Welcome to the next level of digital banking. Banks are subject to a lot of noise about fintechs today. Optimism regarding technology is at a high, mobility is widely regarded as a game changer, and vast amounts of capital are being deployed in fintechs. Banks may be tempted to dismiss the noise or they may panic and overreact.
So says McKinsey's Cutting through the FinTech noise: Markers of success, imperatives for banks, which recommends a middle ground that focuses on separating the signals that are truly important from the noise. Specifically, this means that banks should be less preoccupied with individual fintech attackers and more focused on what these attackers represent — and build or buy the capabilities that matter for a digital future. According to McKinsey, the following six digital imperatives are leading the way to a customer-centric, mobile first, digitally transformed financial services experience.
Use data-driven insights and analytics holistically across the bank!
Attackers powered by data and analytics—be they fintechs, large consumer ecosystems , such as Apple, Facebook, and Google, or some of the more progressive financial institutions — are opening up new battlegrounds in areas like customer acquisition, customer servicing, credit provision, relationship deepening through cross-sell, and customer retention and loyalty. Consider the provision of credit — one of banking’s last big moats. Access to large quantities of transaction data, underwriting and custom-scoring customers for creditworthiness, understanding and managing through credit and economic cycles — these are unique assets, skills, and capabilities that banks have built and leveraged over centuries.
Create a well-designed, segmented, and integrated customer experience, rather than use one-size-fits-all distribution.
The days of banking being dominated by physical distribution are rapidly coming to an end. The proliferation of mobile devices and shifting preferences among demographic groups mean that customers expect more real-time, cross-channel capabilities (such as status inquiries and problem resolution) than ever before. Physical distribution will still be relevant but far less important, and banks must learn to deliver services with a compelling design and a seamless unconventional customer experience. Banks must recognize that customer expectations are increasingly being set by nonbanks.
Why does a mortgage application take weeks to process? Why does it take an extra week (or two) to get a debit card online versus in a branch? Why can’t a customer make a real-time payment from his or her phone to split a dinner check?
Banks need to respond to these questions by improving their customer experience and meeting their customers’ changing expectations. Financial services is the only business where you can be rejected as a customer. In an age where mobile devices provide real-time transparency on just about everything, it is critical to provide customers with information about the status of an application or what other documents are required.
Digital-marketing capabilities that equal e-commerce giants!
Today, banks are in a fight for the customer, not only with other banks but also with nonbanks. The moats that have historically protected banks will not even begin to compensate for the wide gap in marketing skills that currently exists between e-commerce players and banks. Big data and the advanced-analytics capabilities described above are merely the foundation of digital marketing. Mastering digital media, content marketing, digital customer-life-cycle management, and marketing operations will be critical to banks’ success. Building these capabilities and recruiting and retaining digital-marketing talent will require considerable time and investment.
Mitigate the potential cost advantage of attackers through radical simplification, process digitization, and streamlining!
After the last dot-com boom, banks successfully electronified core processes. Now they must digitize them. The difference is crucial — an electronic loan-processing and fulfillment process at a bank largely implies the sharing and processing of PDF files of paper documents. For example, digitizing a mortgage application would involve creating and manipulating data fields, such as borrower income and liabilities, in a largely automated manner in the cloud. This would be a multi-year process for banks, as it would require the integration of multiple legacy systems and potential replatforming to enable truly digitized processes. Simplification, digitization, and streamlining opportunities exist across large swaths of banking operations.
Rapidly leverage and deploy the next generation of technologies, from mobile to agile to cloud.
The technology agenda for banks and bank CIOs has become even more demanding and complex. First and foremost, “mobile first” is not just a buzzword — it is the clearest directive banks could receive from consumers about how they want to interact with their service providers. Second, banks must fortify not only their technologies, but also their internal processes and cultures, to defend customers’ data from breaches. Third, the pace of innovation in banking is accelerating rapidly, requiring banks to increase their speed to keep up, including software development through techniques such as agile and continuous delivery. Finally, significantly faster, nimbler, and dramatically lower-cost versions of processing and storage technologies are now commonplace. Banks need to move onto such platforms, retiring and replacing legacy systems quickly. Since such systems are neither easily nor quickly replaced, many banks may choose to move to a “two-speed architecture” approach that builds more flexible layers of technology on top of existing systems but still draws on and interacts with those systems to provide the next generation of technology agility and seamless customer experiences.
Rethink legacy organizational structures to support a digital environment!
The typical organization chart of any bank will show a matrix of products and channels, with physical distribution usually leading in size and scope. The profits and losses (P&Ls) that accompany these matrices vest power in the owners of the channels and products that are most likely to be in the firing line of fintech attackers. These attackers are typically oriented to customer metrics tied directly to their financial performance. In contrast, most banks have consensus-oriented cultures that require a long time to build alignment. Banks must complement their existing P&Ls with approaches that enable faster adaptability to external changes, and foster cultures that support speedier decision making. Banks must think hard about how best to organize to support the five preceding imperatives, asking what organizational structure and decision rights will most effectively support a data- and insight-driven operating model, a distinctive customer experience, digitized processes for greater efficiency, and next-generation-technology deployment.
What does this all mean - today?
Taken together, these six imperatives carry the same overall implication for banks as the six markers do for fintechs: a long-term shift in the nature of competition and successful business models. An overarching challenge for banks is how to “open up” structurally—with respect to how they leverage partnerships and how they permit other entities to access their capabilities. The age of fintechs is here. There is no time to lose.