No industry is immune from the risk of being ‘Ubered’, yet the digital revolution does not affect every industry equally. There is one, however, that holds the potential to become 100% digital: banking. The sheer scale of the opportunity makes banking a case in point for digital transformation anywhere.
The forces shaping retail banking, like shifting demographics, are accelerating the uptake of new technologies. Digital natives, who did not grow up with cheques and local branches, swipe their screens to check their balance. How we live our lives is legitimising new ways of managing our money.
There are the big five incumbent banks that dominate the market in the UK, more than 10 challenger banks that have been around for years, such as Virgin Money and Tesco Bank, and dozens of start-up players or ‘neo-banks’, such as Atom and Mondo, launched on the back of the mobile revolution. All of these players are competing, ultimately, for the same retail banking customers.
How will this highly competitive environment be transformed by digital technology? Are the incumbents about to face their ‘uber moment’? Or will it be the start-ups that lose out? And what are the implications of digitisation on the internal workings of these firms?
Together with Matthew Guest, Head of Digital Strategy, EMEA, Deloitte, I took a deep dive into the benefits of digital ways of working with the report ‘Digital transformation in practice’. The study, based on data and interviews with executives in 24 UK retail banks, including incumbents, challengers and neo-banks, offers a framework to help established companies navigate digital transformation.
Three ‘digital dangers’ emerged from our analysis. First, technology is enabling the creation of new products and service offerings in existing markets. Think of your sector, do established firms face a loss of market share and gradual decline as new offerings come along? Second, digital technology is driving new workplace practices that are faster, leaner and more engaging than before. The danger here is that bureaucratic internal structures hold established companies back, making them unresponsive and making it harder for them to attract high-quality talent. Third, some new arrivals are reinventing industries in a way that can challenge the very survival of incumbents – Uber disrupting traditional taxis, Netflix killing off Blockbuster, Airbnb challenging the major hotel chains. How alert are you to these potential threats in your industry? Do you have a blinkered worldview that makes such challenges hard to identify?
For each one of these dangers there is a corresponding set of opportunities for incumbent firms to address – scope for market innovation in the form of new products and services, operational innovation in terms of new ways of working and business model innovation as a way of proactively shaping the industry in new ways. Let’s look at each of these in turn.
Transformation opportunity #1
Market innovation: products and services
With digital banking comes the opportunity for enhanced relationships with customers. Think for example about Tesco Bank’s Balance Peek, Nationwide’s Impulse Saver and, more widely, predictive analytics and voice biometrics. The report shows that the born digital neo-banks have quickly built the capabilities for high-quality digital services. The big incumbents have achieved parity in terms of quality but at considerable expense. The challengers are a mixed bag, and a bit stuck-in-the-middle: they lack the deep pockets of the incumbents and the digital savvy of the neo-banks.
So what should established firms do to develop their digital offerings?
(a) Become a fast follower. Step one is to get in the game by launching a range of digital products or services that replicate whatever you are doing elsewhere.
(b) Identify needs and opportunities specific to the digital market. Step two is to move beyond what your customers have historically bought and identify new opportunities, such as linked-up offerings in related areas.
(c) Develop a hybrid ‘bricks and clicks’ approach. You cannot expect to beat start-ups at their own game so you need to play to your strengths. This typically means creating a hybrid offering that capitalises on your existing, physical presence. Metro Bank is a great example. At its launch in 2010 it was the first new high street bank in the UK in over 150 years. Since then it has continued to open new branches and has invested in the local community to create ‘stickiness’ with its customers.
Transformation opportunity #2
Operational innovation: new workplace practices
The traditional ways of working in the banking sector are slow and bureaucratic. This is partly because banks are heavily regulated. As neo-banks come along, with much leaner structures, the established banks are having to think deeply about how and where they can develop new workplace practices. One approach is more flexible working: “People are drawn to projects, not companies,” says Grant Bourbousson, Digital and Marketing Director at Tesco Bank. Indeed, talented people need a continual flow of inspiring projects or they will move on. So while the impact of digital innovation on the way we work is much less visible than new products and services, it is no less dangerous to established firms.
The study shows that the adoption of new digitally inspired workplace practices is mixed. Every bank has a digital team, often separated out into a dedicated unit. Almost every bank claims to work with ‘agile’ (rather than ‘waterfall’) development methodologies. However in reality, across all 24 companies, 67% use agile models in their front-end app development. Only 25% use these methods in their back-end infrastructure work.
So what is the advice for established players here?
(a) Simplify your legacy processes. Agile methods are part of the way forward but so is the important re-engineering of existing processes. It starts with a clear understanding of how activities might be oriented around user needs.
(b) Separate out your digital activities – with caution. Carving out a separate digital unit comes with pros and cons – it provides focus and shows commitment but can lead to problems of reintegration later on. Lloyds Banking Group digital operation, which has 1,000 employees working in a separate building from its headquarters, is a great example of how to do it right. The unit’s job, described by Marc Lien, Director of Innovation and Digital Development at Lloyds Banking Group, is to “push the bank as a whole to think differently”. It cuts across silos to bring about transformation.
(c) Agile methods also have limitations. Thinking agile is faster and more effective for workers, but it is not a panacea. As Joe Norburn, Head of Digital at Coutts puts it: “Agile doesn’t mean you make it up on the fly. You still have to do the quality thinking up front.”
(d) Do not dismiss the possibility of real change. Digital technologies make it possible to get work done in radical ways. For example, the Netherlands bank ING has 52,000 employees around the world and 3,500 based in its Amsterdam head office. In 2014 the company’s COO launched a new “agile way of working” built on ideas borrowed from Spotify. ING’s head office was restructured around self-managing ‘squads’ of nine people who work using agile principles. The results in terms of customer service, cost efficiency, employee engagement and innovation have been substantial.
Transformation opportunity #3
Business model innovation
The digital revolution has made many business model innovations possible – think of Uber, Airbnb and Skype. While the threat to incumbents here is huge, it can also be overstated. In plenty of industries, traditional companies have managed to fight back. BMW, for example, has launched a ride-sharing service, ReachNow, in response to the threat from start-ups like Zipcar.
In retail banking, there are real threats, such as new payment providers. Consider Apple: it does not want to be a bank – it wants to take a slice of the profits. As David Fleming, Digital Director at the Co-operative Bank says: “The worry is that you can secure value from customers by owning their relationship… if customers are going through the Apple interface, Apple gets to control the messages, which forces us to be open with data and APIs.” There are also other threats of disruption to retail banking, including peer-to-peer banking and blockchain technology.
So what is the advice for established players here?
(a) Adopt an ‘active waiting’ strategy. Get ready to act quickly when required. In practice this involves actively monitoring trends, building scenarios for how these new technologies might play out and hiring people with the right expertise.
(b) Invest in real options. In the world of finance a real option is the right (but not the obligation) to buy an asset at a particular price. For example, Barclays, RBS and HSBC have established accelerator programmes. Elsewhere Santander invested US$100 million in its UK-based fintech fund. Meanwhile RBS and Barclays have hedged their bets as part of R3, a consortium established in 2015 to work on blockchain applications for banking.
(c) Do not underestimate the barriers to entry. You need to understand the size of the current barriers to entry and how defensible they are. In banking, and in a few other sectors like pharmaceutical, incumbents continue to enjoy privileged access to customers making life very difficult for start-ups. In other industries, such as media and music, the barriers are much lower.
Have you got a digital mindset?
Cutting across all three opportunity areas is the need for a new digital mindset, which we call fast/forward. Fast means alert, agile, experimental and capable of decisive action. Forward means proactive and searching and also seeking to create a meaningful connection with customers and stakeholders.
You might think that these qualities sound obvious but many established companies promote exactly the opposite. In retail banking established companies tend to fall back on slow and internally focused procedures, or consensus-drive discussion processes. Some aspects of banking, especially those parts that deal with regulation and compliance, need these cautious ways of working. But other aspects of banking can and should operate with a more experimental and decisive approach. That is what the fast/forward mindset is all about.
Are you on the right side of the digital disruption curve? Take the time to find out and do it before your industry faces its ‘Uber moment’.