Is Your Bank About to be Digitally Disrupted?
According to Mike Cagney of SoFi, he is going to do to “banks with a smart-phone based model what Amazon has done to bookstores and Uber has done to taxi fleets. Cagney believes there is going to be “a seismic redistribution of market cap in banking and they (existing market participants) will not see it coming until it’s done” (“The Uberization of Banking”, Andy Kessler, the WSJ, pg. A11, May 1st). SoFi has already turned the banking model on its head by getting its money from investors versus passbook savers. And in contrast to organizations participating in the subprime crisis, SoFi uses data and advanced analytical models to cherry pick those within its book of loans.
Providing validation for the SoFi business case are analyst firms. These firms say that most banks have not yet realized the promise of emerging digital technologies. Analysts see FinTech disrupters emerging in the form of startups and established technology providers. Most use new and innovative technologies to change versus perpetuate the existing banking business model. For this reason, analysts say existing firms need to look at how transformative technologies can put them at the center of a customer’s life. As a part of this, they must prepare to overhaul their customer relationships and service proposition. This includes using technology to change how borrowing decisions are made. Today, these can be based upon very specific, quantifiable criteria. With the potential of a total customer view it is possible to derive “perfect” or “near-perfect” financial decisions. Responding to the opportunity, Wells Fargo announced a few weeks ago a business lending solution that could make a decision in a day including putting the money in the customer’s bank account.
What is the opportunity for incumbent vendors?
To respond to the disruption potential that Mike Cagney and other Fintech firms represent, existing banking companies need to take advantage of the opportunities in front of them to use data for business advantage.
- Regulatory Compliance—Banks need to get control of an ever growing list of compliance requirements. Key to doing so is the ability to accurately report and show control over risk data. At the same time, they need to be able to not only defend their perimeter but also defend their data from cyber security attacks. If hackers get in, they shouldn’t get all your data.
- Solution Alignment—Banks need to remake their product offerings so they are attuned to their customer’s needs. Not fixing this makes bankers even more susceptible to disruption and can lead to margin reduction as competition works to increase its revenue or sales at an existing player’s expense.
- Marketing Readiness—Banks need to be able to increase up-sell and cross-sell. To do this, customer insights are needed. For many banks, operating in real-time has proved difficult because they are saddled with legacy processes and systems. The inability to operate in a real time, omni-channel environment will increasingly be the kiss of death.
- Operational Efficiency—Banks need to continuously improve and create operational efficiency. Most often this means improving processes through advanced applications. Not fixing this is a business risk because legacy systems cannot necessarily support new business processes or desired customer centricity. Given this, change is needed. It starts by unlocking and reconciling legacy data siloes.
- Disruptive Technologies—Banks need to create the operational efficiencies to invest in disruptive technologies. The problem is that too many banks have so far found it difficult to adopt cost saving technologies including all varieties of cloud technologies. At the same time, many banks struggle to adopt the new business capabilities needed to either play offense or defense with digital disruptors. This includes making sure their data is protected or making sure it generates the meaningful insight to drive better business decisions. Increasingly this requires being able to blend existing and brand new and existing data sources.
- Mergers and Acquisitions— Mergers and Acquisitions are challenging because added businesses typically increase the diversity of systems that banks must be maintained, managed, and integrated. For example, customer data can resides in an even larger number of systems making a single view of customer difficult to deliver. This makes business synergies—how a merger or acquisition becomes accretive–hard to deliver. While most mergers and acquisitions do provide dollars and resources for the merger, getting true synergies must start by fixing legacy systems and data.
What is holding Banking incumbents back?
Banking organizations that we talk to say they are struggling to respond to each of the above opportunities because of one thing, the state of their data. For this reason, they cannot manage their end to end data governance processes and regulatory compliance.
For many, this fact has led to the creation of a chief data officer (CDO) function. These CDOs need to put their attention first to data governance and not to the analytics that will actually drive business advantage. For most, this involves putting in place enterprise-grade data management and governance capabilities as well as operational best practices. These require information regarding authoritative data sources, capabilities to ensure the quality and completeness of data as well as a data lineage to demonstrate data governance. All of this will ensure trustworthy data is served to risk models.
At the same time, banks tell us that they need their sensitive data under lock and key from potential attack. Doing this requires rigorous policies and capabilities to protect data as a corporate asset. And things do not stop here; it requires data security. Doing this is built upon having knowledge of where sensitive data traverses the enterprise and on-the-fly data masking and redaction. Together these can reduce the impact of the next data breach.
Next, banks tell us they need to grow their business. They are held back here because they lack the ability to collect, integrate, and make relevant customer data. Without fixing this, they cannot improve customer intimacy, upsell/cross sell, etc. What is needed is the ability to deliver a complete and cross-organizational view of the customer portfolio. Banks, today, need data to increase their ability to provide meaningful customer segmentation. They need data to drive improved customer engagement; for example, the ability to provide an up-to-date and accurate views of all customers and their product, account, and holdings data on demand.
Next banks need to move their investment dollars from legacy systems to systems that will enable real business transformation. This is critical to perpetuating their right to win. The first element of this is going after the effective sink holes of historical legacy investments. It is important to realize that this investment is more than just about applications. This includes all the costs that support the legacy system from hardware, storage, and network. Hard costs can be eliminated here every time an application is eliminated. Therefore, it is essential that organizations move data to new and more modern applications and, as legacy data is archived, to actually retire and turn off legacy applications.
Finally, banks need the ability to manage through a never end set of business mergers and acquisitions. This is often starts with aligning business models. M&A activity requires customer, product and financial data from multiple organizations, with different data and process models, be aligned to generate organizational benefits.
Banks have many challenges, but they can perpetuate their right to win. Like other industries, they are limited by legacy systems in terms of costs and by their ability to use data to win at their business. They have an opportunity against disruptors, but disruptors will win if they do not overcome their data back hand in the go forward period.
Thank you Andy Joss and Peter Ku for providing your knowledge and expertise.