I have to start with the mid 80’s. When I was about eight years old I started to save money. On world savings day, I proudly entered the bank branch with my piggy bank. While the money was counted, I waited anxiously to see how much I had saved within the year. Afterwards, the amount and the interest was entered into the savings book and I was additionally rewarded with a small gift. Without knowing it was the first customer experience I had with a bank. And it was a good experience.
There are about 35 years between my first world savings day and today. But how has my relationship with my bank changed during this time? Have I changed or has the bank changed? Or both of us?
It must have been in 2018, two things happened to me at almost the same time:
- Just out of curiosity I opened an account with a bank that could be called a neo bank. I was able to open the account within a few minutes. All I had to do was download the app, fill in a few details, have my identity card ready and identify myself via video. Immediately afterwards, I had a fully functional account and could execute my first transaction. Two days later, the credit card for the cash withdrawal was in my letterbox. I didn't need any paperwork or even a computer.
- My wife and I wanted to open a bank account for our first-born son. After some e-mail correspondence and an appointment we entered the bank branch with our two sons. About two hours and several signatures later we were released. Because something went wrong when opening the account, the access to online banking only arrived after weeks by mail.
I am aware that it is a little unfair to compare the opening of a current account with the opening of an account for a minor child. But this is about the experiences I have as a customer. No matter how complex a process and the regulatory requirement is, you can always look at the process from the customer's perspective or from the bank's perspective. And that's what makes the difference. Traditional banks design the process the way they perceive it and not the way the customer experiences it. This is one of their main problems.
The question is, how can banks escape this situation. Simon Moss (CEO of Symphony AyasdiAI) recently publishedan article “Banks aren’t as stupid as enterprise AI and fintech entrepreneurs think” and I fully agree. Banks and bankers are not stupid. But there are a couple of things which traditional banks can learn from neo or challenger banks:
- Customer Centricity
It is pretty obvious that digital transformation needs to start with customers first (as you can read here) but banks often struggle with it. Not only because of digitalization banks should put customers always in the centre of their thinking. Digital transformation can be used as a catalysator and accelerate the process. The ongoing development of digital disruption can have a leverage effect to increase customer satisfaction and at the same time improve back office efficiency.
- Software as a Service and Cloud Computing
No doubt, banks are to a certain extent technology companies. But that doesn’t necessarily mean that banks have to develop, deploy and maintain all of their infrastructure on their own. Too long banks thought they were better at it instead of relying on standard software. Maybe twenty or thirty years ago there was no alternative but today we see many niche and platform vendors providing most of the solutions banks need to a reasonable price with good service and support. Coming along there is a huge trend towards moving to the cloud which relieves the banks of further tasks such as maintenance and operation.
- Risk-taking attitude
in the time when banks did not have to fear competition and were among themselves, they forgot that one also had to take entrepreneurial risks in order to be successful in the long run. In this respect, they became more and more conservative and lost their innovative power, which they could undoubtedly possess. banks are well advised to encourage a willingness to change. and they have already started to do so. often, however, in departments or labs established specifically for this purpose, but not nationwide. This inevitably leads not only to competition with other banks, but also to an internal struggle for resources, budgets and sovereignty. resolving this conflict is an additional challenge.
So why started banks to care more about themselves instead of caring about their customers? In my opinion there are different reasons:
- Regulation and its Compliance
The undisputedly necessary but ever-increasing wave of regulatory requirements means that banks have to invest a lot of time and money to achieve regulatory compliance. The list of requirements is long and would go beyond the scope of this article. However, the result is that too many resources are tied up in these projects and are not available for innovation and transformation.
- Mergers and Acquisitions
For many years banks have sought her salvation in growing. True to the motto "size does matter", the focus was on balance sheet growth rather than profitability (or rather, it was believed that profitability could be achieved through limitless growth of balance sheet totals). as a consequence, mergers and acquisitions were carried out in order to grow faster and stronger. As a consequence, this meant that cultures, organizations and processes had to be brought together and harmonized. This also contributed to the fact that banks became more busy with themselves than engaging with their existing and new customers.
- Legacy systems and heterogeneous infrastructure
As a result of the mergers and acquisitions mentioned above, but also because banks believed that they could better develop all their IT themselves rather than rely on standard software, a lot of money was invested in the development, maintenance and operation of software. However, this investment often turned out to be wrong. In many cases, however, the conclusion was not to replace the software, but rather to further develop and often improve the software. As a result, the IT today produces far too high costs. A lot has been written about the topics cloud computing and software as a service, but it shows how much catching up banks still have to do to streamline their IT.
- Slow decisions and no culture of change
Large organisations need a structure and they need defined processes. Everything else would only end up in chaos. But this has a big disadvantage. It makes the company slow and inefficient. There are lengthy coordination rounds and committees, decisions are not made or are delayed unnecessarily long. Tasks are delegated instead of taking them over. Nobody wants to take responsibility and be held responsible for a possible failure. Instead, one prefers to stay in the current situation and do things the way one has always done them. No one can be blamed for all this, it is simply the size of the organisation that inevitably leads to things not being changed or being changed too slowly.
What will happen with the incumbents? There is no black and white. Some FinTechs will work and some won’t. Some traditional banks will die and some will survive. The world will benefit from both. The key factors are hard work and a bit of luck. As always.