Digital Disruption is no longer an unfamiliar term. Anyone, associated with anything – business, finance, healthcare, manufacturing, transport, selling, buying or just living ones’ life – knows what this means. Having said that, not everyone fully understands the “how” and “why” of leveraging technology to improve (or even just keep pace with) the way in which services and products are offered.
Background – FINTECH 1.0 and 2.0
Several years ago, when financial service platforms were created (payment service providers, lending platforms, digital channels and products, etc. – now known as FINTECHs) banks were complacent. After all, they were well established with a long history of providing banking and finance products and services. However, the FINTECHs came into being for a purpose – to address the pain points that existed because of the way in which banks offered their services, which clients did not much like. Such pain points included account opening, credit delivery, and product distribution channels. Hence, slowly but surely the FINTECHs began to eat into the market share of banks, as clients looking for quicker turn-around times, better service quality, and convenience flocked to them. This is what we call FINTECH 1.0.
Once banks realized that the new technology platforms were posing a threat to the way they were used to conducting business, they started to look at ways in which they could counter this by leveraging technology themselves. However, they soon realized that this was not easy for several reasons, ranging from obsolete or irrelevant legacy IT systems, lack of vision, understanding and skills, and inability to adapt to change quickly (compared to the agile competition). Some larger banks started to build teams and innovation centers to develop technology platforms on their own to better compete and regain market share.
Meanwhile, the FINTECHs themselves started hitting a stone wall in terms of their ability to scale. While they had the necessary technology to provide the much-needed services in a more efficient manner, they lacked expertise in banking and finance and the ability to properly position themselves, raise funding and acquire clients. Much of this also had to do with the regulatory framework, which restricted the FINTECHs from undertaking activities that would help them scale and grow. At this point both FINTECHs and banks realized that it might be better if, instead of competing they could work together to offer improved services to clients, leveraging on each other’s skills: technology, and banking/market know-how. Thus, was born FINTECH 2.0 (circa 2016-17).
In recent times we have seen such partnerships grow in different ways. FINTECHs have either been acquired outright by banks, been incubated by banks in-house through newly established innovation centers, or through a combination of both strategies. The type of partnership depends on the size of the bank, the markets it operates in, and other specific criteria. We have also seen new “digital-only” (challenger) banks being established. The models are still evolving, as is the technology. When the digital disruption began, little was known about blockchain or the ability to use machine learning for data analytics – both of which are now playing a major role (still evolving) in the disruption of financial services.
But Are All Banks Digital Ready?
While the role and strategies of both the banks and FINTECHs have evolved over the past 4 to 5 years, there are many institutions, especially in under-developed and emerging markets that are struggling with the “how” and “why” of leveraging technology. These are the markets where the World Bank Group’s International Finance Corporation (IFC) works to ensure financial inclusion and growth of small businesses. Even before the advent of the digital age, IFC worked with banks in these markets to build their capacity to reach out to the unbanked and small business segment. Today, with the use of technology the capacity and ability of these banks to do so can be enhanced manifold. And it is in this space that IFC’s Digital Finance Services advisory work is focused – how to prepare banks to leverage technology in an appropriate manner, i.e. making them “digital ready” so as to better and more efficiently deliver their products and services to the unbanked.
Strategy and Prioritization
Both the type of advisory services IFC offers to client banks and the methodology of delivering these services has evolved over the years through our interaction with several banks in different parts of the world. Many banks still view digitalization independently of their business strategy. Hence, one of the main activities for us is to get banks to strategize on how to incorporate digitalization, i.e. how to formulate a digital strategy that is aligned with the bank’s business strategy – the point being that digital technology should be leveraged and used for realizing the business strategy. Even before a digital strategy can be developed it is important to know if the bank is ready to adopt digitalization. For this, a Digital Readiness Assessment (or Digital Maturity Assessment) is undertaken, which looks at various aspects of current operations: (a) the commitment of the BOD and senior management to digitalization, (b) the skills set, culture, change management, and other HR related issues, (c) the existing technology platform and its ability to enable digitalization, (d) the existing products and channels, including any digital channels, (e) the existing processes, such as risk management, credit underwriting, compliance, KYC, etc. Such an assessment identifies any gaps that may need to be addressed before the bank can embark on its digitalization journey. And the findings of the assessment feeds into the digital strategy formulation exercise.
Once the digital strategy is prepared, the bank should have a better idea of what it wants to digitalize within the over-all banking operations (usually it is the pain-points for the bank’s clients, such as account opening, accessing credit on time, etc.), and in which order of priority to digitalize. It is obvious that the entire banking operations cannot be digitalized at the same time, and need to be phased in an order of priority.
When we talk about FINTECH 2.0 where both the bank and the FINTECH are looking at partnering, there also needs to be an understanding of each other’s capacity. Time and again we have seen that FINTECHs walk into a relationship thinking that the bank will be able to quickly leverage their platform, digitalize their operations and scale; on the other hand, the bank thinks that the FINTECH will resolve all the issues and ensure that the bank is quickly on its way to offering digital financial services. However, the culture, track record and skills set of both entities is so far apart that the partnership is (mostly) unable to come up to speed within the envisaged timeframe, if it ever comes up to speed at all. It is therefore very important to provide both the FINTECH and the bank an understanding of what is needed in terms of skills, agility and commitment. This is another area where IFC provides advice and guidance to both banks and FINTECHs on what the best strategy should be for partnering.
Big Data Strategy
At the end of the day, the main purpose of leveraging technology is to provide a speedier and faster way of capturing, structuring, storing, analyzing and interpreting data for decision making and product development. Today, we are all familiar with what big data is and where it comes from. We also know that there has been an explosion of the availability of big data, most of which has been generated over the past three or four years. What banks may not know, or have not given much thought to, is how they intend to work with data in terms of finding, capturing, structuring, storing, analyzing, and most importantly deriving meaning and insights from the analysis. Also, banks need to better understand what open banking means in terms of who can access the platform and how much can be accessed. In short, most banks do not have a Data Strategy. With recent incidents of data breaches, we are learning the importance of having such a strategy, encompassing how the institution plans to use data, who has access to it (both internally and externally), who owns it and how to ensure compliance with the evolving data protection regulatory regimes.
High Level Commitment from Senior Management and BOD
Our experience shows that no digitalization effort can succeed without commitment from the very top – senior management (mainly the CEO) and the BOD. As a matter of fact, the digitalization journey should be led by the CEO (also referred to by many as the actual CDO – Chief Digital Officer). Without such leadership commitment and vision, the efforts would not bear fruit because of the different legacy forces within the institution trying to resist this change.
In terms of the BOD composition, it is imperative that the Board of a digital bank comprise individuals who can provide the necessary vision and strategic oversight to the digitalization process. This means that the skills of the BOD members need to be enhanced to incorporate an understanding of digital disruption and the way in which technology can enable meeting business objectives more efficiently. Such skills and knowledge can be imparted through special BOD training programs and through induction of one or more “tech-savvy” individuals to sit on the BODs as independent directors. During the digitalization journey it is essential that these directors work closely with the CEO and other senior management. It is also important to identify and appoint change champions from within the bank itself.
To ensure that banks properly understand the repercussions of digital disruption and approach the digitalization process in a proper manner, it is essential that they: (i) have a digital strategy that is aligned with the business strategy and which also prioritizes what needs to be digitized and in what order; (ii) are able to identify whether they can leverage existing FINTECHs and if so how best they can partner with them; (iii) understand that they need to use data productively and responsibly for which having a data strategy is very important, (iv) have adequate technology infrastructure in place upon which to build the digital platforms and processes, (v) have commitment from the CEO, senior management and the BODs who should drive the digitalization process and also manage the accompanying change. Without all these elements in place the digital journey can be very, very rocky and can end up not being implemented at all.
Introduction Digital Disruption is no longer an unfamiliar term. Anyone, associated with anything – business, finance, healthcare, manufacturing, transport, selling, buying or just living ones’ life – knows what this means. Having said that, not everyone fully understands the “how” and “why” of leveraging technology to improve (or even just keep pace with) the way in which services and products are offered. Background – FINTECH 1.0 and 2.0 Several years ago, when financial service platforms were created (payment service providers, lending platforms, digital