needs to be using today's digital technology. All these arcane operations are slowing the banks down and result in them delivering a poor-value service.

Rather than celebrating antiquated processes, I believe the banks should play to the strengths that stem from their longevity as institutions. Because they've been in business for so long, they stand for something. People respect the brand, and those who work for them are proud of that brand. That creates an enormously strong culture that can carry them through the disruption of reinventing their internal processes. Their leaders just need to summon the courage to go through with it.

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