Arthur D. Little’s Ignacio Garcia Alves, Philippe De Backer, and Juan Gonzalez tell bankers in no uncertain terms that they cannot stall the shift to digital transformation. Legacy systems have been a major factor in this delay, but the authors say banks have a chance to come out ahead of fintechs — provided they have the right answers to 11 key questions. Through these questions, the authors make it clear that banks must think much bigger than they are currently, make sure they fight the right battles, and move faster despite not knowing exactly what’s coming. They also advocate for putting an ambidextrous leader in charge, one that can deliver significant growth and productivity improvements in the short term while completely redesigning the bank’s business model. They discuss the role of the board and the customer, organizational culture, technology investment, the need to set aside corporate ego, and the billion-dollar question: are you ready, willing, and able to move to where you need to be?
[Editor’s note: This article is an excerpt from the book Disruption: The Future of Banking and Financial Services — How to Navigate and Seize the Opportunities.]
The model of the traditional bank we’ve all grown up with is no longer fit for purpose. An apt comparison is what happened to traditional news media 10-15 years ago. Seemingly overnight, the vast majority of advertising went digital. That left the pages of newspapers and magazines devoid of ads, which were their bread and butter.
If you think we’re just witnessing the start of a shift to digital transformation in banking, think again. Leading banks and disruptors are already into their second or even third phase of digitization.
Legacy banks do have a few things in their favor. The first is their huge financial resources, which are second only to Big Tech. The second is a client base that remains relatively sticky, as traditional banks are still trusted to look after people’s money.
Another ray of hope for legacy banks is that fintechs are swimming with a lot of other sharks. For instance, the market for payment companies is seriously overcrowded, with many players starved of capital and staring down empty balance sheets. Inevitably, this will create a bloodbath from which many non-banks won’t emerge.
Although banks do have some latitude in choosing their future path, there are overarching forces by which they’ll all be governed. For one, banking will largely move online, with a narrower range of hyper-personalized offerings being sold through newly evolved ecosystems like marketplaces. Banks will also need to move toward higher-value products and services aimed at previously ignored segments, like small and medium-sized enterprises.
So will legacy banks or fintechs come out on top in the long term? Despite their head-in-the-sand attitude, we believe banks might just have the edge — but their success will depend on how well they answer a vital set of questions.
Question 1: Do You Have a Clear Point of Arrival for the Industry?
In many ways, this is the most important question of all: when you look into the future, what do you see?
If you don’t have a clear industry point of arrival in mind, you’ll find yourself reacting to the latest competitive threat without knowing whether it’s an indicator of structural change or just a one-off. In other words, if you aren’t disrupting, you’re the one being disrupted, and it’s not difficult to see where that disruption is coming from. The global fintech market was worth US $128 billion in 2018. By 2022, its value is expected to reach $310 billion as new entrants pile in.1
As the traditional value chain is dissolved by these disruptors, it’s being replaced by a wider financial ecosystem consisting of many niches. This is creating a world where, at least for now, capital-intensive models still coexist alongside those lighter on capital.
In this hybrid business environment, the old-school British banking model that has for so long underpinned financial services is looking increasingly irrelevant and creaky. If retail banks are to maintain any kind of position in the market, they need to turn to a balance sheet–light model that revolves around selling third-party products rather than recycling deposits into new loans. For that, they will need a very different set of capabilities.
As with any transformation, there will be peaks and troughs, but we believe this fintech disruption will continue in the long term — and we aren’t the only ones. If we take market cap as a good proxy for financial resilience, we can see that the markets are more interested in looking at future value than yesterday’s balance sheet.
What’s happening to banks is, of course, part of a much bigger economic shift. As Anne Bennett, CEO of the National Australian Bank, says:
The largest movie house owns no cinemas, the world’s largest taxi company owns no taxis, and increasingly, large phone companies own no telco infrastructure. What, then, is the future asset for banks?2
Her answer? “Experience.” But that’s of little use if it’s being applied in the wrong direction, fighting long-lost battles.
This makes understanding what the industry’s point of arrival will be a key question. It’s a question that requires imaginative, and perhaps painful, thinking. Although that arrival point will be different for every bank, a common requirement is that it should be far, far away from where the bank is now. If it isn’t, the senior leadership team hasn’t been thinking big enough.
Question 2: Are You Fighting the Right Battles?
If you recognize it’s no longer possible to be all things to all people, where are the battlegrounds where you have an advantage or can gain one by acquiring new capabilities that will help you stand out?
A legacy bank hoping to compete against fintechs and non-banks cannot afford to dilute its resources by pursuing a hedging-our-bets strategy. Putting eggs in various baskets may work for an investor, but not a legacy bank.
Instead, you need to lead from the front by focusing on market segments where you can leverage core competencies and embrace new opportunities being created by things like open banking and embedded finance. Keep in mind that a total bank transformation should never be viewed as a side project for your IT department or something that can be solved with an off-the-shelf, one-size-fits-all solution.
Transformation means shedding long-established activities; reevaluating the levels of risk you’re willing to accept; restructuring systems and processes; investing without quibble in the new technology that’s needed; and appointing the right kind of leader, one who will embrace an ambidextrous model. This is the only way to differentiate yourself in a market where there’s a narrowing of market share and a shrinking of spreads between low- and high-priced services.
How will you know if you have an effective strategy in place for doing what needs to be done? The simplest way to evaluate a bank’s corporate strategy, of course, is to ask: “Does it work?” The glib answer is that it depends on what you mean by “working.”
Performance metrics only tell half the story, since they depend on both the chosen strategy and how well it’s been implemented. You need to consider other assessment indicators, like the degree of consensus among executives about the corporate goals and policies to be pursued and the extent to which you don’t have to shelve planned programs or embark on cost-cutting ones (clear signs of strategic planning failure).
This should be obvious to a bank’s leaders, but too often, we see precious resources deployed on a large scale without a well-thought-out purpose. Without a clear strategy, it’s no exaggeration to say a bank could be heading for bankruptcy.
Question 3: Are You Being Sufficiently Decisive and Fast?
How quickly a legacy financial institution can realistically transform itself is one of its biggest challenges. The change you require must be undertaken now. There is no point in waiting things out in the hope that this is just some sort of ripple in the Matrix — it is not. What banks are experiencing is a complete shift of the tectonic plates.
Just look at electric vehicles. Five years ago, people thought it would be decades before we’d reach any meaningful inflection point in the market. Indeed, in Norway, 95% of new vehicle registrations are now for electric cars. The company with the clearest view of the auto industry’s point of arrival is Tesla, which long ago saw an integrated world of batteries and solar panels and decided how it was going to be part of it.
Whose fault is it that banks find themselves having to move so fast? Surely not the regulators. Aren’t they the ones who’ve been sheltering legacy banks from a full-frontal onslaught by the fintechs?
The reality is that legacy banks should have used their time under this protective regulatory umbrella to prepare for a day when it’s not there. “Transform or be left behind” should have been their mantra since well before the 2008 financial crisis.
Those institutions wrongly thought they could successfully weather the storm. Today, we have left the first stage of digital transformation behind and entered a place where convergence is blurring the lines between sectors, leading to the creation of new marketplaces and making the need for speed ever more imperative.
Question 4: Do You Have the Right Person in Charge to Do What’s Needed?
This question is central to a legacy bank’s future success. The bold decisions that are required right now mean that CEOs cannot sidestep imperatives or hide behind their teams.
If a bank is to reposition itself, it needs a CEO with the creativity, bravery, and vision to bring about real transformation. Preparing for banking’s point of arrival (whatever you see it as) requires revamping the entire organization, including all front- and back-office processes. It requires trimming labor and IT costs, reducing time to market, improving agility, and bringing about greater operational efficiencies. That’s a tall order in the best of times, and particularly so given the waves churned up by the pandemic.
There are few, if any, incumbent leaders who’ve had to deal with anything like this. One thing is certain: it can’t be accomplished by a chief executive bound by old ways of doing business. What’s needed is an ambidextrous leader who can deliver significant growth and productivity improvements in the short term while redesigning a bank’s business model and moving it to a new place. The likes of Banco Bilbao Vizcaya Argentaria (BBVA), J.P. Morgan, and Goldman Sachs have risen to the challenge.
Banking leaders must have in mind a transformative vision that encompasses the desired point of arrival and a path for getting there that doesn’t destroy the bank en route. This is quite different from being forward-looking, which involves doing little more than identifying a few industry trends and sketching out some possible responses.
Truly ambidextrous CEOs are adept at peering through a blizzard of largely irrelevant information, slicing into the complexity of others’ opinions, and driving their decisions forward even when they’re based on incomplete information.
Question 5: Does the Board Understand What Needs to Be Done?
Do your board members appreciate that legacy models are no longer economically plausible and that investing in a multitude of businesses to see which one will flourish is a luxury bet they can no longer afford to make?
If they think we are still in a business-as-usual mode, they will end up appointing someone to run the business who thinks like them. Their collective, blinded view of the industry’s future will ensure their bank remains firmly stuck in the past. They will not recruit the ambidextrous leader who’s needed, defaulting to a “status quo CEO” who has experience making a universal bank perform poorly. That’s the last person they need in charge right now.
How do you stop this from happening? Refresh the board by bringing in open-minded individuals representing a mix of genders, races, and experience. They must also be tech savvy, with knowledge (or at least a strong awareness) of such things as artificial intelligence (AI), machine learning, robotic process automation, and augmented reality.
To ensure their knowledge stays fresh, the board needs a true technology advocate — not just someone who “does IT.” That means a board member who’s not only technically competent, but someone who can explain simply and clearly the ongoing need for wholesale digital transformation.
If the default position of your board is to look for reasons not to spend on tech, there is cause for worry. Going digital is about far more than just having an app or customer interface that offers balance and payment features. It means having the courage to scrap the obsolete cost-and-revenue models banks have clung to for so long, replacing them with an entirely new value proposition.
Open your eyes to how much banking is being changed by technology. Look at your children or grandchildren and see how comfortable they are with their smartphones, social media apps, and online games. They’re quickly becoming the ones to whom your bank must cater.
Question 6: Are Your Corporate Values and Organizational Culture Right for What Needs to Be Done?
Bankers tend to flinch at the mention of anything that doesn’t have hard financial edges. Today’s leaders have to think in terms of an organization’s personality and culture, given that consumers now look beyond the mere mechanism of a transaction to the look and feel of the company that sits behind it.
If your culture isn’t right, you’re always going to lose out to the fintechs. And corporate cultural change doesn’t happen by accident. Rather, it springs from an open, forward-thinking mindset instilled by the CEO.
It will be the job of your ambidextrous leader to convince everyone in the organization that the good old days of banking have gone. It’s no longer about moving slowly and cautiously and never taking a risk. It’s time to throw that dog-eared rulebook out the window and push fresh messages into every corner of the organization.
Sadly, many bank executives do not yet understand the impact of something like digitization and how it affects every aspect of the business, from core functions to organizational structure and culture.
We have all seen what happened at RBS, where despite the institution’s massive resources, it was incapable of creating a successful digital bank. It was hamstrung by old ways of thinking that didn’t match up with the new model.
Contrast that with the likes of N26 and Tandem, which broke through and achieved great things with mere pocket change. They did it with a mindset that was focused, fast-moving, and aimed squarely at meeting their customers’ needs in the best way possible.
Having the right culture in place is also fundamental to recruiting and retaining staff. This is even more important today, with many once-loyal employees reconsidering their options. In April 2021, nearly 4 million Americans quit their jobs, the highest monthly figure ever recorded by the US Bureau of Labor Statistics.3
Almost two-thirds of employees now list corporate culture among the most important reasons for staying with their current employer — or for leaving them.4 In fact, culture is often cited as the single best predictor of employee satisfaction, more so than compensation or work-life balance.
The cultural values and day-to-day behaviors of banks are often out of sync with those they want to recruit and retain. Too often, they fail to respect their employees, which is truly unfortunate, because being shown respect by those they work for is the thing people want most.
Is your bank a respectful organization? If it isn’t, it needs to become one, especially if you’re embarking on a fundamental reorganization. Lack of respect is associated with change that is ill-conceived, pursued in haste, implemented inconsistently, and vaguely communicated, resulting in little clarity about how it fits into an organization’s long-term strategy.
Question 7: Are You Investing in the Right Technology?
Technological obsolescence is rife in today’s banking environment. Many regulators have woken up to that fact, even if all banks haven’t. Those not paying attention to end-of-life hardware and software situations will find themselves looking into a funding abyss as they scramble to replace their tired IT infrastructure with something more fit for purpose.
Effective adoption of next-generation technology is the road to greater customer engagement; faster product development; better operational management; and improved compliance, efficiency, and growth. It will also enrich the customer experience through stellar, hyper-personalized service. Shifting to new technology obviously necessitates the writing off of old systems and software, but this is a cost that must be accepted. Fortunately, the cost of IT continues to fall, and the adoption of cloud-based services can dramatically cut infrastructure costs.
Banks must also become technology agnostic by using architectures for front-, middle-, and back-office processes that allow easy integration with third-party solutions and reduce dependence on legacy IT solutions.
For some banks, this is a huge mountain to climb. We were vividly reminded of that while writing this article. What happened? A very large international bank, a household name, asked for confirmation of a transaction to be sent by fax!
How many offices still possess fax machines, let alone private individuals? Rather than asking for a secure means of communication (e.g., a PDF in which information is embedded), the bank was happy with a document into which one could copy and paste anything, sent from an unverified phone number that could have belonged to anyone.
From increasing productivity and cutting costs to reaching previously inaccessible market segments and enriching the customer experience, technology makes it all possible.
Of course, given the pace of change that technology brings to every sector, predicting the future of any industry is a highly speculative venture. Who knows how emerging technologies will impact the banking sector over the next decade? Just because there’s no clear or immediate picture of how this might happen, there are no guarantees that they can’t or won’t have an influence.
With such breakthrough technologies continually appearing, staying at the forefront of a banking segment is a challenge for even the most innovative financial institutions. Banks will have to work hard to carve out a niche through innovation and then protect it with an unrelenting commitment to high levels of service and efficiency improvement. In other words, identifying emerging technologies and using them to lever an advantage must become an iterative process.
This is no longer about adapting old tools and products with a new wrapper; it’s a complete rethinking of the bank and how it operates. Going head to head with competitors that offer a lower-cost product when you have slow, obsolete systems and processes is an impossible task. Legacy banks can’t compete because their outdated software doesn’t allow it, and the historic web of cross-subsidies (in which profitable products prop up the unprofitable) just can’t be disentangled.
Question 8: Are You Putting the Customer at the Forefront of Everything?
For banks, the customer must be everything. You can slice, dice, and measure anything you want, but this is the only KPI in town.
Of course, if banks really want to serve their customers, they need to move away from thinking of them in terms of their demographics and purchase histories, which can be quite misleading about their future needs. Instead, they must use technology to acquire a greater understanding of those they do business with and use this to personalize every interaction.
State-of-the-art chatbots and other computer-supported conversation tools are now a minimum requirement. If you can apply AI to recognize each customer and accurately predict the purpose of every conversation, so much the better. If this helps you become a seamless problem solver that can offer one-call resolution, you’ll save your customers time and effort, and that will win you their hearts and minds.
Given that disruptive third parties can now access customer data held by another financial institution, banks have no choice but to focus on becoming high-level, data-first organizations themselves, so they can monetize their wealth of customer knowledge. Again, this comes down to investing in the right technology and top-notch analysis.
Question 9: What Steps Are You Taking to Become the Innovative Organization You Need to Be?
Have you adopted the agile approach of a non-bank? Create quickly. Seek fast feedback. Double down on your winners. Kill your losers. Rinse and repeat.
Of course, this means you must be prepared to accept a higher degree of failure, but the rewards can be worth it. Orange Bank & Trust Company is proof of what’s possible: it’s able to bring out six to eight product innovations in a month, which is double what a legacy institution can deliver in a year.
According to a PwC study, leading innovators can grow at a rate 16% greater than the least innovative in sectors that include financial services.5 So, if senior leaders haven’t put a credible innovation strategy in place, their bank will have a hard time delivering the products and services their customers will be searching for tomorrow. You cannot ever be innovative enough, because the idea that once seemed ahead of its time can become mainstream in a year — or less.
Question 10: Are You Willing to Set Aside Your Corporate Ego?
Only the biggest banks can realistically expect to go it alone. If traditional banks are to deliver exceptional value to their customers — as they must — they have to be willing to partner with fintechs. They have the digital knowledge and experience banks need to plug the gaps in their offering.
In fact, banks must be prepared to become part of a much wider ecosystem geared toward serving the broader needs of the customer. By doing so, they will be able to turn defense into attack and better protect their position.
In such an environment, it isn’t generally possible for a financial brand to stand out as it once did. Banks can, to some extent, mitigate this loss of visibility by ensuring that they play a proactive role in shaping any platform they’re part of. Santander Bank has done this by launching Trade Hub, a proprietary platform that encompasses nonfinancial services. For many financial institutions, coming together with third parties to provide sector-specific solutions will be the only way to a long-term future.
Question 11: Are You Ready, Willing, and Able to Move to Where You Need to Be?
This is the billion-dollar question.
Legacy banks must become lean, mean, fighting machines, running capital-light business models like their digital rivals. They must become ambidextrous organizations, capable of balancing immediate survival requirements with a longer-term transformation. For many, this poses an even greater threat than disruptive newcomers.
If you don’t think you need to shift, everything else is irrelevant. As Winston Churchill said, “Those who fail to learn from history are condemned to repeat it.”6
When we asked some CEOs what they saw as the banking industry’s point of arrival, many said there wasn’t one. They meant that it is constantly shifting, so take aim, fire, and miss is pretty much the standard process. Of course, it’s how far you miss that matters. Once you’ve reinvented yourself, you need to do it again and again, through a constant cycle of deconstruction and reconfiguration.
As we see it, the point of arrival may shift, but it tends to stay within a certain bandwidth for extended periods (usually 10-15 years) before breaking out of these boundaries, probably because of technological change. It then settles into another position, ready for the process to repeat. We can think of universal banking as one of these phases, the rise of the fintechs another, and marketplaces probably the next. Astute CEOs will be thinking in terms of these cycles so they can be winners not just in five to 10 years, but 20 years down the road.
Having a clear picture of the industry’s point of arrival doesn’t mean you have to be able to see every step you must take along the way. It would be a waste of time to even try, since the only two certainties now facing any business are constant instability and the shortening of time frames for doing anything.
We’re sure that when Jeff Bezos began Amazon in his garage, he had no idea of where his company would be in 25 years or the degree of disruption it would cause. How could he have conceived of Amazon collapsing the established value chain by providing buyers with an unbeatable combination of lower prices, great convenience, and fast delivery? He began with a disruptive model in mind and took it from there. After that, it was a matter of being prepared to continually adapt and seize opportunities as they arose.
But as we’ve seen, there are no guarantees. Even with strong will, smarts, and resources, digital transformations can fail. Sometimes this is because of slow decision-making that doesn’t deliver on a vision. Sometimes there is insufficient commitment to bringing in the right people.
The path any bank takes will depend on how its leaders view the future — banking’s point of arrival — and how they answer questions like the ones posed here. In the end, the winners will be banks that can overcome the inertia that legacy institutions have traditionally been incapable of surmounting. Bank executives: over to you.
1 “Global Fintech Market Value Is Expected to Reach $309.98 Billion at a CAGR of 24.8% Through 2022.” Cision PR Newswire, 26 September 2019.
2 Cenin, Matt. “Supporting Customers in the Digital Age.” National Australia Bank (NAB) News, 11 March 2021.
3 Ivanova, Irina. “People Are Quitting Their Jobs at Record Rates: That’s a Good Thing for the Economy.” CBS News, 21 June 2021.
4 “Mission & Culture Survey 2019.” Glassdoor, 2019.
5 “Breakthrough Innovation and Growth: Top Innovators Expect US $250 Billion Five-Year Revenue Boost.” PwC, September 2013.
6 Geller, Laurence. “Folger Library — Churchill’s Shakespeare.” International Churchill Society, 21 October 2018.