Banking Fintech

The digital bank vs digital banking

The digital bank vs digital banking. Main photo: mrmohock, Shutterstock.com
Written by Sudhir Kesavan

Traditional banks should feel more threatened than they currently do, says Sudhir Kesavan, who examines the difference between digital banks and digital banking.

For a few years now, it has been expected that digital will spur the creation of banks as platform, marketplace banking, identity as a service offering and other constructs of a radical nature. But as we look around, we don’t see this construct in any scale that could be called a trend. It isn’t that a small set of banks aren’t on this journey. Banks such as Capital One, Santander, BBVA, DBS and others are very much on their way. What I believe is happening is that a sharp chasm is emerging between a large number of traditionalists and the smaller set of pioneers. I have absolutely no doubt that a majority of the banks are going digital, but the divide couldn’t be sharper.

Banks are essentially risk management businesses. That’s what they do. The business of attracting customers outside of product or services that don’t involve this function is lost on a bank. The regulatory protection, and customer apathy of banking as a necessity, causes a bank to be inside-out in its thinking. And to a large extent this is very rightly so – credit risk and underwriting risk is the core operation of the bank. As far as a banker is concerned, without this, you’re just a fintech! (Oops! Did I just reveal what most bankers think of fintechs?)

This thinking has led traditionalists to continue to view digital as first and foremost a channel strategy, and second as a cost management one. To make matters confusing, digital is indeed a game changer for both. It’s a great way to reduce the friction of accessing a bank’s products and services, as well as delivering those product and services, which is why all banks are spending an incredible amount of money here. But in my attempts at working with banks, what I discovered is that while the traditionalist bank is a doing a lot of work on the digital front, in most cases this isn’t part of some grand redefinition of the bank’s proposition/strategy. If one peels away the cover of a typical bank’s enormous digital investments, it does seem like (in most cases) the light at the end of a tunnel is that of a reduction in cost of operations or integration into new channels, and not actually the dawn of a new, digital day.

Digital transformation horizons

To simplify this, I looked at the digital transformation of a bank in terms of three horizons, as shown below. The outer edge is the fourth horizon, that of disruptive forces.

Digital maturity of business and experience of the end customer.

 

At a macro level, the digital transformation journey is getting ‘templatised’, and though it remains vastly complex, the three horizons seem appropriate:

  • Presence. Typically, the bank and its offerings are available on all digital channels, or are getting there.
  • Transformation. At this stage, the bank is looking at moving its current value proposition to be individualised, omni-channelised [sic] and real-time.
  • Reinvention. The digital promise stage, where the bank plays the contextual advisory function.

I then overlaid this framework with a lot of what we hear and comment about (from banks, fintech gurus and mere mortals like yours truly). The following picture emerges.

Digital maturity of business and experience of the end customer.

And finally, to highlight the starkness of the differences in the definition from a traditional bank’s perspective and that of digital pioneers, I added two lenses:

  • Red lens – for the traditional bank’s current view.
  • Blue lens – for the pioneer bank view (including fintech and gurus).

To be fair, there’s a fair bit of overlap in what the traditionalist and the pioneers talk about, yet the difference of strategy isn’t in what you say, but in how you allocate your time, resources and money.

Digital maturity of business and experience of the end customer.

The red space is what’s occupying the traditional bank. It’s easy to dismiss this as legacy debt, but in reality this is so much more than that. It’s about the bank taking the digital opportunity to improve its effectiveness and efficiency for its current proposition. For a bank, this is a huge transformation. Any one of these capabilities is challenging, and the complexity of attempting to do many in parallel can only be imagined. This is also critical to the bank, as this will be the new normal that the current competition will set up. On the other hand, the digital world that gets written about the most is the blue lens. These are two completely different worlds. I will elaborate more on how different they are a little further down.

Bank rationale

I’ve had the fortune of selling to and working for (as a provider) both ends, and these are two completely different philosophies and capture vastly different value. Yes, traditional banks are spending an enormous amount of time, resources and money on digital, but not on the digital reinvention opportunity.

I’m an optimist, and I believe that the bank rationale is that it’s doing all that it’s doing in order to be ready for reinventing its proposition towards customer need servicing. But I’m also an opportunist – the longer traditional banks hold out, the more attractive the digital pioneers become. In a winner-takes-all world, this is a no-brainer. Let’s look at these lenses a little more intensely.

Red lens vs blue lens

The red lens is about extracting the maximum value that digital technologies have to offer for current business processes. It’s more defined by technology strategy than an overarching digital strategy. This isn’t to say that the digital strategy is missing, but rather it’s the legacy debt that’s the driving force. The payoff is in mobile-enabled customer access, simplified and automated processes, convenience and ease of use. It sets the stage for an omni-channel experience for the customer, and kicks off digital marketing into high gear.

The initiatives are typically funded by the CFO and the CMO, with operational simplicity being sponsored by the COO – all at a LoB level. Typical management style about delivering against a plan of cost savings and outcome measurement of impact on known KPIs.

The blue lens is the customer need space. In every sense, it is a return to the original roots of the organisation’s value to the customer, therefore the overarching capability is entrepreneurial. It’s often mistaken that this is all about innovation. My belief and experience is that it isn’t just that; innovation is a part of it, a very critical part, but it’s really about creating a business model based on customer needs, and scaling that as a business. And that’s an entrepreneur’s job. The only CXO who can sponsor this is the LoB head, if not the CEO himself. All the capabilities that you would see in this space have two significant traits and these are that all of them are data-driven and learning based.

A digital bank as defined by the red lens viewpoint is a noun – it’s a place to get to and is driven by hard business plans, and is tracked according to it. This is where you extract significant value from existing business models. Digital banking as defined by the blue lens is a verb – it’s a journey fraught with all the startup challenges of proposition validation, customer discovery, growth hacking and funding cycles.

The ROI of customer obsession

The line separating the traditionalist vs the pioneers is actually a chasm. I look at it as the “ROI of customer obsession” chasm. Transformation will give a bank the ability to be part of marketplaces, streamline channels and free business teams to sign up partnerships and be up and running within weeks instead of quarters. Beyond this, a bank enters unchartered territory, and this is where the difference between whether digital is a channel strategy vs a competitive strategy comes in. For the traditionalist, this is a chasm they would rather not cross. I suspect that a majority of traditionalists would focus their energies in 2017 on the data science and big-data-led propensity modelling initiatives for the CMO, and RPA-led cost optimisation strategies for the COO.

As a banker, prioritising the customer-need-driven agenda can only be successful if it forms part of the overall strategic agenda, or else it will end up as proof of concepts. To reiterate, I respect the pain of transforming the core to be digital-ready. I’ve played my bit role in the transformation of a truly remarkable bank and am proud of it, but being fortunate to see the digital banking view, I think a majority of the banks need to feel far more threatened than they currently are. While a majority of FIs will become digital banks, it’s only the pioneers who will practice digital banking.

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Main photo: mrmohock, Shutterstock.com

About the author

Sudhir Kesavan

Sudhir Kesavan heads the fintech team of vLendRight, a customer journey platform that enables banks to gain market share in auto finance. For the last 19 years, Sudhir has worked as a technology provider with banks and FIs in the US and Europe. He and his core team have worked in digital transformation for several years, focusing on innovation in banking using a methodology they call 'digital imagineering'.

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