Traditional banks are struggling to keep pace with the technological revolution. The consequence they face could be irrelevance. What should they do in the face of this threat?
The answer is to build IT infrastructure anew where possible. Banks must start learning how to operate in the new world now. Continuous bit-by-bit reform is not enough, because it takes too long, and means that the innovation game will be lost.
In order to get familiar in the new technology and data world quickly, it is a viable option for established banks to build parts of their banking completely new, in a greenfield model. This may be for a specific new product or customer segment. This has the advantage of being fast, building familiarity with the new environments, and also being able to test new possibilities on the business side.
This root and branch approach is something that cannot be simulated: either banks operate and innovate in the new world or they don’t. There is no halfway - it’s a binary logic.
The pace of change in technology in the last five to ten years is nothing short of a revolution. So much more is now possible. Banks are able to do things that they simply weren’t able to do 10 years ago.
The three strategic levers of banking are maximizing revenue, minimizing cost and mitigating risk. All these three levers are now directly affected by new technologies.
The new customer segments around the millennial age group (20-40 year olds) are interesting and profitable for the future, but also challenging. These customers are very tech-savvy, want to do their banking almost exclusively online, yet are often data-security sensitive and demand full transparency in service and price. As a general rule, the younger the customer, the more demanding they are in terms of automation and speed.
Legacy banking systems are simply not designed to keep up with modern customer expectations. They are neither fast nor accurate enough when it comes to critical data to facilitate the new relationship that’s needed with these new customer requirements.
It’s imperative for banks to get into the new tech paradigm in a serious way. If they don’t, it will become nearly impossible to service these new customer segments going forward.
Fintech and big tech firms are already at least 5-10 years ahead of the majority of banks in terms of speed of innovation and data quality. These new players could render banks obsolete if established banks don’t transform their IT quickly.
Some banking markets (like Asia or the Americas) are more pragmatic in their relationship with Fintechs. They seem to be more willing to cooperate with fintech companies, and acquire them to innovate. They seem to appreciate the wisdom of the old American saying: ”If you can’t beat them, join them.”
And it’s not that banks have nothing to bring to the table in such collaborative arrangements. Banks can bring in their assets of product and regulatory know-how in such relationships with the tech firms.
It’s astonishing how great the divide still is between business and IT in the banking sector.
It also requires changes in governance, leadership and investment that will make possible the close, collaborative work of business and technology leaders in the bank to achieve common goals together.
This represents a sizeable and fundamental shift from the strong vertical silos of business units or functional departments in the current paradigm, towards an integrated, horizontal working together of teams across boundaries.
Bridging the cultural gap is one key role that consultants have to play for banks. Consultants can explain the advantages of integrated behavior, as well as what frameworks and incentives can be used to achieve that end.
There is still a huge opportunity for established banks to leverage their assets into the digital future of banking.
New greenfield platform strategies and new tech partnership strategies are two of the possible ways to achieve maximum success in the new paradigm. BearingPoint is a partner of banks in making this transformation a reality.