A Citibank analysis makes an interesting observation that while digitization could lower incumbent banks’ costs by 30 to 50 percent, largely by reducing headcount, it could also take away 10-30 percent of their revenues and give it to their even more digitized (new) competitors. This statement is referring to a scenario when the banking vertical layer will unbundle to digital disruption, laying open any inefficiencies for new age service providers to exploit. It conveys the extent to which digital is disrupting, pervading and transforming business; an extent that many organizations are yet to come to terms with. In banking, for example, digital has eroded the (incumbents’) advantages of reach and capital and completely commoditized products and services. With price, incentive and advisory also losing their potency as differentiators, banks are in search of that elusive unique proposition that will be valued by customers. Meanwhile, the agents of digital disruption new digital players (big tech, Fintech etc.) powered by modern technologies – Cloud, Artificial Intelligence, Blockchain, Mixed Reality, and Internet of Things – are steadily disintermediating incumbents from those very customers.
The way out of this grim situation – and it’s not an easy one – is to scale digital transformation throughout the enterprise. Most banks understand this but are unable to carry it through: in the latest Efma – Infosys Finacle ‘Innovation in Retail Banking’ survey, only 17 percent of respondents confirmed deploying digital transformation at scale.
Our conversations with banks around the world reveal a growing impatience to get past the challenges of legacy technologies, integration and culture, which are the biggest barriers to transformation at scale. Actually, incumbent banks have no time to lose, because each day is bringing a new competitor that is digital-native by design. Hence in 2020, we hope they will focus on five actions to achieve digital transformation at scale:
- Transforming the business model from pipeline to platform – Heading into 2020, banks will have to consider receding from a me-too universal bank model to start focusing on and ultimately excelling in a particular area. In a commoditized market, this is the only path to growth. Here, there are two decisions to make – selecting the area of focus, which would be influenced by context (customer base, asset size, capital structure, operational strengths etc.) and choosing between scaling the existing business model and evolving a new one. We believe, the traditional pipeline bank model is clearly on its way out. Taking its place is a platform business that does one or a combination of the following better than anyone else – manufacturing cost efficiently, operating a marketplace, distributing a wide variety of financial and non-financial products, or serving a particular customer segment better than rest.
- Automating operations for unprecedented efficiencies – Digital challengers have cost-income ratios that are half of traditional banks’; the latter must respond by automating aggressively, not only within the organization (with RPA, APIs, Cognitive Automation) but also at inter-bank level (with Blockchain).
- Building an agile organization by breaking silos – Agile approaches are essential for continuous innovation. But the traditional banking organization is riddled with silos that hinder this goal. Breaking them down to facilitate cross-functional interaction is complicated, given the conflicting interests in play. Some banks have succeeded by assembling a cross-functional team to implement every new idea within a tight deadline or making the entire team responsible for improving a customer journey, thereby forcing all members, regardless of function, to pull together.
- Modernizing the application landscape with cloud-native, open, smart and scalable systems – Legacy systems transformation is a prerequisite for the larger digital transformation of a banking enterprise. Since a number of componentized solutions that are AI and cloud-enabled are available, the only question is how to execute the transformation.
- Orienting people and culture towards customers – People transformation is absolutely essential for digital transformation at scale. The goal is to create an organizational culture that is customer-focused and supports continuous learning and experimentation through collaboration. It must be accompanied by a revised set of metrics or KPIs aligned to the new culture.
In 2020, Infosys hopes to help banks scale digital transformation throughout the organization. Our trends forecast also covers the shifts impacting this agenda.
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Sanat Rao
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