The future of banking

Article

The future of banking

Seven wicked problems for banks in their strategic transformation

Incumbent retail and corporate banks find themselves at an intersection where digital transformation presents itself as both a threat and an opportunity. If they want to remain relevant in a rapidly evolving ecosystem, they will have to focus even more on (digital) strategy, new technologies and agile and robust operations. In order to help them, we have identified seven wicked problems for banks which we will present as a framework for identifying and navigating challenges in their strategic transformation.

7 wicked problems for banks in their strategic transformation

Rapid technological developments, continuously evolving client habits and expectations, new entrants and changing regulation are dramatically impacting the traditional banking value chain. As a result, the role of banks in this value chain is changing substantially as well. The banking ecosystem is becoming more and more complex, driven by an increase in ways clients consume financial products and non-banks (e.g. IT firms, fintechs, and retailers) claim their place in the value chain. Banks need to think ahead about their role in this future ecosystem and decide what capability set they need to fulfil their purpose and mission in a changing world. We have identified seven wicked problems for banks which we will present as a framework for identifying and navigating challenges in their strategic transformation:

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1. Banks have to embrace Digital

Client expectations change faster than ever before. How can banks fully embrace digital? How can they build the competencies and DNA that are needed to rapidly design, test, and scale transformational outcomes? First of all, they must decide whether they want to be a leader when it comes to meeting client expectations, or a follower and early adopter. Second, they need to build complementary digital capabilities among their workforce, systems, and structures. Finally, they must be able to change immediately and quickly learn from failure.

2. Reimagine the Client

Long term sustainable growth in banking requires genuine client centricity and a focus on actual client journeys. How can banks reimagine the client? How should they remove clients’ worries about financial services and improve their understanding of clients? How to support clients (both in retail and corporate banking) in this new world in which machine-to-machine communications and payments prevail and money flows are becoming even more invisible? What new and different services are needed to help clients maintain their grip on their financial well-being – and prevent new ‘digital’ banks and fintechs from taking over entirely?

3. Grow and Expand

The traditional value chain of banks is under huge pressure. Banks must choose where to play and how to win. For instance, growing scale is still relevant in the digital era - it enables banks to free up sufficient funds for investing in innovation and to scale up new business models more rapidly. While the traditional retail model is difficult to export, digital banking is perfectly suitable for rapid cross-border expansion. Also, future (digital) distribution of banking products and services will be dominated by a few major platforms. These platforms will enjoy economies of scale based on network effects, Big Data, analytics, and the lack of geographic boundaries.
We discern three ways to grow and expand:

  1. Drive revenue from Open Banking. Excel at becoming a manufacturer and drive revenue from selling services through a wide array of channels and platforms.
  2. Excel in client focus and growth through scaling innovations. Find new markets and/or propositions that can be scaled. How to identify these markets, create new propositions and set up for scale?
  3. Pursue Inorganic Growth. In mature home markets, banks can also pursue to grow in their traditional business model through industry alliances (e.g. global complementary plays), ecosystem plays and focused acquisition strategy in Europe to create a second home market.

4. Radically Simplify the Business

Banking is complex and regulated. How can banks automate and streamline processes? How to deal with complex, legacy technology and legacy thinking? First, make a choice - don’t be everything to everyone. Simplifying systems means (more) simplified products, while offering more tailored products will impact the system. Smart outsourcing solutions can radically simplify the business whilst maintaining a full service portfolio.

5. Unlock the Data-Driven Bank

Clients trust banks with their data. How to use the full potential of this data to wow clients? How to unlock insights from valuable client data, enriched with external data sources? Asking the right questions and applying advanced analytical techniques improves the decision making process. This allows staff to focus on making decisions and acting on them, rather than (manually) collecting, cleansing and analysing data.
The future workforce will be very different from today’s. Two powerful forces are shaping this new world: the growing adoption of artificial intelligence in the workplace, and the expansion of the workforce to include both on- and off-balance-sheet talent. It is crucial to experiment with and implement cognitive tools, to focus heavily on retraining people to use these tools, and to rethink the role of people in an automated working place. Adopting technologies like robotics, Big Data and artificial intelligence will help banks to automate routine and increasingly non-routine tasks, thereby improving efficiency and effectiveness, gaining competitive advantage and making better, faster decisions. Organizations that are not able to adapt to this new era of automation are likely to struggle. Scale and deep technical skills will not be enough to compete against the power of the machines or organizations that have a workforce with more adaptable skills.

6. Champion Open Banking Ecosystems

How can banks engage in an increasingly more open ecosystem consisting of e.g. fintech, social, and 3rd party providers? Contrary to conventional belief, these new parties are not aiming to directly compete with incumbent banks, but by solving client dissatisfaction they actually do offer severe competition. Incumbent banks can leverage their insights by embracing collaboration and co-creation, circumventing the time-consuming development of internal capabilities.
The speed of transformation of the banking sector implies that the current capability set is probably not sufficient to remain successful. Banks need to decide which (new) capabilities they need to build or reinforce, and which capabilities they need to buy or source through collaboration with third parties in their ecosystem. This will accelerate the development of (new) capabilities, provide the flexibility to adapt the capability set to changing needs and increase connectivity to other platforms and new players.

7. Strengthening & Securing the Bank

Regulatory compliance, financial stability and a safe environment should be the bedrock of a mature bank, not something banks need to continually respond to. How to modernize the bank while building “always on” financial risk management, operational risk management, regulatory compliance and ensuring the bank’s brand and clients are safe? Establishing priorities is key, due to the perceived trade-off between risk management, compliance and (speed of) business. In fact, a risk strategy can turn risk management and compliance into a value proposition for clients.

The Future of Banking

In the upcoming months we will share a range of articles with you on the future of banking, based on the ‘seven wicked problems’ mentioned in this article. Our research skills and day-to-day experience in working with banks have allowed us to dive into these challenges more deeply. By sharing our insights, we strive to help you with the choices you face in your day-to-day work and with aligning your leadership, culture and organizational structure to a fully digital mindset, optimizing the use of proprietary and external data.

More information on The future of banking?

Read also the article on the 7 wicked problems that was published on Banken.nl (article in dutch).
Do you want to know more on the future of banking? Please contact Harmen Meijnen via the contact details you’ll find below.

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