For most people ‘transformation’ means a marked change that completely changes something to the point that it is unrecognisable in appearance or structure. The connotation is a complete overhaul, a clean slate, a radical change because incremental improvements are just not enough.
The ongoing transformation of the banking industry is fuelled by extraordinary disruption, both on the digital and regulatory fronts. But should banks morph into universal structures that look the same and operate exactly the same in a blueprint fashion? That’s where strategy plays a crucial role.
Pursuing a transformation programme without a clear idea of what the business should look like in the aftermath would in all probability lead to regrets, missed opportunities and an organisation that is unrecognisable to its customers because its culture and ethos have eroded along the way. Even within the huge wave of disruption that is shaking the financial services industry, the biggest risk remains that banks become irrelevant to their customers.
Retail banks manage the relationships of a whole spectrum of customers, personal and non-personal, each of whom is increasingly selective on the type of banking services and the preferred channel for each type of transaction. Some customers will feel more comfortable with depositing funds at the branch and using the ATM for withdrawals. Others might feel uncomfortable with subscribing to both internet banking and mobile banking as they might feel overexposed to having their accounts compromised.
Despite the fact that transferring funds between your own accounts is much easier on mobile banking, some people still prefer the bigger screen of internet banking. To many people using a cheque as opposed to an electronic payment gives them a stronger sense of tangibility and traceability to the transaction. Behaviour is driven by perceptions, ideas and beliefs that we all carry, based on our knowledge.
However irrational some of these beliefs might be, the fact remains that digital transformation does not lead banks to let go of the old and embrace the new – it requires them to keep all options open for customers to choose as they wish. That’s definitely an incongruous meaning to ‘transformation’ but one which is also very real.
Banks need to catch up with the fintechs in terms of agility and digital offering, but at the same time they are carrying a very bulky customer base that is somewhat reluctant to move on. The Generation Z segment refuses to set foot in a branch while a few customers who are still in their 40s and with a tertiary level of education are still uncomfortable with having mobile banking.
The physical branch is here to stay because digital can never replace the trust built through human connection
Digital transformation and secure banking are not opposing forces but complementary pillars in a symbiotic relationship for an increasingly efficient, convenient and easy way of banking. The strategy for increased take-up and use of digital banking channels needs an accelerated momentum both from the traditional retail banks and even on a national level.
The physical branch is here to stay because digital can never replace the trust built through human connection. It would have been much easier to just transform traditional banking to digital banking but it is not that simple. On their part banks will need to strategically manage the shift to digital by carefully identifying customer needs and changing perceptions as society evolves in the digital sphere, influenced primarily by social media and apps that get people excited about the new way of doing things.
Managing the full spectrum of channels, integrating upcoming regulation into their business operations and keeping pace with the more agile fintech companies will be a mammoth task for banks.
On their part fintechs face the gargantuan challenge to build customer confidence with limited physical presence and a very short history. This reality presents a great opportunity for banks and fintechs to find common ground and build strong alliances that gives them mutual excellent growth prospects and possibly even competitive advantage.
Though risk-related transformation is less exciting for customers because it is primarily driven by regulation, it is nonetheless extremely important for the sustained health of the banks. The tsunami of banking regulation was a direct effect of the global recession in 2008 which uncovered several flaws in the legal frameworks governing the banking industry across the globe.
The simplification of legal frameworks for the movement of people and companies, especially within the European Union has accelerated the dynamics of globalisation. This phenomenon led to a new era where the movement of money across geographical borders was faster, to the point that incremental improvements in monitoring are no longer enough.
EU legislation came down with an iron hand on systemic banks to transform their risk and compliance processes into a completely way of operating. These risk and digital transformations that banks will need to handle simultaneously over the next three to five years are not only extremely onerous but crucial for the sustainability of these institutions in the years to come. Strategy will play a vital role in the way that these two important programmes are executed and simultaneously managing the bank-customer relationships as the transition is carried out.
The strategic challenge for banks is to move fast on their transformation programmes but at the same time preserve their identity, in a way that their customers can still relate with their brand. The huge demographic shifts that Malta is going through with the influx of foreigners further exacerbates the complexity of this endeavour. The spectrum of banking needs of foreign-born residents goes a full circle – from those seeking asylum from war-torn countries and starting off with a basic payment account to owners of multi-national companies with complex banking requirements.
Ultimately strategy boils down to making choices, drawing boundaries according to the risk appetite of the board of directors and re-dimensioning operations. The transformation of banks follows the radical changes in various industries and runs in parallel with other disruptive technologies such as electric cars, solid-state batteries and solar energy.
History taught us that the winners will be those banks which adapt to the new landscape, transformed by digital and regulatory reforms and yet maintaining a strong brand identity and relevance to their customers. The fulcrum lies on a clear strategy that is owned by the board of directors and supported in a coherent manner across the organisation through the multiple projects and day-to-day operations.
The aftermath will be a transformed banking landscape that perhaps carries a similar façade but is significantly safer and more robust.
Daniel Magrin works for Bank of Valletta at the Market Intelligence Unit. He has vast experience in IT, business strategy, research and data analytics in the financial services sector.