The future of banking is digital – a discussion on the strategy for success

Upgrading legacy mindsets is just as important as bringing legacy systems into the digital age.

Consumers are demanding the enhanced levels of service, simplicity and personalization that only a truly digital bank can offer. So by digitizing and optimising the back office, banks can use advanced data analytics, to provide customers with tailored experiences and products across physical and digital channels.

There have been examples of digital banks that have been spun up in 10 weeks or less. It can be done, but they need certain key elements to make that happen.

They need to do it at the sort of pace that Google has been constantly adding new features to its platforms while enhancing old ones.

The good news for those that make the transition from legacy systems to cloud digital platforms where security improvements are constantly made is they can keep customers happy. Opening up the discussion at NetEvents Bill Boyle asked his panel for their views on how far they think the banks are going in real digitization.

In response Gavin Scruby, CIO, SmartDebit said “The challenge they face is where they are as an industry. The best example is electricity you just plug in, everybody uses it the same way, electricity is electricity. Banks as an industry, core, central banks, are now in that same process, in that same position. They're a utility, so you can't have much innovation from one bank without disrupting what everybody needs to be able to use. So where they are right now is the need for regulation change, which we've had with PSD2, and open banking, to allow that push for them to innovate. So the digitization is fundamentally limited already by that position that they're in. I think that's why fintech is growing, so all those wrap-around services won't be from central banks”.

Moisés Navarro, Principal Strategist, VMware commented “Part of the discussion should start by defining what digital adoption means. I think that banks have been working in the digital world for many years if not ever, and they have done already several interesting things for us, the users and consumers. Now, there are still things to do, for sure, but again, what's the expectation coming from the market? We as users are demanding more in terms of retail services from banks, the same as we are from other businesses. Maybe not that much, and maybe we can discuss about it, how much do they need to become digital?

On top of that, I would say that, they have been doing their homework. Obviously, there is room for improvement and there are opportunities for doing many more things. One of the things that I haven't seen as a user is the proper use of analytics. I don't mind if it's artificial intelligence, machine learning. I don't mind. But the smart use of the data they have for our expenses and the way we behave as a citizen, this is not properly liberated, in my opinion.

So there could be a very good opportunity for them to become much more digital and to leverage that power on our behalf and our benefit, so in my opinion this is something still to do”.

Arash Aloosh, Professor in the Finance Department of NEOMA added “Actually, I think that the industry is changing, but there are a lot of cross-country differences, so it depends what is the perspective that they are looking at. For example, if I look at Asian banks, there is a lot of digitalization going on, even in South American banks. There is not much digitalization yet in European banks, because if they think that digitalization is a kind of efficiency improvement in the banks it depends on their benchmark. We had so far the best performers, Western banks, as if we think about this benchmark, the others were not efficient, so they have been trying a lot to improve their efficiency and offer products and services through the digitalization.

For example we can easily go on a platform and buy stocks and bonds immediately, but to settle the transaction or trade, it's going to take three days. This is unbelievable. So it is very inefficient, and we need digitalization to improve this market efficiency, As a business school, we see a lot of changes, so because of that, we have changed our strategy – it is key for us to teach students what digital transformation, fintech and blockchain will mean to the future of banking for example”.

Navarro added “Let me get deeper into something real that is happening, efficiency. That's a boring word. Probably we can agree, but this is what the banks are mostly trying to achieve even today, and maybe this is happening only in the case of Europe, maybe because of the maturity or they feel they are incumbent or whatever, but efficiency is still a key word in banks today.

I think that they have power enough to deliver a lot of value to users, and now I think they need to reshape the way they are leveraging that power on our behalf and our benefit. Efficiency is one of the things they are addressing, because they have enough people, skills, technologies available, and they need to really extract much more value out of them. Let's think for example in the case of developers and application development. The big banks have more developers than software companies, but they don't think they are a software company, and they don't think they are producing the value out of those developers that the software company is delivering”.

Scruby said “I think efficiency is almost one of the only things they can do, because they can't innovate, and often they think the customer is going to drive innovation for them. They're going to tell them what they want to get out of their systems, and customers don't. Twenty years in product development has shown me that customers can't tell you what they want. They can only tell you what they don't want, and banks think it's all happy and it's all nice, and that's why the fintechs are growing around this and are now open to do the innovation that banks aren't doing, and banks are just concentrating on efficiency and speed of their data centres. They're not working that well at the moment”.

Aloosh commented “I just want to add, in addition to efficiency, complexity and culture, because this industry is very, complex. It's not just a matter of mathematical, computational risk, there's a lot of psychology going on in the market, how traders' behave, what customers' and clients' demands are, so there is a very, very complex industry that cannot easily make policy. For example it is very difficult for Federal and central banks to decide what's going to be the best and optimal output.

Customers and clients, are conservative. How many of you are willing to deposit your main source of revenue on a regular basis in a digital bank? I can't comment on a general population. I can just say in my class, it is less than 2% that use digital banks. Of course, they use Internet banking, but not much of even mobile payments”.

Scruby said “I think the public in Britain particularly, don't care that much about security. I think they should care far more about it. Until something very high profile happens, there's not going to be a big push from the industry to consolidate and get some security in place.

Credit card systems have PCI for credit card data. As open banking takes off, when our account numbers and sort codes will be the transactional codes we use, as soon as that becomes a security issue, the industry will get around and do something. But until then, that's going to be quite open, because there's not a specific standard people are held to on it. Even in GDPR, it's bank account data is just the same as any other data. It's not even a special category”.

Aloosh agreed “Of course, regulation is very important for changes in industry, because profit of banks, and all financial intermediaries highly depends on the regulation. If the regulation changes a bit, maybe a part of industry will get wiped out and go out of profit. But where should regulators become pro digitalization, that's a question of specific markets and what they see, but banks have been considering changes in industry and they do a lot of experiments. For example, in Europe, because they are conservative and they want to have an open perspective on the changes they open their own digital banking.

For example, Societe Generale, has introduced Boursorama as a pure digital bank, which has been done in Singapore, and is a very good way of hedging. Because they are efficient. They understand that introducing a pure digital bank and analyse the customers' and clients' behaviour and preferences toward those type of services”.

Navarro commented that “In Europe I think that banks are trying to grow, the main concern is to really increase their growth rate year over year, so they are competing against themselves, I would say, in terms of I really need to grow. They need to show growth to their stockholders.

They could be concerned about the new entrants and disruptors, sure. That's fair, and that's natural, so they take care of it. In my opinion, they are alert and they are taking care. We can discuss if they are doing the right thing or not or if they can be disrupted. We can do it, but again, they are not blind. The first thing they are trying to do is to grow year over year, and this is an organic growth, and again, efficiency here plays some role, because they can improve results because of efficiency.

But now there are also these other banks, and usually they are big banks, trying to really change their scale. So it's not only a matter of organic growth or M&A, which is my opinion in Europe is something very, very common. They are also to really change their scale, and I've seen banks claiming publicly that they want to deal not with millions of customers but they want to deal with billions of users, and I remember very recently, a few weeks ago, a Santander Chairwoman publicly stated that they would be investing €20 billion in the next years only in technology for changing the scale.

So this way, they are not the ones delivering a service or a good or a product to a final end user, but they could be the ones promoting, facilitating this kind of services change. Somehow, it reminds me of the processes we've seen with the famous disruptors, Airbnb, Uber, Netflix. We always name the same ones, so something is happening. Maybe we don't disrupt that often, but those disruptors, what they did was to build that platform. They were not the only ones producing something to be consumed. They were facilitating the producers and the consumers to interact, and I think that maybe this is a good opportunity also for banks, and in the case of Santander, they already disclosed that they are looking to that opportunity”.

Bill Boyle then introduced a question from a member of the audience “The Economist article you were talking about, it's a very good article. One of the posited questions that they didn't actually answer, which I'm interested to ask you, was that they were comparing the regulatory environment in different countries. So for example, if you compare Singapore, they've gone around and said, our banks need to become digitally native themselves, so that they're not threatened by these digital upstart technology companies. Whereas on the other hand, the UK regulatory body has taken the approach of giving out licences to help digital start-ups attack or coexist alongside the big banks, so that it's more competitive and forces them to change themselves.

From your perspectives, what you see, what you do day in, day out, do you have a preference for either approach? Do you think one's better than the other in terms of consumer outcomes and business outcomes? What are your thoughts there?”

Scruby replied “In the UK, I think the regulator has given up getting banks to innovate, and so it's created that, and they're dragging their heels on the open banking regulators now, so I think that it's the only way for the UK. Other markets that are more digitally native themselves and have perhaps a younger banking system, I think a different system will work better, particularly areas like Singapore”.

Navarro added “Yes, anybody in incumbent markets, I think the role of the regulator, it's playing some sort of defence on behalf of the banks. I know it's a burden in terms of complying with regulation, because banks are meant to really spend a lot of money for that compliance, and they have to put in place money reservations for credit, et cetera, but on the other side, this is preventing those new entrants to really make a big impact. So in these incumbent markets, this is playing this defensive role.

Which one I would promote? Honestly, I don't know. I prefer the markets to be able to freely compete and develop services, but as a personal preference. I think nevertheless that, as you were saying, depending on the countries, banks are trying to behave properly and to adapt to that market, and I also think that because of the regulation in Europe, even though they are protected somehow from those new entrants, again, they are not blind. So they are trying to embrace them, to foster and promote them and obviously to extract all the value they can on their behalf. So Europe is playing that kind of role, and I don't think or I don't know if new entrants coming from the banking sector or from other geographies can really, really be a new entrant in an incumbent market. I don't know how easy that is.

Again, probably, the regulator could be the defensive on the local players”.

Aloosh added that “central bank roles are fairly difficult, as regulators. They do a lot of study to know what is going to be the best outcome of their policy, but that is a very complex question, what is going to be the optimal regulation or what type of strategy they should promote, because that also depends of the reaction of the market psychology of, for example, clients. Just an example, we would like - to manage our fund, and having our own control to see that where we're going to invest and so on, and one of the asset managers in New York, for example, Betterment, uses this strategy to get more clients. They just give customers a device and a robot adviser, and they can decide how much they move their assets and so on, which is not obvious that they're going to do a good strategy”.

“I would say the UK market is more fun, speaking as someone who speaks with fintechs and works with fintechs all the time and start-ups. It's a much more dynamic environment, and that obviously just means more customers for you as well” said Scruby.

The follow up from the audience member was “on one of the points Gavin Scruby made, because going back to the article, the head of one of the Singapore banks - - they were saying, how are we going to change this? Because most of our staff are in their 40s or 50s. How can they become cloud natives themselves, and then they saw what Ant Financial was doing, and they started saying, what would Jeff Bezos do and tried to permeate that culture to do it themselves?

Do you think it's more on the cultural side of difficulties there, or that really banks don't want to risk their position by taking too much of a jump?”

Scruby replied “I think there is a risk that when banks start creating their innovation and incubation hubs, and I've seen it with a couple of them, they get a bit affected by the central culture of the bank, because they're running it. Some of their core services come from the bank, so you end up with something that's not truly innovative, and what they're trying to do is copy a model where you can't guarantee engineered success, so a lot of these start-ups, only one or two are going to pop up and do something, and the bank's trying to create something where they're going to get an 80%, 90% success rate”.

Boyle added “I was talking to one of the big US Banks last week, and they were saying that they now, with the fintechs that they're dealing with, they give them 18 months maximum to deliver?”
Navarro replied “But that's the tricky part. I think for a few years, banks have been trying to break, some dependencies on the past, and why not - collaboration with fintechs can be a good way to achieve that innovation, but the dilemma in my opinion is that they have tried to innovate either by themselves or with the help of third parties. The tricky part was how to monetise that innovative.

So I think they need to bridge as soon as possible whatever they are doing for innovation and for bringing new value to the production they already know very well. Because if not, they are not going to monetise, so I understand the explosion of exploration and testing and experimentation, but I will try to link as soon as possible to that main stream and main production factory that they have. If not again, innovation can be awesome but not monetised, and that's not good for the business.

So I think, again, there is no magic rule. There is no recipe. In my opinion, it's hard, but that's the tricky part. That's where the magic might happens or might happen”.

Boyle asked Aloosh to elaborate on what he meant by what he’s seeing blockchain being - how it's developing?

Aloosh replied “Blockchain technology is a big innovation in finance. There are studies showing that, for example, proof of stake is a kind of equilibrium. So there is a lot of learning going, but I believe that there's going to be a lot of changes in terms of application and also in the infrastructure as well. But it depends on the industry and the time that when we're going to see those changes”.

By Bill Boyle, Senior Analyst, International Banking Systems Intelligence 

The transcript of the entire discussion is available: https://www.netevents.org/wp-content/uploads/2019/01/Debate-VII-Banking-Technology-IBSI-draft.pdf