I reflect on my last piece of work and two extracts stand out for me,
There is an increasing need for local South African banks to consider doing business with a Fintech company.
It remains to be seen whether any other South African bank would venture into this territory where acquisition rather than collaboration becomes the norm.
I am an advocate of the collaboration model because it is a calculated risk that a South African bank can take amidst the competition in the market. I believe that the collaboration between a Fintech and South African Bank would bring a unique blend of focus, experience, innovation and ambition to the table. With this thought in mind, I recently became privy to a very interesting conversation, where instead of collaboration or acquisition, the talk was around a company taking the middle ground, i.e. the notion of ‘internal metamorphosis’,
I define ‘internal metamorphosis’ as a financial institution looking to re-engineer itself into a Fintech. I ponder over the topic being debated and I can’t help but remind myself of a statement made by (Kirsner 1), “It would be hard to choose two words that feel less descriptive of life inside a large organization than “lean” and “startup.”
The debate among friends and colleagues stirred up a thought in me on whether this transformation can be actually be attained. I cannot imagine how a traditional bank with legacy thinking and structures can evolve into a two-speed business model that can hyper-personalise and become customer centric experience centres yet I am happy to be proven wrong.
Benefits of transforming into a Fintech
The option of taking a financial institution through ‘internal metamorphosis’ and pursuing a Fintech type model has some known benefits, i.e.
- Making decisions based on evidence and data, rather than executives’ instincts.
- A faster cycle time for developing ideas.
- Better-quality feedback from customers and stakeholders, often because you’re asking them to actually buy something, rather than just spout opinions in a focus group.
- “Getting out of the building” to speak to and observe real customers and stakeholders.
- More flexibility about making changes to ideas as they progress from concept to “minimum viable product” to finished product.
The benefits are clear and there is certainly a case for evolving the traditional into something digital. The point of debate that we all wonder is whether traditional banks can transform themselves from inflexible, analog monoliths to delivering highly personalised physical and digital experiences.
Looking within a traditional bank
We all know the truth about nature, ‘a caterpillar can become a butterfly’, yet with all things being equal, the questions traditional banking executives need to critically ask themselves are the following,
- How will the current business model be impacted? Which aspects of the current model need to change? Why is the current model relevant to what we want to achieve?
- What would this change in direction mean to executive decision-making authority? How will failure be made acceptable? How would the company adopt the concept called ‘innovation accounting’, as a part of becoming a Fintech?
- What measures have been implemented to attract\retain the right blend of talent to pursue this direction? How would change be managed as a part of the metamorphosis?
- Why would the current culture of the company be retained? How will the company culture drive accountability in rapid innovation?
- Which factors of the current company culture need to be changed to adopt a Fintech identity?
These are tough questions to be asked and it requires one or a few executives to take a long, hard look at the surrounding factors and be brutally honest. As Eric Ries and Steve Blank once said, “they will run into two brick walls that an actual startup would never have to deal with”.
Banking by definition sits in the middle of the economy and as much as that economy changes (all the time) so must banking adapt. It is an industry that continually has to reinvent itself, continually innovating and redefining what it provides for its clients. Now, more than ever before, banks are feeling the pressure to reinvent themselves to thrive in a digital age and i future-proof the world of financial services. This is a great opportunity for innovators in non-traditional banking spheres to participate — engineers, developers, creatives, design experts — all have roles to play in the banking innovation ecosystem of the present and of the future. The core aspect we need to question is whether converting a traditional bank into a Fintech is warranted, let alone feasible.
Internal Metamorphosis – the learning thus far
Around 80% of financial services executives say their firms have some form of structured Fintech strategy in place, but only 10% say their strategy is very effective, according to data from Capgemini’s World Fintech Report.
The report also highlighted a number of factors that executives believe are behind this lack of success,
A risk averse culture
- The top barrier to achieving results is a lack of conducive culture for innovation, with 40% of executives citing this point as a significant obstacle. A removal of this barrier requires that leadership acknowledge there is a cultural challenge and support the implementation of a clear strategic vision and plan.
- Thirty-seven percent of respondents said budgetary constraints were hindering innovation, making it the second-biggest hurdle to achieving results. In part, budgetary constraints arise from a need for organisations to spread budget across business-as-usual operations, including maintaining legacy systems.
Attracting the right talent
- The majority of firms agree that they need to address talent challenges in order to catch up to industry wide technological changes. The biggest obstacle in this area is competition for talent, with 67% of respondents citing it as a top hurdle.
The option to transform a traditional bank into a Fintech is indeed an interesting perspective. The notion on whether it can be done is ultimately up to the leadership team driving the change, as they remain accountable to the both shareholders and the employees.
Notes to consider:
Traditional banking functions are being contested and becoming commoditised. As a consequence, value is shifting from functional capabilities to relationships. While emerging competitors may be able to replicate banking functions better and at lower cost, they will find it much more difficult to build and manage the breadth and depth of customer relationships traditional banks have carefully built over decades. Because of these relationships, traditional bankers, far from being dis-intermediated, have the ability to shift their focus from service fulfillment to service facilitation and orchestration. Banks can position themselves as the principal gatekeeper to their customers, creating an ever-evolving ecosystem of services and experiences. To achieve this, traditional banks will need to rapidly transform. They will need to connect with an ever-expanding portfolio of business partners and they will need to engage customers in new, powerful and enduring ways. The rewards will be significant for those banks that can rise to these new challenges. For those that fail to do so, the future may be less bright.
My view is that there is no need to transform the bank, just embrace the changes and apply the necessary steps for a change in people, culture, technology and business practices.
Banking executives can work to position their organisations at the center of rapidly evolving banking ecosystems. While Fintechs are able to leverage new technologies to compete against banks in specific functional activities, they do not yet have the benefit of banks’ customer relationships. Bankers have historically created value through the specific banking functions or services they provide however, in a future where these are readily replicated, banks’ value will be centered on the quality of the customer relationships they maintain (see Figure 2).
Banks have an opportunity to position themselves at the epicenter of evolving ecosystems, overseeing and orchestrating a broad range of best-in-class services for the benefit of their customers. Although technically able to engage individually with a range of service providers, customers of banks are more likely to remain loyal, entrusting their banks to manage processes and relationships on their behalf. These banks will be better positioned to offer customers lower costs and a wider range of compelling services and experiences from the innovation occurring within the ecosystem, Fintechs and others.
Banking culture will also evolve and transform. As the incumbent institutions are relieved of the burden of many traditional banking functions, time and resources will be available to focus more intensively on the needs of the customer. Capitalising on the ecosystem will demand a radically different bank culture, mandating customer centricity as the predominate force within ecosystem-centered banks.
In closing, we should be asking ourselves, is it better to transform or collaborate?
Brill. J. Drury, N. Lipp, A. Marshall, A. Wagle, L. (2015). Banking redefined. Disruption, transformation and the next-generation bank. Available at: https://www-935.ibm.com/services/multimedia/La_Banque_a_l_ere_cognitive_Oct_2015.pdf
Banking on the future. (2016). Available at: http://foundery.co.za/blog/banking-on-the-future/
Here’s why financial firms’ Fintech strategies are failing. (2016). BI Intelligence. Available at: http://www.businessinsider.com/heres-why-financial-firms-fintech-strategies-are-failing-2016-11
How Banks Can Keep Up With Digital Disruptors. (2017). Wharton University of Pennsylvania. Available at: http://knowledge.wharton.upenn.edu/article/banking-and-fintech/
Kirsner . S. (2016). The Barriers Big Companies Face When They Try to Act Like Lean Startups. Harvard Business Review. Available at: https://hbr.org/2016/08/the-barriers-big-companies-face-when-they-try-to-act-like-lean-startups
Euchner , J. (2013). Personal interview with Ries E.