Banking Fintech

A digital bank, in one picture

Written by Chris Skinner

In order to become a digital bank, you have to juxtapose physical thinking with digital thinking. Story by Chris Skinner.

I spent a day working on a bank’s digital strategies recently. It was a fascinating day and, as is the norm with some of these off-sites, a scribe artiste was scribbling my ramblings on a chart. I liked the summary so much, I thought it was worth sharing.

Develop strategies, Chris Skinner

What this shows is the challenge at the top-left: how do we convert an institution built for the physical distribution of paper in a localized network focused on building, and humans into a digital disruption structure for data in globalized network focused on software and servers?

That’s pretty much the tenet of the book Digital Bank and is elaborated into stories of banks who have tried to do this. This is shown at the bottom-right: how do we convert the bank? Do we throw away the old bank? Do we run new bank alongside old bank? Do we just try to stick digital on top of old bank?

Most banks take the latter approach, which is why they have a chief digital officer and talk about channels and integration. It’s tosh, as those banks won’t be around in 10 years. When you’re competing with new startup firms that enable P2P transfer of value in real-time for 100 basis points -0 the costs of their software and servers, how can an incumbent compete long-term when their consumer-to-bank-to-bank-to-consumer operation invokes credit risk managers and underwriters who sit in offices and cost 300 basis points to employ? This is the point: if you have a competitor using software and servers to transmit value at 100 basis points, you cannot keep up if you’re competing using buildings and humans that cost 400 basis points.

Yet, most banks operate this way: let’s do digital and stick on top of our old systems. It maintains the status quo, is easy and enables the bank to look good by sticking lipstick on the pig. The fact is, it’s still a pig, and in a few years the pig will snort. Nothing against pigs, but I’d rather deal with Jennifer Lawrence or Orlando Bloom.

Digital thinking

The fact is that the bank must juxtapose its physical thinking with digital thinking. It has to build a digital foundation with access via form factors – human, mobile, chip-based and more – rather than integrating channels to a physical foundation. This takes leadership, as it entails strong courage to change the banks’ core systems. It also takes strong technology vision and understanding, which most bank leaders lack because they came through a risk and finance function and think that, by having a digital team, they‘ve done the job and covered the bases. Wrong.

There’s lots of other thoughts in there, but the final one is that to get this change across to the board team, you just need to be really simplistic:

  • Moving bank data to the cloud is just moving our mainframe to the internet.
  • Moving our systems of record to the blockchain is just moving our databases to the internet.
  • Focusing on mobile is good, but think of mobile as just a transitionary period to moving everything onto the internet. That’s the internet of things.

I likened it to growing up. When I grew up, I had a car that I had to fuel with gas and fill myself. When I grew up, I had a television that could play four channels and was controlled by a central authority (the BBC and ITV). When I grew up, my mum would go to the store two or three times a week and fill up the fridge with groceries from the local store.

These were all physical movements and exchanges involving cards, cash and cheque payments. Now, my children are growing up in a world where the car runs on electricity, drives itself and runs on the internet. The television plays to demand and orders the shows I like through the internet. My fridge gets filled with groceries it orders direct from the store over the internet.

Everything is on the internet – the Internet of Things – and my bank has to be on the internet too. It may not need to be there in 2016, but by 2020 if it’s not on the internet, it’s in the bin.

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image: lcr3cr CC0 Public Domain

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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