Are you really a digital bank? Part two

  • By Alan McIntyre, Julian Skan and Alex Trott

The public cloud, agility and a disciplined fintech engagement model are among the key priorities’ assessed in the second part of the series on that explores whether banks are really on the true path to becoming digital.  

1. Did the bank commit to public cloud as its default infrastructure?

A default public cloud architecture drives a lot of positive behaviours around modern engineering practices, technology development approaches, data management and analytics, and is a clear indicator of a future-oriented mindset that puts the burden of proof on status quo rather than change. 

While scalability and application rationalisation can still be important elements of the business case for public cloud migration, increasingly the most compelling element of the equation is native access to the data management and analytical tools provided by public cloud providers. 

Even if public cloud isn’t currently the right answer for certain applications (and there are lots of situations where it still isn’t), the best digital banks continually ask the question, “Why not?”. 

The best digital banks will also address regulator concerns about public cloud and make the case that it should be their default. The less mature may hide behind those regulatory concerns as a reason to slow their pace of change, but we think they’ll regret it.

2. Does the bank understand that enterprise agility is a team sport?

The central challenge with building a digital-first culture isn’t just technology development and building a conveyor belt of minimal viable products. 

It’s also about integrating all the HR, compliance, risk, financial planning and control systems to support an iterative and nimble approach to the business. 

Those that do it right are aggressively moving budgets from run-the-business to change-the-business initiatives through an integrated financial investment plan and governance processes that focus less on fiefdoms and more on enterprise outcomes and winning together. 

Unfortunately, there is still a lot of lip service being paid to enterprise agility at the C-suite level, leaving many CIO evangelists to wade through the mud of legacy approval and monitoring processes. 

The path of least resistance then becomes small peripheral projects that allow a declaration of success on enterprise agility without materially changing how the business operates. 

In contrast, leaders embrace enterprise agility as something that necessitates change in every aspect of how the bank is run and, hence, treat it as a revolution rather than an evolution.

Unfortunately, there is still a lot of lip service being paid to enterprise agility at the C-suite level

This is a challenge facing all banks in Australia currently, many of whom are implementing organisation-wide change programs, in a bid to drive cultural change and business agility. 

The challenge is not realising the opportunity of change outcomes in aggregate as often happens by conducting fragmented programs, especially where different parts of the bank are moving and transforming at different speeds. 

3. Does the bank’s business strategy emphasise innovation in the core?

Some banks, unfortunately, are hoping that peripheral challenger initiatives will someday grow to a scale that they will absorb and transform the legacy bank. 

Yet, without challenging the technology approach, culture, and ambition level of the piece of the bank that houses the bulk of the balance sheet and customers, banks’ fintech and innovation initiatives—regardless of how press worthy they are—are likely to remain just gnats on the elephant from a valuation perspective. 

While challenger banks in Europe are attracting impressive multi-billion-dollar valuations, their limited balance sheets and income streams often depend on payment processing fees that are continually being compressed, leading to questions about their long-term economic model. 

A decade from now, the best digital banks will have a strong balance sheet, stable funding and excellent risk management, not just a frothy valuation based on vague future growth plans. 

For incumbents, that means harnessing the power and strengths of the traditional banking business model to better serve all their customers, not dismissing those capabilities (and the customers they serve) as irrelevant and outdated. 

For the best challengers, it means maturing into institutions whose business model isn’t radically different from those banks they are seeking to replace, but which is far better executed.

Relative to their international counterparts, Australian banks mostly escaped the impacts of the Global Financial Crisis (GFC), meaning they have not been forced to innovate as quickly or as radically. 

A decade from now, the best digital banks will have a strong balance sheet, stable funding and excellent risk management, not just a frothy valuation based on vague future growth plans

They are no longer able to just copy and build upon to stay ahead of market threats – this will get harder with new banks and other digital players encroaching on their turf.

The innovation banks have been driving has generally been focused on front-end digital services, but building on a high cost distribution, operations and technology core. 

Now is the time to look at cost structurally and end-to-end, with a truly digitised model removing the reliance on the complex core. 

4. Does the bank have a disciplined fintech engagement model?

A true digital bank has clarity around the its buy/partner/copy criteria to ensure its customer offerings always remain relevant. 

An Open Banking trader mentality can create a flotilla of supertankers and speedboats that can move in formation, with the best ideas and capabilities getting to the front line quickly, rather than being stuck in stage-gate and vendor-assessment purgatory. 

While it is great to have innovation labs, venture capital investment stakes and consortium memberships, the real litmus test for a bank’s engagement with the fintech community is whether it increases the metabolism of change for their customer-facing propositions. 

The trials of some of the banks that seek to buy innovation by trying to purchase and integrate fintechs also show that the gravitational pull of the traditional bank business model often isn’t overcome by a single innovative acquisition, regardless of the strength of its momentum. 

No bank is going to be the sole source of innovation, so how a bank engages with the broader ecosystem to filter, prioritise and monetise the good ideas of other institutions is going to be key to staying at the forefront of the industry.

5. Does the bank have a culture and HR approach that values technology and engineering skills?

Does a tech mindset permeate every level of the organisation, from the boardroom to graduate recruits, and create an environment that not only attracts top-tier talent but also allows it to thrive and develop? 

A diversity of skills and experience is key to not only rapid product innovation but also to designing great customer and colleague digital experiences. Increasingly, leading banks don’t have a Chief Digital Officer because digital is their DNA, and not just the provenance of the cool kids in the corner. 

Also, the banks are competing against Australia’s other industries for the same digital talent pool, with all organisations moving towards digital excellence. 

This fight for digital talent will only intensify, so banks must differentiate themselves beyond the usual rewards to attract, engage and retain. Drawing talent from new pools (e.g. professional backgrounds/areas of study) will also broaden the scope of skills and capabilities to help drive innovation.

Similar to number eight above, these pockets of talent need to be well integrated with the core business and be working on moving “the big dials” rather than being allowed to focus on a number of science experiments with limited relevance to the economic engine of the bank. 

Building a great engineering culture doesn’t mean doing everything yourself. The best digital banks still leverage technology partners and systems integrators to accelerate innovation and change. They just use them in different ways and are increasingly replacing low-cost offshore workforces with higher cost technology partners that can co-innovate and provide surge capacity for critical initiatives.

Overall, the missing piece is consistency and integration of change

What’s next?

There are pockets of digital leadership in Australian banks, with significant investment having gone into digital front-end services. 

However, based on our research, this is not all that is needed to become a digital leader. 

It takes digitisation across the organisation - into the core, and legacy business and technology - to generate more sustainable, higher economic returns.  

Additionally, it is clear that Australia’s big four banks face an intensifying challenge in the years ahead. 

Despite investments in digital transformation, it will take some time for these programs to bear fruit in terms of revenue generation. 

In the meantime, they are vulnerable to their nimbler, faster ‘upstart’ competitors. 

Overall, the missing piece is consistency and integration of change; many programs are still diffused and fragmented across the banks, often facing leadership and cultural integration barriers.

This is reducing the structural impact of this change to re-invent end-to-end digitised processes and operations. 

This must be pervasive to be impactful; banks must look beyond retail clients and drive concerted change across all aspects of the business and segments, especially the SME and commercial segments. 

The journey is long, and banks must pivot to this new business, and change delivery models, for regular launches of new digitised capability. 

After all, digital maturity will separate future winners from losers.

Alan McIntyre is the senior managing director, banking, Accenture and Julian Skan is the senior managing director, banking, Accenture strategy. Local insights were provided by Alex Trott, banking lead at Accenture Australia and New Zealand.  

Read the first part of the report here