Outlier Briefing: The march towards digitization in banking with Publicis.Sapient’s David Donovan

Takeaways

• The need for digitization: "Our ethos has always been that companies have to transform their business models and be digital, not only to thrive, but in some cases, to survive."
• Digital outperforms: "If you look at the volatile stock market today, it's not a surprise that the companies that are digitally native have held up much better."
• Banking lags: "Only 17 percent of banks are successfully deploying a digital model. And pre-COVID, only 43 percent had a little bit of a strategy or working roadmap."
• M&A: "You're going to see a lot of M&A, because what COVID did was create a lot of depressed valuations for banks."
• Challenger Banks come out stronger: "We've read how a lot of bigger banks had to turn away a lot of loan applicants because the backends of these banks are still underpinned by legacy technology. You're seeing companies like Square step up and take care of it."
• Goldman Sachs gets it: "Goldman absolutely gets the urgency to be digital. If you look at the technology and offerings they've made, it's incredible."

Listen to the full briefing

The following excerpts were edited for clarity.

The need to go digital

Publicis.Sapient works with all the major investment banks and most of the global investment managers and hedge funds. What's interesting is that our ethos has always been that companies need to transform their business models not only to thrive, but in some cases, to survive. If you look at the volatile stock market now, it's not a surprise that the digitally native companies outperform the market because of the very fact that they're digitally native.

With that backdrop, if you look at banking, only 17 percent of banks are successfully deploying a digital model. Pre-COVID, 43 percent of banks only really had a little strategy or working roadmap for digital. Unfortunately, it takes a pandemic to create urgency. In the past three weeks, you've seen banks create urgency around serving their clients.

Certainly, some of the banks' business models were rooted in being proximate. The bank branch, for example. Pre-COVID, 50 percent of people were going to branches to do their banking. You've seen a quick pivot as banks start to socialize digital options for their clients, how they can help them, and give them some financial advice. I would say we're not even close to where we need to be.

Two classes of financial institutions

I hate to be draconian, but this is my personal view as someone who leads a pretty sizable practice: if you're not digital within a timely period, your business model will be extremely threatened. Fintech is becoming more prevalent and when you think about consumers and look at the digital native brands outside of finance -- Apple, Amazon, Netflix, and Spotify -- they've created a seamless consumer experience that consumers now expect from all their brands.

Before, people kind of put up with their financial institutions because they needed to. Now, they're going to demand the same experience from their financial institution that they get from Amazon and Apple. When you look at the future, if a bank can't produce that type of user experience, they're not going to be doing business. You'll see banks in the future compete against big technology firms like Apple and Amazon. Some fintech firms, like Square, Stripe, and MoneyLion, which may be young now, will be household names in three to five years.

Large vs small banks

Smaller banks may suffer a bit. But like you've written about on Tearsheet, there are small regional and community banks that have partnered with fintechs. They've been able to create a lot of value for their customers by doing that. Certainly, scale matters. You're also going to see a lot of M&A. One thing COVID has done is create a lot of depressed valuations. Big banks reported last week and were hit pretty aggressively. It will be interesting to see how smaller and regional banks weather the storm.

Challenger banks

Challenger banks will come through this strong. If you look at the CARES Act and PPP, we've read about how some of the bigger banks had to turn away applications from people who weren't their customers. They weren't able to process their applications because the backends of many of these large banks are underpinned by legacy technology. They don't have the ability to onboard new clients in a seamless way or do KYC in a seamless way.

So, you're seeing companies like Square step up and say, we'll distribute the funding. We can do this. It's a perfect example -- small businesses need this funding right now and because of legacy technology, they're not getting the immediacy they need. Fintech can fill that void. I think you'll see more examples as we go on. I think that will create an opportunity for some fintechs to build a strong business.

In some cases, banks will either acquire or partner with these fintechs. I definitely think that will happen at some point. It will depend on the fintechs' strategy: whether they're building the brand to sell or really to disrupt.

Goldman Sachs gets it

When you look at Goldman Sachs, they absolutely get the urgency to be digital. If you look at some of the technology and offerings they've made, it's incredible. They're fortunate in some ways that they're not saddled with legacy technology because they weren't a bank pre-2008. That gave them a bit of an advantage to build their infrastructure in a digitally native way.

They're building a corporate bank -- this is public knowledge. When Goldman brings their corporate bank online and starts going to Fortune 500 companies for their treasury business, they're going to be able to offer much more attractive rates because their corporate bank is going to be completely digitally native. They won't have to price in the 300 to 400 employees that would be part of a treasury business at another legacy bank. It shows you the value and importance of digital technology. It allows you to get into any business -- Amazon proves that.

Responding to COVID-19

We work with banks to support their business operations, especially in technology, trying to transform these companies tactically and strategically. We have very large technology engagements and when COVID hit, employees couldn't work on premises anymore, nor could we.

We were able to stand up all of our client engagements -- some of which are 400 to 500 people working across multiple geographies. We have 400 people working globally with one bank client: New York, New Jersey, Dallas, Toronto, the UK, and three locations in India. We were able to standup our entire team virtually in a co-location model with our client doing daily standups, practicing Agile development, leveraging the same tools, and having daily scrum meetings. We have 40 projects going on with this client and our velocity, in many cases, is faster than before.

It's a testament to what you can do when you have to make change, when you don't have any other options. We were a little faster than our clients. If you think of the pace of how everything got shut down, it was very quick. It put strain on logistics. Simple things like getting laptops or logins to VPNs or RSA tokens -- we were able to work through these challenges within three days of the lockdown. We're now adding people to teams and onboarding new people with our clients virtually.

The new virtual normal

Like with 9/11, I think some of our behavior has changed forever. I think virtual is certainly a model that needs to looked at for our clients. Being on prem has its advantages like looking people in the eye, culture and camaraderie. There are probably a lot of things that can move to a virtual model and be more efficient. I'm sure that will happen.

One thing that's important is development -- we feel that for banks to thrive, they have to be as digitally native as possible. All the activities around transforming their infrastructure. Cloud -- not just transferring infrastructure to the cloud but rearchitecting it. How do you set up an architecture that ingests large amounts of data? How do you segment your businesses? How do you do your development in the cloud? These can all be done virtually and more efficiently.

The most important thing about development is talent. I don't care if you're Google or Goldman Sachs, it's always about finding talent. There's greater demand for technical talent with domain knowledge. I worked on Wall Street for 20 years. Having that understanding of the business, the workflows of the products, then you can transform and change them. Consumers will demand it -- there won't be an option. Setting up virtual engagements will unlock a lot of talent around the globe that you'll need to transform your business model.

Production AI

There's a lot of conversation about AI, a lot of people talking about it. We are actually executing production AI, working with clients leveraging a lot of data sets to help them manage money. We're looking at data around COVID and how consumer behavior is changing around it. We've looked at how this may impact bond prices, for example. We've built models with our clients leveraging AI and a lot of volume of data to help them make better decisions.

Cognitive helps with speed. If you look at financial services, there are a lot of capital markets that can be optimized with cognitive search. If you want to look up a certain bond or understand counterparty risk, instead of toggling through a Bloomberg terminal, you can call it up with a chatbot in the same way you'd talk to Alexa in your kitchen.

Looking out into the near future

We're focused on bringing a greater awareness to our clients about the importance of being digital, especially the cloud. The types of institutions that will be successful in the next three to five years are going to be institutions that will integral parts of a large ecosystem or platform. Using Goldman Sachs as an example, they're partnering with Apple around the credit card. They're partnering with Amazon around small business loans. They're bringing services to their own user groups as well as to other firms' users. That will be the model that will thrive in the future. Some services you'll bring under your own brand. Others might be white labeled.

With COVID, it's a very important time for banks to step up and be market leaders. Why shouldn't banks take a leadership position to help procure prescription medicine when people are sequestered? Or food delivery?

Look at China and WeChat. 3.5 billion users around the world have smartphones and 1.7 billion of them are unbanked. It creates an amazing opportunity for the institution that wants to be forward thinking and wants to create personalized, simple experiences for consumers that enable them to live their lives in real time.