Banking and consumer finance firms are navigating a dynamically changing environment, in which regulatory constraints, consumer deleveraging and evolving channel dynamics present significant obstacles to profitability. Banks are increasingly seeking to dramatically streamline and simplify how they work. Large incumbent retail banks are being threatened not only by small nimble fintech startups, but also by large tech companies. Rakuten in Japan, Alibaba in China, and Amazon here in the USA, have all made significant inroads into retail banking space. So what do these large tech giants have in their favor for success? They have the essential digital maturity, huge customer-base with advantage around customer-experience, and huge brand presence that can be leveraged into banking. The fintech startups have advantage in being innovative and fast, but they lack customer base and brand recognition, for which they are inclined to collaborate through partnerships with the incumbent banks. The only advantage incumbent retail banks have against both is the significant trust they have with its relatively large customer-base. They must build this trust further by investing aggressively into customer-experience and earn loyalty by going after the customer’s digital-first habits, engage with successful transactions, and gaining traction with new customers. Incumbent banks can no longer afford to ignore the digital threats that they are facing already here and many more that are headed towards them.
What must large incumbent retail banks do?
Retail banks appear to be vulnerable of losing the special status they once enjoyed and so must leverage what they currently have as advantage – huge customer-base with stronger trust. The biggest challenge they face is their bureaucratic, complex and slow culture that is slow to innovation that can extend optimum customer-experience. With an industry that is facing truly disruptive changes, banks must realize that it takes more than data and systems to self-disrupt their business before they get disrupted from outside. This requires companies to not only set bold digital ambition and strategy, but also preemptively transform to the right operating model, culture and IT systems to support such objectives. Rather than treat digital competence as an end goal that they must achieve simply by upgrading their website, they must focus on building a more agile, responsive organization that can react quickly to market shifts while innovating with speed. They must make their cultures more adaptive and innovative, and bring in technology systems that can help them advance their strategies with clear conviction that digital maturity is important, but technology is the means, not the end. They must become more aggressive with re-imagining their offerings, rethinking their operating model to become innovative with their value-chain, processes while considering business-model innovation. They must scan the horizon for end-to-end value creating solutions that span beyond their traditional boundaries with innovation-ecosystems.
Rethink the bank’s operating model
The biggest obstacle to implementing a distinctive strategy for a bank has become how difficult it is to adapt their operating models quickly to a new strategy. Banks must proactively rethink their operating model for adaptability, on how resources are organized and operated to get work done. Bank executives must take into consideration all strategy around ambition, purpose, values, where to play, where to win, business model, sources of growth, drivers of value, customer priorities, in-house capabilities, & cost/benefit targets of the company to drive the redesign of their operating model. Every element of the operating model, including accountabilities, roles, responsibilities, structure, governance, capabilities (with people, process & technologies) and most importantly the culture, must be redesigned. People must become a key element for the their bank’s strategy to enable a well aligned workforce for the ever changing needs, accelerate IT flexibility for strategic changes, accelerate time-to-market, improve go-to-market, and ultimately deliver a great seamless customer experience.
Banks must seriously consider taking a “people-first” approach
With bold strategies comes the need for the aggressive execution and agility of the organization to adapt to new realities quickly. This comes with enabling the leaders to sponsor and manage changes effectively. Leadership must be well aligned to the strategic imperatives and sources of advantage, so that their alignment is palpable, visible and maintained at all levels. They have to be able enroll and activate leaders across the organization, while being engaged with the broader organization. Employees at all levels must understand the changes and be equipped to manage it as often as they come along, while stakeholders remain deeply engaged. Critical behaviors necessary for culture shift must be reinforced and accountability must be hardwired in line management metrics, as well as performance management and recognition systems.
For their digital transformation success - a high level of confidence in initiative delivery must be attained with a portfolio approach to initiative management that supports transparency across milestones and outcomes. Rigorous methodologies, tools and testing of initiatives are required. They must have forward-looking view that provides early awareness of emerging issues. Rigor and diligence will need clear governance structures, including explicit roles, processes, and decision rights. The value-added strategic initiatives office must be established that provides support and structure to the organization.
Shift to agile high-performance teaming, problem-solve, test and learn culture
High-performance comes from setting high aspirations, focusing externally on customers and competition’s moves, taking responsibility for the entire business performance, bias towards action while having no tolerance for bureaucracy, excellent teaming skills, and readiness to embrace innovation / change when necessary. Speed is a key factor to be considered for digital success. In large and complex companies, this means reducing reliance on hierarchies, and leveling hierarchies requires reliance on collaboration. The most common new approach is to adopt at least some aspects of the agile methodology. Agile ways of working include multidisciplinary teams, short sprints to accomplish something valuable, new roles such as “scrum master” and “product owner,” and other design features that differ in concept and approach from traditional ways of working, especially in large organizations. Rather than imposing specific methodologies, many large companies apply agile’s general principles, paying special attention to the integration of agile teams into the rest of the organization. Lean approaches, design-thinking, and other methodologies also have an impact.
When it comes to evaluating new product features and process changes, test-and-learn companies skip lengthy project studies and test their best options with customers and stakeholders. Companies benefit when they release incremental product improvements rather than wait for a complete solution that addresses every angle of a problem. The most effective tests last a week or two—enough time to gather feedback to highlight the options that resonate most. From there, a company can dump the weak options, improve the best ones and test them again. By breaking down major initiatives into smaller, testable parts before rolling out plans widely, companies get ahead of problems and make critical improvements early. True test-and-learn approach is disciplined and rigorous that will seize new opportunities quickly. Before any test begins, a team develops hypotheses for the options in question that consider the company’s strategy, target customers and financial goals.
Keep customer at the center of everything
Companies must re-imagine customer experience by making digital engagement as the goal and redesign business and operating model around it to deliver data advantage and innovation. The scope of the design changes must include end-to-end customer journey. It must cross all business units, product and service lines, and channels. If an ecosystem of partners provides the experience, the design changes are applied to all participants. The target design includes experiences that are both completely digital, and partly digital (mobile devices) and partly physical (branch & customer-service over the phone). Companies must actively coordinate the design of products and services with the design of the customer experience. The bank’s data on customers and the customer experience (of individual customers as well as groups of similar customers) is made available throughout the company and used to tailor the customer experience. From the point of view of customers, the digital aspects of the experience need to be as smooth and easy as the best digital interfaces that work consistently across all devices, including mobile phones, tablets, computers, kiosks, set-top boxes, and automobile multimedia systems. Create customer communities on social media sites such as Facebook and LinkedIn, which allow customers to interact with them and with each other. In turn, companies can learn and collect data from such interactions.
Be driven by innovation and speed
In the pursuit of innovation, approach it as a system that has three major components: a strategy comprising choices on where and how to create growth and value through innovation; a supporting set of processes for research and product development; and an enabling set of systems, tools, and capabilities. To rejuvenate innovation in the company for impact, the system must be organized for speed. For example, bringing new products and/or services to market quickly avoids giving competitors early looks or the opportunity to influence trial results. We cannot have time-consuming trials and test launches that often kill new products before they have a chance to find their market. Effective innovation systems are designed to limit the waste created by going too far down unproductive paths. The company must not be afraid to jettison “failed” ideas along the way, having learned the lessons from them. The quick, iterative nature of the customer experiments will keep the process moving fast and limits costs. Failing fast and cheap is partly about making efficient use of scarce resources—by putting them where they have maximum impact—and partly about capturing lessons learned. Using an adaptive approach, good innovation systems institutionalize by taking advantage of the experience curve.
Value-focus during execution of strategy
Value creation lens helps companies focus their efforts on the levers that can have the greatest impact (organic growth, reduced operating expenses, better asset productivity, and others). If you think about customer behavior, a customer basically at some level weighs the value that they perceive in a product or service against the asking price. This thought process will help company management to think about where they could possibly add value to their current offerings or create new offerings that are delivering new types of value. The whole intent of this is to help managers increase the value that they deliver to customers. It becomes the basis for prioritizing innovative ideas and solutions with most impact that must be pursued.
Right teaming to problem-solve and arrive at innovative solution fast
As companies develop the bold strategies with clear sources of advantage from digital solutions for customers, they will need to assess the gaps in their existing operating model and act fast to adopt new ways to execute on the strategy. Co-creation with several tried and proven principles and mindsets is gaining traction that has the following characteristics:
Market environment for banks have customer preferences and solution options that are changing rapidly.
Companies are bringing customers into the fold for close collaborative exercises; the customer feedback and learning from such collaborative ventures, result in more aligned solutions.
Problems are complex and solutions are often unknown, where creativity and ingenuity will be critical for innovative solutions that must emerge quickly. Customer empathy, interactivity, cross-functional collaboration is critical for such innovation success.
Modular approaches are taken with value-focus and customer-centricity. Rapid iterative cycles on modular components allow for quick changes without big loss.
With test-and-learn culture, failures are kept small, cheap, and learning from them has become important for the right solutions to emerge.
The culture is moving to more team-oriented, collaborative, innovative, and eager to delegate, making them the reasons for increased moral and low turnover among employees.
Creating a focused microcosm where co-creation can happen with design-thinking, agile principles, startup mindset and storytelling craft can be incorporated to ensure customer-centricity, value-focus, innovation-driven and speed optimized solutions. Such co-creation teams that we call “Co-SPIN,” focuses on one impactful initiative as a pilot, which can help establish credibility and demonstrate reliability that will help future initiative behaviors. As more and more initiatives are rolled out, and critical mass is developed across the organization, the culture shifts. Co-SPIN stands for co-creation with speed and innovation. Inspired by the “Accelerated Solutions Environment (ASE)” at Gemini Consulting in the early 1990’s, innovative solutions, cohesive teaming, accelerated execution and faster results are the hallmarks of this approach. Through out the various stages of this exercise, storytelling craft is used, to not only engage the participants, but emotionally connect and earn commitment towards high-performance.
A startup mindset is adopted to have a cohesive team spirit that is bold, customer-centric, insurgent and biased towards action. Agile principles are incorporated to address the innovation and speed. Design thinking ensures keeping the solutions derived, brimming with customer centricity through a clear understanding of the customer experience journey. Co-creation in this way enables the team to develop features iteratively with active customer participation, adapt rapidly to changing priorities, delay the risky bet on nascent magic mirror technologies and increase cross-functional collaboration.
Culture shift is paramount for banks
Shifting the business culture involves influencing people’s deepest beliefs and most ingrained behaviors, which is hard. But the secret to culture is that it comprises many different components, and when you change the parts you change the whole. Culture at its best, can be an asset that enables, energizes, and enhances human behavior – and when wisely nurtured, it can accelerate and sustain business results. Companies with high-performance cultures score far higher than other companies on key measures of employee engagement, and they reap the rewards that the engagement brings. Here is how to shift the company culture:
Identify the aspired culture - The first step is to define what you want—to show what the company values in the new environment, and to describe the goal in terms of specific behaviors.
Align the leaders to the new culture – Leaders at all levels must be enrolled and activated to the new aspired culture. The alignment of leadership must be palpable, visible and maintained. They should walk the talk and role-model the new behaviors for reinforcement of their teams.
Reinforce the new culture into the organization - Companies with high-performance culture aligns every element of their organization around the cultural objective of such high-performance. They ensure that new roles are clear. They develop human resources procedures that put top performers in the jobs where they have the greatest impact on critical behaviors. They create incentive systems that encourage and reward the right behaviors. A culture of high-performance emerges from these and other measures, because people throughout the organization see that it is what’s important. Of course, behavior change doesn’t happen automatically. People may know what’s expected of them, but they may still need to embark on a personal journey of change before they truly live the new culture.
Get the banks ready for an ecosystem economy
Banks must create a customer-centric, unified value proposition that extends beyond what users could previously obtain. Digital pioneers are bridging the value chains of various industries to create “ecosystems” that reduce customers’ costs, increase convenience, provide them with new experiences, and whet their appetites for more. Not only do banks have exceptional data that they must exploit with effectiveness but they also must become more central in the customer journeys that include big financial decisions. Banks must be able to blur traditional industry boundaries. With focus on customer experience, they must sell an ever-wider range of products to their loyal customers. When it comes to customers’ decisions about where to place their money, research shows that banks enjoy greater trust than large tech companies. And banks have exclusive access—for now—to huge amounts of incredibly valuable customer data. Already we are seeing early success stories from around the world, as banks start to develop platform-like capabilities. It is not too far-fetched to imagine a day when banks will offer a range of services, reach a vastly larger customer base, and succeed at their digital rivals’ game.
Banks must take on a full-scale digital transformation, not only for the economic benefits but also because it will earn banks the right to participate in the next phase of digital banking. The idea of fintechs as a threat to retail banking might be receding. But the new strategies adopted by the large technology platform companies are even more challenging for incumbent banks. As banks move from their traditional focus on products and sales to customer-centric marketing, they should reconfirm that their source of distinctiveness is still potent, design and deliver an extraordinary customer experience, and build the digital capabilities needed not just for the next few years but also for the longer term. Without the right people and organization, the strategic and operational plans of the banks will likely falter. Banks need to evaluate their current leadership, structures, talent ecosystems, cultures, and ways of working and then invest strategically in areas where they fall short. With a thoughtful collaborative approach like Co-SPIN, incumbent banks will be better prepared from people perspective for the next wave of digital disruption—before it hits.