You hear all the time about the incredible pace of change in technology and the way that it affects business, but sometimes we kid ourselves about the real speed of that change and the depth of its effects. Retail banking is a perfect example to illustrate this yawning chasm between the illusion and the less attractive reality. In this article, I want to provide a critique of the banking sector and its failure to change fundamentally and to modernize.
Banking is an old sector: the Banca Monte dei Paschi di Siena has its roots in the 15th century and the oldest UK banks go back to the 17th century. We often talk about legacy technologies holding companies back, restricting their speed of operations, and hampering their ability to adapt. Well, established banks have legacy technology in spades.
They also have cultural challenges. The old saying has it that something is “safe as the Bank of England” and that is a standard for security. But today we need banks to be more dynamic and represent something more than being a deposit box for our wealth. Consumers are accustomed to the superb customer experiences in entertainment (Spotify), devices (Apple), retail (Amazon), travel (Uber), and much more. Surveys show that they want their banks to be responsive, easy to use, and available across multiple channels. They’d like banks to be secure but also to be advisors, enable flexible movement of assets between accounts, provide useful data analytics, be cloud- and mobile-friendly, and offer deals that are specifically targeted at their interests.
At their core, banks now must become digital enterprises, but, frankly, it has been slow going. As Deloitte observed, “While many banks are experimenting with digital, most have yet to make consistent, sustained, and bold moves toward thorough, technology-enabled transformation.”
We all know that retail banking has changed significantly. You can see it in the proliferation of apps and the fact that, in pre-pandemic times, the morning and evening commute are peak times for transactions as people arrange their finances while sitting in trains, buses, and subways. Banking has become a virtual, often mobile business, thanks to new tech-literate consumers pushing banks in that direction. But my fear is that the banks aren’t moving nearly fast enough and that’s bad for us as consumers and bad for the banks themselves.
Banks are under pressure to change because challengers don’t have the legacy constraints of incumbents and because PSD2 and open banking regulations are having the intended effect of promoting banking as a service, delivering transparency and greater competition.
Attend any business technology conference and banks will talk about their digital transformations and customer experience breakthroughs, but it’s my opinion that a lot of this work is more window-dressing than platform building. Or, to put it another way, banks are inserting a temporary pacemaker, rather than undergoing the open-heart surgery that they really need. It’s a case of “look over here” in the form of apps and websites, but the underlying platforms remain old and creaking and that means that the banking incumbents are hampered.
To be fair, I have lots of sympathies here. They simply can’t move as fast as the challenger banks that have had the luxury of starting their infrastructure from scratch and sooner or later that will come back and bite them. Look, for example, at cloud platforms where only 10 or 20 percent of infrastructure has been migrated despite promises of cloud-first strategies and the banking data centers where monolithic on-prem hardware still reigns.
You feel that slowness of action in your interactions with banks that communicate only via issued statements, letters notifying you of changes to Ts and Cs, and threats when you go into the red. Inertia is nothing new in banking either. We like to think that technology change happens in the blink of an eye, but in banking contactless Near Field Communication (NFC) took the best part of 20 years to become mainstream.
This is the dirty secret of banks. They see the need to change but remain shackled. Why are the banks so slow? Historically, because it was hard for competitors to gain banking licences and the capital to really challenge, so there was no catalyst or mandate for change. It’s also because change is tough and fear of downtime or a security compromise to critical systems is very real. More recently, because internal wars in organizations set roundheads against cavaliers, the risk-averse against the bold, resulting in impasse and frustration.
But while change is tough, that’s exactly why banks need to power through. Think of Winston Churchill’s wisdom, “If you’re going through hell, keep going.” How? By a combination of a maniacal focus on expunging legacy systems, placing maximum emphasis on superb customer interaction experiences, and digitally enabling anything that moves.Banking has become a virtual, often mobile business, thanks to new tech-literate consumers pushing banks in that direction. But banks aren’t moving nearly fast enough and that’s bad for us as consumers and bad for the banks themselves. Click To Tweet
Right now, the banks are surviving, not thriving. They’re rabbits blinking into the headlights of approaching traffic, frozen in the moment. But they need to disrupt themselves before others do it to them. Change is painful but not as painful as the alternative. They have to do much more or they will see a decline in their fortunes due to their bankrupt capacity for innovation and their inflexible infrastructures.
For more on how the banking industry is in transition and how to develop a strategy for addressing these pressing challenges, check out this framework for digital banking transformation.