22 Jun 2020
Banking the Future in a post COVID-19 World
Opinion paper by Carl Chirwa, Head of International Banking at Bank One - Business Magazine - 17th of June 2020
By now, I can safely assume that most businesses including banks have had to tear up their meticulously detailed plans and budgets for the year. 2020 has pulled a number on every single business, government and living individual. As the saying goes ‘… you can plan a pretty picnic but you can’t predict the weather!’
This article is intended to share some thoughts particularly to Banking Executives as they try to unpack and navigate the ‘new normal’ as is now popularly known. Hopefully these insights may assist, as we all have had to literally go back to the drawing board and re imagine our near and long-term strategies in a post COVID-19 World.
“Banking is a margins game! We are essentially in the business of buying and selling money; we buy low and sell high and make a margin!”
I vividly recall this statement uttered by my first boss, the archetype of a Fixed Income Trader at the turn of the century. He fits the description to the tee, from the heavily gelled hair, the custom designer suit, matching belt and shoes and replete with the obligatory Breitling wrist watch.
The concept of ‘buying and selling money’ completely blew my mind and I immediately fell in love with Banking as a career. This was on my first day on the job nearly 20 years ago on the trading floor of a Global Bank where I first interned as a star struck, freshly minted college graduate.
The ‘Margin principle’ has remained largely true since banking began, until after the Global Financial Crisis in 2008 where interest rates have been largely at historic lows. Jerome Powell, the Chairperson of the US Federal Reserve Bank signalled earlier this week that US Dollar Interest rates will likely remain at near zero levels until around 2022.
The local Mauritian market flush with liquidity coupled with a Government that does not appear to be in the mood to borrow despite the historically low interest rates albeit and a recent budget that is geared towards large infrastructure spending to stimulate the economy.
So is it ‘Game Over’ for the traditional Banking model based on Net Interest Margin (NIM’s)
Rebalancing the Revenue Model
Margin compression IS the ‘new normal’ as rates are set to be lower for longer. The ‘Great Lockdown’ triggered an economic sudden stop which has put substantial pressure on banks’ Interest Earning Assets across the globe. Therefore, a NIM’s dependent banking strategy is no longer sustainable for Banks going forward.
It is No Longer ‘Digital First’, it is now Digital Everything!
Future proofed banks have already begun to pivot their focus towards a Non Interest Income (NII) led revenue model and are figuring out ways of generating more fee-based revenues to sustain earnings going forward. Fees need to be earned and justified. This means solving real problems in real time for which clients are willing to pay for in a transparent manner.
Digital Transformation is NOT about Technology, it is about Strategy
This requires a complete rethink of banks’ Digital Transformation Strategies. Senior Leaders can no longer afford to delegate the Digital Transformation Journey to a group of techies holed up somewhere in an ‘Innovation Lab’ that present hazy progress reports to Senior Management periodically.
According to a recent survey by the Wall Street Journal of Directors, CEOs, and Senior Executives found that digital transformation (DT) risk is their #1 concern in 2019. Yet 70% of all DT initiatives do not reach their goals. Of the $1.3 trillion that was spent on DT last year, it was estimated that $900 billion went to waste. Why do some DT efforts succeed and others fail?
Fundamentally, it’s because most digital technologies provide possibilities for efficiency gains and customer intimacy. But if people lack the right mind-set to change and the current organisational practices are flawed, DT will simply magnify those flaws.
Allow me to summarise five key thought leadership lessons, gleaned from subject matter experts coupled with my own experience from my five year stint whilst at CITI on best practice to successfully navigate the digital transformation journey.
Lesson 1: Figure out your business strategy before you invest in anything.
Leaders who aim to enhance organisational performance through the use of digital technologies often have a specific tool in mind. “Our organisation needs a machine learning strategy,” perhaps. But digital transformation should be guided by the broader business strategy. You cannot be “all things to all men”. Figure out what you are really good at, and focus on becoming the best at that!
There is no single technology that will deliver “speed” or “innovation” as such. The best combination of tools for a given organisation will vary from one vision to another depending on the chosen business strategy. Furthermore, the technologies selected should be both scalable and inter-operable.
Lesson 2: Leverage insiders.
Organisations that seek transformations (digital and otherwise) frequently bring in an army of outside consultants who tend to apply one-size-fits-all solutions in the name of “best practices”. A more effective approach to transforming our respective organisations is to rely instead on insiders — staff who have intimate knowledge about what works and what doesn’t in their daily operations. Often new technologies can fail to improve organisational productivity not because of fundamental flaws in the technology but because intimate insider knowledge has been overlooked.
Lesson 3: Design customer experience from the outside in.
If the goal of Digital Transformation is to improve customer satisfaction and intimacy, then any effort must be preceded by a diagnostic phase with in-depth input from customers.
At Bank One, a snap survey we recently conducted with a focus group of our clients across our main Lines of Business i.e. Retail, Corporate, Private and International Banking revealed six common requirements that clients are willing to pay fees for in a Post COVID-19 operating environment ;
- Digital On boarding – A Seamless Digital customer on boarding process which maintains highest level of KYC standards is no longer a new innovation, but a strategic imperative – the less clicks the better.
- Omni – Chanel User Experience – Client demand for access to banking services through mobile, touch screen, tablets, cards, cashless and contact less touch points alternate remote flexible interfaces has increased 3X during the crisis and the traditional branch banking model is predicted to die of natural causes.
- Cyber Security -The lockdown has heightened the risk of cyber-crime. Cyber resilience is key to client acquisition and retention
- Processing Efficiency – Near Real Time processing , tracking & enhanced visibility of cross border payments
- Price and Value – will determine the main banker status a depressed corporate earnings environment
- Certainty and Risk management – Corporate Treasurers and CFO’s will require access to relevant real-time tools and insights that help them assess and mitigate risks or maximise opportunities and make better decisions.
Lesson 4: Recognise employees’ fear of being replaced
When employees perceive that digital transformation could threaten their jobs, they may consciously or unconsciously resist the changes. If the digital transformation then turns out to be ineffective, management will eventually abandon the effort and their jobs will be saved (or so the thinking goes). It is critical for leaders to recognise those fears and to emphasise that the digital transformation process is an opportunity for employees to upgrade their expertise to suit the marketplace of the future.
Lesson 5: Bring Silicon Valley start-up culture inside.
Silicon Valley start-ups are known for their agile decision making, rapid prototyping and flat structures. The process of digital transformation is inherently uncertain: changes need to be made provisionally and then adjusted; decisions need to be made quickly; and groups from all over the organisation need to get involved. As a result, traditional hierarchies get in the way. It’s best to adopt a flat organisational structure that’s kept somewhat separate from the rest of the organisation. Do not be afraid to fail. Failure is part of the process. Fail Fast, Fail Small & Fail Forward Learn to ‘kill your darlings’ i.e. Do not get emotionally invested in a failing project. Take the lessons learned from failure and move forward quickly. Do not be afraid to form smart partnerships with Fintechs to accelerate scale and speed to market but also invest in developing some capacity of in-house expertise and resilience.