Digital-First Banking Units: Under Construction

Banking is a practice that remained unchanged for decades since its establishment. Despite the fact that its core continues to be the same, the global spread of innovation has changed various aspects of banking, replacing the old-school practices with new technology and digital capabilities. Today, the status of a digital bank brings along a package of attractive benefits and operational advantages. For this reason, traditional banking providers are currently facing a big challenge, as their future survival and success directly depend on their ability to digitalize. One of the best solutions might be to build a digital-only component, adding value to the experience that customers receive. Only this way traditional banks have a chance to keep up with the existing alternatives, and continue to remain attractive for the clients.

Yet, is the introduction of digital-only units enough? Would it be a better option to simply start from scratch and build digital banking institutions? The report “Time to Start Again: The State of Financial Services 2019” by Oliver Wyman, suggests that it would indeed be more resultful to start all over again, taking advantage of the existing technological developments and combining the old and new.

Digitalization is a force that is currently spreading across industries and fields and changing the canvas of the financial world. Let’s look at the example of Amazon: it gave smaller retailers the ability to reach micro-segments across the world, as efficiently as never before. At the same time, Netflix came into the picture and modified the video industry, disrupting the prior unquestionable leadership of the Hollywood giants. Changes have also taken place in the field of travel, with numerous digital start-ups, such as Uber and Airbnb, providing an upgraded customer experience.
The banking industry was not an exception and also got substantially affected by the power of digitalization. The environment became even more diverse and competitive, with thousands of new players and offers. Most traditional financial institutions realized the need to improve the existing infrastructure and began partnering with fintechs, but at some point the limits of such model began to emerge.

An alternative, as suggested by Oliver Wyman’s report, would be a greenfield approach, which would allow existing businesses to build new businesses, while leveraging the benefits from the existing entities. The new establishment then becomes a part of the unique culture, with its own independent strategy and objectives. It may be used to specifically cover a particular segment or consumer need, but at the same time can continue to reflect the legacy of the organization at a broader scale. A perfect example is the consumer platform Marcus, developed by Goldman Sachs and divided into four key areas – borrow, spend, save, protect, that in total offer 12 separate products. The conclusion that may be drawn from this specific case is that Goldman Sachs views personal financial management as a critically important aspect for its future activity.

Needless to say that consumers are currently much more demanding than a couple of decades ago, so it is increasingly complicated for entities to achieve stable growth. The core focus is on innovation, yet the speed of innovation is not fast enough to meet market needs. Wyman illustrates the considerable disadvantage that traditional banks have in comparison with the digital entities. The only factor preventing challenger banks from acquiring complete leadership is funding and status, given by name recognition.
It is time for financial institutions to get out of the comfort zone and begin reforming offerings, business models, internal processes, and organizational structures entirely. Conventions must be erased to meet the needs of modern consumers and businesses, who search for alternative solutions. The success is currently based on the level of performance and open banking mindset, rather than legacy contributions. One of the biggest advantages of such approach is the lower cost of serving the “converted” consumers paired with a better level of customer service.

The digital greenfield organization will not need to replicate all of the components or offerings of the incumbent banking organization. The transformation should be consistent and step-by-step, such as initially digitizing one single component. This way, an entity will be able to shift towards customer-centric model faster and less “painfully”. It will be enabled to use data and advanced analytics more efficiently for a continuous development. The need of the consumers for new product offerings will be met more effectively in a shorter time-frame, seamlessly and with a lower cost.

To ensure future success, financial institutions must adopt a new vision and acknowledge the fact that the current system must be disrupted for the birth of a more efficient one. Leadership will be in the hands of those, who will be the fist to take action.