Is complexity the natural byproduct of sophistication? Definitely not, if complexity drives up costs, drags down value and shuts out a potential 20% in profits. But that is exactly what complexity is doing to banking, a sector that ranks 6th on a global complexity index featuring 26 industries.
Any effort at mitigating the adverse effects of complexity must start by identifying possible causes. Banking regulation, without doubt, is a big source of complexity. Example: the Dodd Frank Act, which is still a work in progress, is already more than 8,000 pages long. Add to that the still unfolding impact of Basel III provisions and a host of other local and regional regulatory norms and requirements, and the cost, time and complexity of compliance only increases. The last has a direct impact on banks’ ability to innovate. Respondents to the EFMA-Infosys Innovation in Retail Banking 2013 survey cited regulation as one of the top barriers to innovation with large & medium banks rating it at number 4, and small banks at number 2, after IT systems.
For a sector where change typically tends to be evolutionary, disruption did indeed come as a surprise. Who ever expected competition from telecoms, retailers and other non-traditional entrants? Non-traditional players eyeing the retail banking markets were clearly encouraged by new possibilities created at the intersection of cutting-edge technology and changing expectations among increasingly digital customers. Most banks simply did not have the regulatory elbow room or the structural flexibility to steer smoothly into the tail winds created by technologies like cloud, analytics, social media and mobility. And even as they were navigating their way out of product-centricity into customer-centricity, the table stakes were raised to engagement and experience.
The sustained uncertainties of global macroeconomics only added to the overall pall of complexity in banking.
Given these multiple reasons for banking complexity, and the size and diversity of banking institutions, it is obvious that there cannot be a one-size-fits-all strategy for simplification. Every simplification program has to be tailored to the individual circumstances and needs of each bank.
Of course, it is possible to draw up a laundry list of banking elements that are primary candidates for simplification. That will be the focus of my next post.