Since the beginning of the modern era, great men, women and companies have come to characterise the forms of production, distribution, and consumption which define each epoch. During the rise of mercantile empires, buccaneers on the Spanish Main encapsulated the form of smuggling and piracy which saw European monarchs enrich themselves with gold from the New World. By the eighteenth century, this trade was institutionalised, and great chartered trading consortiums like the East India Company defined an age of commercial enterprise and early globalization; where the EIC controlled half the world’s trade and administered a loose but expanding empire.
During the Industrial Revolution, engineers like Isambard Kingdom Brunel and magnates from the coal-stained north propelled the world into economies of mass production and consumption. In the early 20th century, Henry Ford is a defining figure, whose assembly lines not only revolutionized the manufacturing process but defined a new age – Aldous Huxley’s Brave New World fittingly describes the modern era AF (After Ford). Towards the end of the century, however, eyes turned east where Toyota’s adoption of Total Quality Management allowed it to dominate the market and rock the settled assumptions of western industrialists. The 21st century has its own visionaries, competing with nation states over the extent of their technological advances. Jeff Bezos and his sprawling Amazon empire is an obvious example, as is Google and Facebook: companies which are leveraging AI and network effects to erect vast digital empires. The age of Big Tech points to the fact that companies are adapting to a digital context, just as businesses in the past adapted to Fordism or exploited the opportunities of globalization.
We spoke to Tony Moroney – Managing Partner at Beta Digital – to see how financial institutions can best overcome digital disruption and adapt their processes to stay relevant in the new climate.
The Amazon Model
Amazon began its life in 1994 as a modest online bookstore, but Jeff Bezos’s aggressive vision has saw the trillion-dollar company become the business model of our times. We asked Tony what financial institutions might learn from this “Amazonisation”:
“The lesson for financial services is that Amazon started out as a bookstore and then realised, because of its business model, that it could sell anything. And it also realised that it didn’t even have to be their stuff. So, Amazon Marketplace was created. And then suddenly, it found itself at the centre of everything the customer needed to do.
“And that’s completely different to a traditional financial services institution model, where the discussion is around selling products and services, and how they’re going to acquire and onboard customers. But funnily enough, the minute customers are acquired by financial institutions, they’re no longer treated like customers. The issue for most banks and financial institutions, is that their P&L has a product and channel profitability emphasis. But you don’t really see anything about customer profitability. So while financial institutions might talk about being customer-centric, most are not.
“Amazon by comparison is customer-centric. It really understands and can pre-empt customer needs based on their relationship and indeed, inferences from similar customers activities. Amazon is obsessed with using data insights to drive both real-time decision making and customer outcomes. But it also makes it easy for their customers. A fantastic example of this is one-click purchase.
“Financial institutions can’t simply invest in technology to become an Amazon because so much of what Amazon does is in its DNA and culture. But what Amazon does teach the financial sector is that competition will not necessarily come from within the industry; think about what Uber or Airbnb did to the taxi and hotel industry respectively.
“I think part of the issue is that banks tend to think in verticals: ‘banking’, as opposed to ‘domains’. Amazon, Netflix and other disruptors by comparison ask; what’s the customer trying to do with their life, and how can we create a great experience.”
It’s clear that the financial sector faces serious challenges and we asked Tony about this:
“The biggest issue facing financial institutions is how to stay relevant. Technology is advancing at a rate of knots, and new players are continuously educating customers as to what’s possible, whereas financial incumbents – despite their best efforts – change slowly.
“This is a real challenge as the rate of change to both technology and customer expectations, typically exceeds what incumbents are capable of doing.”
We next asked Tony to comment on how he thought the pandemic has affected this:
“The pandemic has had both a positive effect and a mirage effect. In positive terms, it has educated businesses and customers that they can do things digitally.
“The mirage effect is that financial institutions managed to operate online during the crisis, which is great. But working from home is not digital transformation. That’s just doing what you always did but having people at home instead of in the office. Okay, they were ready to respond to the crisis, but what next? How are they going to innovate and how are they going to make sure that they are relevant? Consumer and business expectations from before the pandemic have changed radically because they have been educated that you can do things totally differently.
“Everyone has now realised what’s possible. And that’s going to have huge implications down the road in terms of customer demands. But financial institutions are still thinking in industry verticals, while customers, particularly personal customers and increasingly SME’s, are thinking in domains – their goals and ambitions.
“The pandemic also produced a context collapse where the boundaries between home and work broke down. Business life, social life, personal life – it all suddenly collapsed into this online digital world. Organizations need to think through this in terms of what those boundaries should be, as well as the opportunities and threats.
“One of the big trends I notice is organisation’s focus on digitising, which means taking what they always did, and putting a digital veneer on it. All too often, what they’re not focused on is: how do we create value for customers in a new and different way that meets their expectations? And in that context, when it comes to employees, how are we going to use the digital tools and technologies that are available, to create an environment where its safe to innovate, where employees can experiment, and collectively feel a sense of belonging and purpose.
“This is really going to be tested when we move into a hybrid world where you have some people at home, some people in the office, and some people crossing over. The challenge is to get to a situation where everyone has a clear understanding of where we’re going, based on a real clarity of why the organisation exists, and a commitment to how we’re going to transform and make a difference. Otherwise, I don’t think traditional banking, as we know it today, has a real future.”
The threat from Big Tech
Considering the future of the industry, therefore, we asked Tony to assess the threat Amazon and Big Tech more generally poses – particularly considering how is has already expanded into such a diverse array of sectors (from healthcare, food, and even space).
“In many respects, what protects banks today is regulation. If it wasn’t a heavily regulated market, we would already have an Amazonisation of banking today. You can see the evidence for this by looking at China where, back in 2014, they essentially gave licences to Apple and Google equivalents – Alibaba, WeChat, Tencent etc – to operate in the banking sector. We don’t do that in the Western world mainly due to the perceived prudential risk.
“The fundamental issue is that despite their technological competence and customer insights, allowing technology players into the financial sector risks instability due to their limited knowledge of banking. And compounded by a fear that in response to their entry into the financial sector, the incumbent institutions could start experimenting in areas they don’t fully understand – equally creating risk.
“Because it’s a regulated market, Big Tech has instead been slowly chipping away at the edges through things like distribution agreements: partnering up with institutions who carry the regulatory burden.
“But if tomorrow the UK government or EU did turn around and say, “Well sure Apple can have a banking licence, and Amazon can have one too”, we would see quite a dramatic response from the sector. Because the one thing for sure is that Amazon or Apple would not do what the existing guys do today, they would totally change it!
“And this includes structure. One of the issues is that as financial institutions expand, they become specialists within specialisms. So you have an origination area, a compliance area, an underwriting area, a servicing area, etc. You see all these functional specialists in the organisation. But what they don’t have is a single line of sight to see what the customers are doing. They’re only seeing their own part and de facto, they’re silo driven.
“Furthermore, banks have never been good with data, as they don’t have a data culture.”
Use of data
Reflecting on this, we asked Tony how banks can use technology to make better use of data:
“I’ve talked to numerous financial institutions who have ambitions to expand operations based on access to more data. And typically I’ve replied: “but what about all this data you have today that you don’t use, what’s going to be different?“
“If you have the mindset and wherewithal to use the technology, of course, you can do anything. But how many banks today are running their businesses based on real-time data of customers behaviour? So, technology is great. But not without the mindset. It’s like changing the wheels on a car, it’s still the same car, right? But if you don’t know how to drive it, it’s not going to make any difference if you change the wheels.
“And part of the issue is the bigger you are, the more you focus on operational excellence. And that’s good, but it’s not sufficient. You also need to keep innovating. And while most banks talk about it, but they don’t really innovate. They just tinker around at the edges. And a lot of the innovation is point innovation, but it’s not transformative.“
We next asked Tony to explain the difference between digitisation and digital transformation:
“Financial institutions are investing heavily in digitisation – digitising what they already do to be more efficient and compliant. But these are internal metrics. They’re not necessarily creating new value propositions for customers or enabling them to compete for new customers. And this is where FinTech and Big Tech is chipping away because they can see that the system is still very bank-centric. And can therefore easily identify and target areas of customer experience improvement where there is money to be made.
“So in reality, banks have competition left, front, and centre. And now the question for big banks and financial institution is to ask: what do you have: you have a brand, you have customers, and you are trusted. So surely you could respond to do something about this.
“But this goes back to the earlier point; because banks are structured around products and channels, they’re not truly focused on customers.
“Many banks and financial institutions have heads of digital. Well, why isn’t all the business digital? That doesn’t mean that everything is on the digital channel, but why isn’t that just part and parcel of what they do? Why is it something separate? Its automatically created new silos with incumbents protecting their patch, and the digital channels trying to eat their lunch. But why don’t they say, actually, no, we’re customer centric: Let’s understand what our customers are trying to do. Let’s make sure that we can meet their expectations, indeed, exceed their expectations at the time they want. That’s a totally different way of looking at the world.”
Accounting for this advice, we asked how likely it is that financial institutions will transform successfully:
“All the research says that over 70% of digital transformations fail: why? Not because the technology didn’t work but because the organisation and leadership couldn’t change. So, unless the leadership has real clarity of vision, understanding of purpose, is able to communicate it, and can bring about cultural change, they’re going to fail.”
We also asked Tony what potential destruction he thinks “Pipeline businesses” are facing:
“Incumbent financial institutions are typically traditional pipeline businesses. The mindset is to manufacture products or services and distribute them through their own and/or intermediated channels.
“This is compounded because they’re generally set up around things they like to do, such as: origination, servicing, compliance, risk, underwriting, distribution etc. But in reality, the customer doesn’t care about these internal constructs. The customer is interested in achieving their goals in the least frictionless way and preferably by having an experience which is comparable to Netflix, Amazon, Uber etc.
“So I think the problem is that financial institutions are still piecemeal: they’re focused on their expertise and what they are doing. And while there’s more collaboration now, they still have this mindset of manufacture and distribute. As opposed to innovating around customer needs to be part of that solution in a broader ecosystem: it’s not about them being at the centre, it’s about the customer being at the centre.”
Considering the strategic practices that have propelled many of the Big Tech companies to hegemonic status, business schools and journals continually reference the rise of platforms. We asked Tony to examine this concept:
“A platform business model is much more than a technology construct; it’s a business model that excels in data analytics and the orchestration and matching of buyers and sellers. Because of this, it has significant benefit in terms of economies of scope and network effects.
“This is not how your typical financial institution has been set-up and more importantly, not how it thinks about its business model. While many financial institutions are actively trying to figure out how to become more central to their customer’s needs, their approach is piecemeal at best, with gaps in data and understanding of their customer needs.
“Banking-as-a-service certainly offers financial institutions the potential to avail of end-to-end platforms, with API’s and regulatory compliance fully embedded, and while this can potentially address the dual issues of legacy and scale-economies, it won’t necessarily make organisation any clearer on its business model or culture. Both of these need to be addressed in the first instance. Equally, in theory, Open Banking should enable financial institutions to have access to better data to create better product and services, but I suspect for many incumbents, there remains a question as to whether there is more to gain or more to lose.”
How to be truly digital
We also asked Tony about the issues determining the effectiveness of financial institutions to become truly digital:
“A critical issue is ambiguity regarding the purpose of financial institutions coupled with a fixation on the technology as opposed to being fully grounded on the “why and how” of transformation.
“So much of what is happening from a digital perspective still appears to be disjointed and disconnected in terms of culture and mindset.
“But the prize is worth going after, however. Apart from being better positioned to compete, there are tangible benefits: from an employee experience perspective which will be necessary to attract and retain talent for a digital economy; and from an ESG perspective, in that waste and inefficiency can be removed and sustainability can be improved through digitally enabled green initiatives.”
We also asked Tony to compare the level of innovation in the West with other parts of the world:
“In the Western world, a lot of the innovation has basically just taken what’s there already and made it better. Instead of asking: Why do we do this at all?
“But in other parts of the world: China, Asia, Africa – they’ve taken a totally different approach and bypassed legacy technology to create something totally different in terms of super apps, biometric identification, and central bank digital currencies.
“Have we seen real innovation in the West? We’ve seen some, but a lot of it’s been about how can we compete with the incumbents by doing what they’re doing a bit better. As opposed to, how do we expand the market, bring more people into it, and create new value?”
Lessons from Big Tech
Going forward, therefore, we asked Tony to consider the lessons financial institutions can discover from Big Tech:
“Big Tech understands customer domains and uses data to understand, anticipate, and meet customer needs in a manner which creates great customer experience. It also understands that the customers have a voice: one that is real-time with the very real potential to significantly influence perceptions of a brand.
“This is why Big Tech is relentlessly focused on customer experience and the removal of friction from the customer’s journey.
“Payments has been a particular focus recently but watch this space in terms of Super Apps, embedded finance, and buy-now-pay-later developments.
“Big tech is sitting on so much money. They’ve had a bonanza through this crisis and they’re cherry picking around the edges of the financial sector, acquiring anything that’s not going to require them to be regulated. They’re buying everything from AI to analytics, and the issue for financial services is: Big Tech, held back by a fear of regulation, are buying all the component parts. But assuming regulation will keep these cash-rich would-be financial service players at bay, is not a strategy.
“Their mindset is totally different: it’s around understanding customers, data, and making decisions in real-time supported by data. If they do enter the sector, they are at an advantage in terms of how they think and how they go after a market. It won’t be brand, channel, or product centric. It will be customer centric based on customer understanding and insight. And that’s where the big challenge for the future is.
“As Steve Jobs said, start with the customer and work backwards.”
Thank you to Tony Moroney for taking his time to speak to us at Disruption Banking.
Author: Curran Snell
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