Digital Transformation: Why Traditional Banks Must Adapt

“Traditional banks tend to push products through channels to get a greater share of wallet and cross-sell. Whereas, digital banks start with the customer journey and need and then build the user experience to be part of a relationship interaction digitally, rather than trying to actually sell them anything.” – Chris Skinner

The COVID-19 pandemic upended businesses in almost every industry and every sector around the globe. In doing so, it also forced the acceleration of digital transformation, including artificial intelligence (AI) and deep learning. Because of these, approximately 6 in 10 businesses confirmed that they sped up their digital transformation plans thanks to the challenges they were forced to face thanks to the pandemic. 

Chris Skinner recently shared his thoughts about the breakneck speed at which these changes happened.

Chris is an author of 14 books, including Doing Digital: Lessons from Leaders, but he is also a public speaker, the voice of a daily blog, a consultant on the future of banking, and a self-proclaimed “troublemaker.”

James Robert and Chris spoke about how the worlds of technology and banking are merging faster than ever before. 

FinTech: Not Something to Fear

Those in the financial industry don’t have to look very far to find well-known financial leaders who are apprehensive about financial technology, or FinTech.

It’s no shock to hear that when it comes to digital transformation, banks are slow-moving, not agile. 

But some, like Chris, are starting a rallying cry — a wake-up call to inspire financial leaders to embrace the challenge of technology.

The fact that many banks are so inflexible when it comes to digital transformation makes it hard for them to pivot since they don’t always use technology effectively.

Chris shared, “Most traditional banks are becoming cloud-based, but they're not cloud-native. Most challenger banks were born on the internet, and most traditional banks were born in the industrial revolution.”

This makes it a lot harder for traditional banks to change and adapt. 

Today, entire financial firms are formed digitally, and these FinTech-based brands that are born on the internet are cloud-native, platform-based operations supported by APIs. They have much more functionality to interact and use open financial services.

But traditional banks? They’re still a long way away from achieving this kind of capability.  

Especially through the lens of financial services, it can be hard to think about the future when clinging too tightly to the past, whereas FinTech brands that were built natively on the cloud have an entirely different mindset that makes it much simpler to change and implement new technologies. 

Chris suggests that banks think of themselves as working from a burning platform, which they should use to spark transformation — that they need to make changes to survive. Chris uses  one of his favorite quotes — commonly attributed to Charles Darwin — to illustrate this point:

"It's not the fittest, the fastest, the most intelligent, or the strongest who survive. It's the ones who are most adaptable to change."

More specifically? The entire financial institution needs to change, inside and out. If digital transformation is being delegated to a CFO, CTO, CIO, or CDO with a budget and a focused project, the bank won’t survive.

Why is this?

Chris shared, “You have to digitally transform as a company with a leadership team who are passionate about making the whole company change. And you really have to adapt, not necessarily in a way that's rigid.”

Banks and credit unions must have a vision of their path forward, and it’s not always a fixed destination. Instead, Chris suggested thinking of it as a “continuum of change” to fit the demands of the 21st century.

Without this kind of clarity, it’s easy to get trapped in a Cave of Complacency with a false sense of security. 

Making a Seismic Shift

Many banks feel threatened by FinTech brands like Square, PayPal, and even Ant Group and Amazon; they worry that these brands will take all of their business.

But these sorts of companies can also serve as catalysts for change for banks and credit unions. 

Financial leaders are apprehensive for one major reason: These aren’t small tweaks; they’re major, tectonic shifts — a total metamorphosis.

However, there is precedent for this kind of seismic shift. In the 1990s, IBM turned its entire operation around, and again, Microsoft did the same thing. Both companies were stubborn, sinking, and struggling, and they used that opportunity to make a nimble change and turn their operations around. 

Chris said, “How did they do that? It's really about recognizing the cultural needs. Digital transformation has nothing to do with technology. It's about people. It's about making people understand that they have a voice and that they can enable change. They're not just being told what to do, but they can tell us what to do.”

After all, technology is just the tool that brings people together, and the financial industry is still a people business. Even with cutting-edge technologies like AI or machine learning, you cannot replace humans with machines.

These tools are perfect to automate the mundane.

And in return? They give banks and credit unions more time to make real, human connections with their customers. It’s about systemizing the predictable so that financial brands can humanize the exceptional.

Chris explained, “AI machine learning is actually there to augment human interaction. It's not meant to replace it. I think that this is one of the things that we get fundamentally wrong, that a lot of digitalization, particularly in financial services, is [about] cost-reduction and getting rid of staff instead of augmenting service and giving better customer relationships and customer advice.”

Digital transformation isn’t about cutting costs or maximizing productivity. It’s about being able to focus on the customer:

• What the customer needs
• How they are behaving
• How banks can be more predictive to better serve their customers

In this way, digital transformation is about giving financial teams the tools they need to better help their customers — not get rid of their people. 

In comparing the work and focus of traditional banks to digital banks, Chris summed it all up, “Traditional banks tend to push products through channels to get a greater share of wallet and cross-sell. Whereas, digital banks start with the customer journey and need, and then build the user experience to be part of a relationship interaction digitally, rather than trying to actually sell them anything.”

Putting the transformation of people over the commoditized transaction of dollars and cents is what digital transformation should be all about. 

Overcoming the Past to Deal with Change in the Present

With compliance standards and regulations in place — not to mention a longstanding set of industry-accepted processes — it’s no wonder that traditional banks have a hard time embracing change. And in some cases? Leadership isn’t sure what digital transformation should even look like. 

But it’s not rocket science; it’s not brain surgery. As Chris simplified it, “It's just creating organizations that embrace the 21st-century digital age and implement it well.”

He pointed to Netflix, which began as a Blockbuster competitor. But they learned lessons from digital leaders and then internalized these lessons and incorporated them into their operations. Netflix dared to disrupt and transform its own business model. Initially, they upset some people when they transitioned from a delivery subscription model to a streaming platform, but they were years of their time, and they redefined how consumers access media. And now? They've even grown to be a content production house as well. 

It’s important to note that in this case, the Netflix leadership team looked outside their own industry to gain perspective. Too often in the financial industry, leaders get stuck looking at what other financial leaders are doing and duplicating that without reimagining what digital banking can be. 

When banks put people — not technology — at the center of their thinking and doing? The digital transformation concept gets easier to embrace. 

Radical Reinvention or Incremental Improvements?

In his work, Chris has seen time and time again that banks and credit unions want to gradually implement new technologies. But his recommendation is, “You have to do a radical reinvention for the digital age, and if you don't make that happen, most banks, they're not going to die, but they're going to get acquired by people who do this well.”

He continued, “If you want to survive as an independent bank, that maybe is the acquirer rather than the acquired, and is the disruptor rather than the disrupted, you have to have a leadership team that really wants to make this happen and is committed to it.”

Not many people want to work outside their comfort zone. But when comparing incremental and exponential change for digital transformation, growth truly only happens when banks and financial institutions get uncomfortable, put their customers at the center of their thinking, and make real, necessary change.