What is going wrong with banking transformations and why?

Last month the European Central Bank (ECB) decided it will conduct in depth reviews and on-site inspections of banks that have digital transformation plans on their roster. Banking transformations make banks more reliant on third-party providers, this heightens their vulnerability to fraud and cyber security issues. And the ECB suspects that these risks are not adequately reflected in most banks’ governance structures and risk appetite. This is concerning because nearly all banks have a transformation brewing, which consume nearly a fifth of their IT-budgets. 

And things aren’t too different across the pond. Digital transformation in banking has become a bit of a buzzword here as well. Whether it’s the promise of untapped potential for growth through technology or a chance at reorientation, banking transformations are like sand on the seashore of finance. However, the caveat with transformations is that they are hard. Especially hard for institutions that have years of technical debt and a low tolerance for errors.

Perhaps this is why data by EY finds that 38% of leaders say transformations underperform against key performance indicators (KPIs). Similarly, nearly 70% have witnessed a transformation that has underperformed in the last 5 years.

1) Successful transformation is grounded in clarity of vision.

Not only do banks need to clearly articulate why transformation is needed, they need to go the extra mile when it comes to communication. Executives need to make sure their product teams and their tech teams clearly understand the objectives of the transformation and its purpose. 

If transformations fail so often, then why do we keep hearing about them? The short answer is that although banking itself is quite an old and institutionalized concept, legacy architectures simply can't keep up with modern demands such as evolving payment methods, integrated CX or expanding channels. To ensure customers continue to get that slick one stop shop experience, banks have to rethink and overhaul old tech. Maybe the final blow to the old ways was COVID-19, which undid the most visible symbol of banks, their branches. With consumers becoming accustomed to handling their money through an app and a smartphone, banks face a bit of a “do or die'' situation when it comes to digital transformation.

So, if banks have to transform, why do attempts at renewal keep failing? The answer to this question is a bit more complicated.

More often than not, when visions fail, a particular team is assigned blame even when the objectives were not clear from the get-go. “Many leaders often think that there is a start and finish to their transformation journeys, but the reality is that the process should never end if they are truly tackling it from a holistic point of view. Transformation should be approached not as a band aid solution or an attempt to keep up with the trends. Consumers, stakeholders, and employees alike will quickly decipher when changes within businesses are inauthentic,” said Jan Bellens, EY Global Banking and Capital Markets Leader.

Technological reimagining doesn’t guarantee profitability. Consider ING Belgium which tried to pivot entirely to a technology business. However, it quickly realized that doing so would put it out of touch with its clients. They went back to the drawing board and came up with Route 24, which is focused on driving value for internal and external clients. 

2) Banking transformations are expensive

Only 41% of executives believe that sufficient funding is available to undertake institution-wide transformations. It is essential to note that most make investments that only extend to a 5 year period after the project ends, which runs the risk of ignoring tasks and initiatives that have long-term profitability. Tunnel visions have deep negative impacts for transformation projects.

This doesn't mean that money spent on such projects will always go to waste. For example, when JPMorgan Chase decided to expand into the UK as a digital-only bank, many, including its investors, were skeptical. CEO Jamie Dimon’s plans to increase his firm’s tech spend by 30% to $15 billion wasn’t resonating with everyone. But the plan has been working so far. Chase has gained twice the amount of non-interest bearing deposits than its competitors in the first year. The key here seemed to be keeping overhead low and focusing on slowly expanding the bank’s offerings. 

3) Fail fast and pivot hard

While agile development cycles are famous, in practice most organizations seem to be missing the point. Only 43% of executives report clearly communicating to employees that unsuccessful experimentation will not adversely impact their career or compensation. Teams should have room to pivot away from falsely promising objectives and reorient operations towards those that fill the overarching vision if they identify issues early in the process. This is after all central to the iterative nature of agile development.

And agility has to come from the top. While Chase in the UK is doing well, not all of JPMorgan’s digital endeavors have gone to plan. Its foray into digital challenger banks called Finn didn't work out so well and closed only a year after its launch. While the exact reasons are hard to pinpoint, some suspect that Finn failed to differentiate itself from JPMorgan Chase’s long standing product.. It may even have failed to lure customers away from competitor challengers like Marcus by Goldman Sachs. Bear in mind that even Marcus has failed to live up to expectations, and Goldman Sachs has since pivoted away from retail banking in America. 

4) Bring everyone along

Transformations are often institution-wide processes that require multiple teams to work together for the vision to turn into reality. Hence, it is important that organizations not only bring data to the table but also prioritize professionals that understand agile development. These can include scrum masters, as well as those who can effectively communicate across teams. 

Life is a two-way road though. Banks need to properly incentivize employees' work to ensure they have their head in the game. Currently less than half of the executives and a small number of the general workforce report that they were rewarded for the work needed for transformation projects. “The misalignment around transformation strategies is one of the key factors that is harmful to a bank’s success. One group may focus on driving efficiencies through technology, and another may heavily focus on ROI. This lack of congruence taints a customer’s experience because it is reflected in their operations,” Bellens added.

Consider HSBC which opened up its data and research repositories to employees. HSBC bankers can easily access information that would otherwise be siloed through its content management system. This can in turn inform their inform their relationships with their clients. For example, when working on a client in the food and beverage industry, HSBC bankers can easily search the data/research the bank has on the industry and get up to speed. The notable thing here is that when looking to transform, HSBC didn't just add tecnological bells and whistles to its architectures. Instead it focused on improving the workflow of its employees. 

Banking transformations are not about which shiny new technology is going to replace old workflows, and are instead more grounded in the abstract questions. Do you know what you are doing? Do you know what isn’t working? Is it worth the money and what do you get out of it? 

And perhaps most importantly, is everyone coming along for the ride?