16 Aug 2017
Over the festive period I performed my corporate duty and answered about half a dozen surveys, typically from the big consultancies and mostly about going digital. No doubt this free content and insight will be distributed gratis to the rest of the world once it has been aggregated and dissected.
Given bluenotes is a digital publication and had its genesis in ANZ’s shift to a digital, social world there’s an enlightened self-interest in doing this, particularly when the quid pro quo is access to a restricted report or the broader survey results.
"Creating new digital models will be essential for growing revenue while digitising existing ones is essential in a low-growth environment.”
Compared with when I started filling out these surveys, perhaps a decade ago in a former life at The Australian Financial Review (itself grappling with what digital meant), there is now more clarity around what ‘going digital’ means – even if there is no broad agreement and considerable ambiguity.
These latest surveys confirmed a few things: almost every major corporate (that is, the target companies of the consultancies doing the surveys) believe they are being impacted by a digital world and are going digital.
Eighty-five per cent of banks globally cite implementation of a digital transformation program as a business priority for 2018, according to the EY Global Banking Outlook 2018.
A recent McKinsey & Co survey found only 8 per cent of companies believe their current business model would remain economically viable if their industry keeps digitising at its current course and speed.
Moreover, there is an emerging understanding of the distinction between digitising an existing process and creating an altogether new process.
Consider Uber: digitising taxi hailing might involve the telephone booking service, the car selection and the payment terminals; Uber however created a whole new platform to directly link cars and passengers and manage payments in one step.
The former makes an existing process more efficient, the latter rethinks ride hailing.
Digitising a process can certainly improve efficiency, cost and service. Using digital to do something radically different however is where the real competitive difference will lie – that’s why banks, for example, are looking at blockchain, partnering with fintechs or buying peer-to-peer platforms.
They are also trying to digitalise existing complex, often manual, processes like loan approvals or even financial advice, via artificial intelligence.
Creating new digital models will be essential for growing revenue while digitising existing ones is essential in a low-growth environment where investors are scrutinising costs.
Regulators are also increasingly engaged in the digital challenge for banks, more so from a system security point of view but also in response to customer demands.
For example, the UK’s Financial Conduct Authority (FCA) recently published a really interesting 32-page paper on the Distributed Ledger Technology (DLT) which underlies blockchain (and in turn most cryptocurrencies).
The FCA clearly laid out its frame of reference: “the potential risks and benefits of DLT applications in financial services and whether it could promote the FCA’s statutory objectives of promoting effective competition, financial market integrity and financial consumer protection”.
Andreas Dombret, an executive director at the German central bank, spoke at a hackathon in South Africa about the cultural challenges in banks when adopting a digital model.
Indeed Dombret captured the underlying theme of many of the consultant projects – what is it that separates the digital winners and losers?
“Numerous issues have already been addressed at length, such as the role of IT legacy, the question whether banks are frequently ‘too big to innovate’, and even the ‘economics of QWERTY - an argument about path dependence,” he said.
What Dombret considered significant however is more fundamental: “namely the role of ‘digital natives’ and their conflicts with conventional bankers. How does this relate to successful banking in the digital era?”
In short, Dombret stressed both cultures were necessary. This is a slant on another nuanced question for digital banking: do customers want to deal with machines or humans?
The answer of course is it depends. While there is a generational shift it still holds true the more complex and significant the decision, the more humans like to deal with fellow humans.
One of the major consultancies, The Boston Consulting Group, has termed the ideal model the ‘bionic bank’, possibly reflecting that its principals are Gen Xers familiar with the Steve Austin oeuvre.
BCG argues “bionic transformation” can increase net profits 30 per cent and while slashing costs.
“To improve performance, banks need to fuse digital functionality and personalized (sic), human interaction,” the firm said.
“This year’s study provides further evidence of that imperative. Leading banks will diffuse bionic capabilities beyond their front end to encompass the whole value chain."
“Data from our Retail Banking Excellence (REBEX) benchmarking, Banking Pools database, Fintech Control Tower, and our latest Retail Banking Customer Survey, combined with insights from client work, suggests that by accelerating bionic transformation in this way, retail banks can generate a 30 per cent increase in net profit by 2020.”
Of course, with digital transformations, many are called but few are chosen. Both BCG and arch-rivals McKinsey & Co, among many others, have analysed why some rebuilds work and others become case studies in schadenfreude.
In its report Why digital strategies fail’ McKinsey identifies five pitfalls: fuzzy definitions; a misunderstanding of the economics of digital; overlooking ecosystems; over-indexing the ‘usual suspects’; and missing the duality of digital.
McKinsey produced a nice summary of the challenge.
“When we talk with leaders about what they mean by digital, some view it as the upgraded term for what their IT function does,” it said. “Others focus on digital marketing or sales. But very few have a broad, holistic view of what digital really means. We view digital as the nearly instant, free, and flawless ability to connect people, devices, and physical objects anywhere.”
BCG meanwhile found one in three companies were disappointed with the outcome of their programs.
The firm fingered four key breakdowns:
These make sense but, paradoxically, the failures and disappointing outcomes with digital transformations is essentially a human one. No matter how digital, organisations – at least for the time being – are human collectives.
Whether they are agile or bureaucratic, fintechs or banks, start-ups or centuries old, they are social structures held together by humans who can adopt or reject new business models. Underlying any technical hurdles in a digital transformation is the cultural one.
That’s why I think the Deutsche Bundesbank’s Dombret is on the money – crypto or otherwise – when he says “the future of banking is not about eradicating one of these two cultures (digital native and digital illiterate), as they are both essential for success”.
For all the valuable insights the big consultancies will collate from their multiple surveys, Dombret is right to focus on the human dimensions.
He argues digital natives and illiterates must learn to appreciate the work of one another and, because of banks’ special role in the economy, “the digital era does not do away with the need for experienced bankers”.
Dombret acknowledges frictions and scepticism are inevitable but even these can be valuable.
“Agile projects, as they are known, are one way of achieving more effective interaction,” he said. “At the Bundesbank, we launched an internal, company-wide awareness project on cyber risks, which was framed as a tour through the ‘cyber jungle’.”
“Of course some staff members poked fun at this scenario. But if mockery is the first step towards deeper awareness and greater understanding, that is fine with me.”
The power of mockery aside, he also stressed the need for digital natives in top management.
Digital transformation is inevitable, essential and will determine which companies succeed. Ironically though, which transformations work will depend on the timeless quality of ordinary human interactions.
Andrew Cornell is managing editor of bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
16 Aug 2017
12 Jan 2018