Time to bank on technology
Author(s) Smita Aggarwal Publication(s) Live Mint Published Date 05 May 2015
I recently met a senior executive of one of the top 50 global banks and he introduced his bank as “a technology organization with a banking licence”. This unusual description set me thinking about what this would mean in terms of fundamental business strategy change for banks. The first change is to consider the universe of technology companies such as Google Inc., eBay Inc., Apple Inc., and many others, as peers and potential competitors. In a recent survey by The Economist of over 200 global retail banking executives, 46% of banks cited digital as their highest priority for the next five years and 36% of respondents believed that competition was more likely to come from non-financial firms.
Learning from competition could be the best way to stay ahead. So, here’s a list of some key strategies that banks can learn from their technology peers and adapt.
Plan and design for hyper-scale, hyper-flexibility and hyper-standardization: Around 6,000 tweets are sent out every second, but Twitter is geared to handle peak volume fluctuations of 20 times or more of that. Changes in backend operations made it resilient and flexible to periodic bursts, while the number of machines involved in serving the site itself has reduced. Banks need to migrate to a structure that allows them to transform repositories of siloed data into information that can be seamlessly accessed realtime and used to create new and sustainable revenue streams. The design and technology should support a big growth in volume of transactions. Spain’s Banco Bilbao Vizcaya Argentaria (or, BBVA), one of the top 50 global banks, has built a state-of-the-art platform to support its entire global business across 31 countries.
Future-proof investments in technology: This can be done by adopting a modular approach that allows plug and play of different components. One of the biggest barriers to change is dealing with legacy. Most banks have multiple legacy systems intertwined with each other, which makes part-replacement tedious and prohibitively expensive. The cornerstone of the transformation of Amazon.com Inc. from an online book seller to a global e-commerce platform was its move to a service oriented structure that allowed it to build many software components rapidly and independently. It’s important for banks, too, to move towards more agile systems that connect different components of transaction processing, front-end channels, data analytics, and more. This can be done through middleware and enterprise service layers that allow replacement of individual components.
Build interoperable formats with compelling commercial models: Market leadership in the digital world will not come by creating entry and exit barriers through exclusivity, but by adopting a stance of creating more efficient, cost-effective and innovative solutions. Many global banks have begun to offer open Application Programming Interfaces to various partners to develop applications and foster the enhancement of a digital ecosystem.
Encourage cross-functional team work: It may be time for banks to replace rigid and hierarchical organizational boxes with an environment of collaborative teams and open communication. Commonwealth Bank of Australia, another top global bank, has created Digital Innovation Lab at in its headquarters to allow collaboration between employees, start-ups, vendors and partners to ideate, create and test solutions.
Re-skill the employee base: Passion, creativity, initiative and intelligence may be the preferred attributes to look for in an employee over experience. It is essential for banks to find new ways to groom the next generation of digitally-minded leaders through exposure, education and experiential learning. It’s now commonplace for bank management and employees to actively engage in hackathons, where software developers, designers and coders create prototypes of digital solutions.
Buy and acquire skills and businesses that maximize synergy: It makes more sense now for banks to invest in skills and expertise like user-interface designers, data scientists, behavioral economists, enterprise architects, etc.
Leverage power of disruptive thinking and speed to market: Engage with start-ups that have bright, yet simple solutions to complex problems that banks may be grappling with. Technology firms continuously and rapidly expand product suite by buying innovation from start-ups, which would take longer to develop in-house.
A brick and mortar retailer such as Starbucks has made a significant investment in digital innovation, which is yielding benefits. Starbucks has 12 million active users of its mobile app, and sees 7 million mobile payment transactions per week, which is 16% of its total sales and 90% of US retail stores mobile transactions. This has resulted in superior customer experience, lower operating costs and improved cashflows. Another collateral benefit is that Starbucks’ stock growth has been significantly higher than that of its peers in the past few years.
The banking sector in India is up for a major makeover through structural changes being put in place by Reserve Bank of India and the government. New categories of banks such as payments banks, small finance banks, postal banks, and policy banks are expected to start operations in the near future. Smarter banks are embracing new technologies so that they can differentiate themselves. For banks to adapt to the rapidly changing environment and continue to stay relevant, it’s imperative that technology is all pervasive and not confined to a few specialists. There is likely to be a strong correlation between a bank’s ability to come up with novel solutions for its customers, and internal transformation. They can avoid playing catch-up by learning from technology peers and becoming better than them.
Smita Aggarwal, Senior Programme Director, Centre for Advanced Financial Research and Learning.

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