How To Fix a Bank in 100 Days

Banks have existed in a world of comfort. The high barriers to market entry like regulation and capital controls mean banks have enjoyed stable profit for decades.  This made competing with banks on their terms very difficult.

The problem is there are now players entering the market who play by entirely different rules. The days of being comfortable and relying on a strong cash flow / stable customer base are over. For banks it’s war time, just look at the facts:

  1. The major disruptors are now making inroads into banking after years of threatening to do so. Alibaba has a banking licence, credit scoring capability, insurance, takes deposits, facilitates payments and lends… and it has ~750 Million customers. It’s able to execute with the scale and efficiency of a technology company not the lumbering slowness of a bank…
  2. Start-ups such as Lending Club and Funding Circle are winning the small business loans market that banks just can’t play in because acquiring those customers is too costly. Not to mention nutmeg and Wealth Front taking some of the more profitable advisory business away.
  3. Increased capital requirements mean that more equity is required on the balance sheet for the same level of Interest Income. At the same time regulators pushing for increased competition in Retail banking means less deposits are available to make Interest Income.
  4. We’re not out of the Sovereign Debt crisis and bank balance sheets are still a long way from where they should be. Deflation is a real probability too, so how should banks react?

These are some almighty headwinds.  So it makes sense to look far and wide to see how to react.

What Strategies Are Out There?

If we look at all the different types of company eyeing fintech, they all have some characteristics that could be useful.   Below I’ve focussed on four research areas, Tech Players, Start-ups, Incumbents and Looking Internally.  Warning, this is not business as usual!

What can we learn from the Tech Players?

Technology is the focus of the entire business, not a department that is subservient to the business. In Tech companies some business based staff bemoan being second class citizens, in banking it’s the opposite. The CEO needs to be a technology focussed (or better yet obsessed) character to deliver the type of technology it takes to compete in the Tech arena. This doesn’t mean being a coder or founder, I’d look at Tim Cook of Apple or Satya Nadella of Microsoft as individuals who are obsessed with how Tech will meet customer needs.

Technology companies are arguably the best in history at building massive scale. Apple has sold over 800 Million iPhones, Alibaba, has ~750 Million customers, Facebook has over 1.3 Billion DAILY Active Users, the majority of which are mobile. These companies have built the technology to support this scale and used two key techniques to achieve this kind of growth

  1. Don’t Dabble. In banking having an accelerator or venture fund are considered table stakes, but getting the most of them is a different thing. Rather than being some the tech department can play with, they must become central to corporate strategy. Alibaba knows  exactly what they want to acquire, and are willing to pay hundreds of millions, if not billions to get it. Name a bank playing in that league? Look at Apple and Google acquisition history, it’s strategic, and based known strategy goals of the business.
  2. Growth Hack. First, hacking isn’t a bad word. Now we’ve got that sorted, if you’re not familiar with Growth Hacking and you’re a CEO or executive in a bank. Study it, internalise it, live it and breath it. The core concept is having the flexibility to tweak product appearance, settings and features and watch the reaction on user growth.

To do this you need products that can be adjusted real time, the analytics to watch the results and the skillset internally to manage that process. Facebook famously industrialised their growth hacking and (pre-IPO) saw user growth as it’s core metric. How will you Growth Hack to increase customer numbers? What’s your developer to user ratio?

The additional insight from Uber and AirBnB is one banks may not immediately feel comfortable with, but I think there are strategies where you can implement regulation digitally and with creativity. I would go as far as to say regulators are consistently underwhelmed by creativity coming from banks, and banks are like a puppy who has been kicked. Scared to go near the regulator with anything but spreadsheets and deference.   Regulation can and should be more automated.

What can we learn from the start-ups?

Segmenting the market works. Most of the really good Fintech success stories of the past decade haven’t been new banks, but in meeting a need not met by the major banks. PayPal, TransferWise and WealthFront all fit into this category. New proposition development in a bank plays in known boundaries, with assumptions about markets it can and cannot serve.

Constraints create innovation. When you have 4 employees and $100k in seed capital, paying $500k for a web server is not an option. So you’d instead buy a little AWS cloud and let it flex up and down as required. A bank’s risk teams will find 1000 things wrong with doing this, but it works so well for start-ups that often its not until they hit hundreds of millions of users they build their own data centres. How many data centres per user does your bank have I wonder?

Acquisitions are a nice exit if you’re a start up. Again look to Google, Apple, Amazon et al here. It’s not the only path to growth if
you’re an incumbent but it’s a damn good one. Start-ups want to partner with banks, banks just need to get a lot better at meeting them half way.

What can we learn from the incumbents making moves?

Embracing Growth Hacking.  I particularly liked this statement from the BBVA CEO – that they saw a

“10% increase in online mortgage sales from simply changing the colour of the calculator”.   BBVA CEO Francisco Rodriguez

Who’s doing that in your bank?

Buying and Building Innovation.  BBVA’s recent investment in Coinbase turned some heads,.  What I like about it this example is that they’re not just buying into another bank, but something quite different.

Experimenting with New Technology. UBS, Rabo and ING have all made public statements about the importance of experimenting with (for example) Blockchain technology.  As CEO if you were to look at your IT Departments R+D capabilities, would you rate them against PayPal’s for experimenting with such technologies?

What can we learn from the challenger banks?

To me the two most interesting challenger bank types are the Branchless of the late 1990s (ING, First Direct), and the Mobile First banks of the late 2000s (Moven, Simple etc).

First Direct and ING carved a comfortable niche with a strong focus on the customer experience and leaving the pain of the plumbing to someone else. Whilst stagnating in recent years, these challenger brands have been useful to grow the customer base for their larger parents.

The newer brands (MovenSimple etc). have renewed the focus on customer experience. It seems the new entrants are able to get closer to what a customer wants than the incumbents can, and if maximised with existing bank scale could be a major tool for attracting customers.

Especially when you consider customers are most likely to be delighted by Mobile and Digital products, they use them far more frequently too…

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What Can We Learn by Being Critical of Banks Current Operating Norms?

Operational costs are inflated by poor senior level understanding of the Tech best practice, and under empowered junior staff. Banks are still building late 1990s style IT architecture, with standard software being forced onto servers whether or not its needed.

IT Spending will need to increase by an order of magnitude to compete going forward. To unlock this spending, banks will need to be more efficient about how they spend (much more efficient) and unlock cash from other cost bases around the bank. We’ve seen the beginnings of downsizing the branch network, but this needs to go much further if the image below is anywhere near accurate.

IDC Tech Spend

If you’re about to spend this much, it pays to be critical about how you spend it, and how you measure success

SImply having a Mobile App isn’t enough anymore. Sure your app has grown by 200%, but is it making you any profitable revenue? Do your users actually like it? If your App can’t cross sell or open accounts, it’s simply serving the customers you already have. Having X million App users that can’t generate you any profit doesn’t allow you to close branches.  Benchmarked against the Tech Companies the User Experience Banks Offer isn’t good enough either.

In summary, the evidence suggests banks need to increase customer numbers, by focussing on user experience, M+A and an order of magnitude increase in Tech spend / efficiency.

What would I do if I were CEO of a bank for 100 days?

After the strong response to last week’s False Certainty Post  David Brear asked me a very interesting question

“What would you do if you were CEO for 100 days?” (other than buy a snappy suit)?

I have some sympathy for bank senior executives. Making a decision isn’t enough. Having the budget isn’t enough. You can send all the emails you want, but the bank has evolved to put in place lots of checks and balances. Much like politics, making any real change isn’t about having the title it’s about having the strategy, people and capability to execute like a Technology Company. To institutionalise the change I propose some key strategic shifts, organisational change and prioritisation of budget.

Strategy Focus Points:

1) Become A Technology Company that Does Banking

Create more of a technology company culture. I’ve seen this go wrong and create a culture clash in the financial services industry. Technologists and bankers struggle to meet in the middle, but is there a way to get your employee base engaged? I’m willing to bet the vast majority own smartphones. How many of them have access to the sheer amount of openly available, free software development resources out there? A start-up does. If even 1% of the workforce started to build in a sandpit the snowball would start to roll. Google Mail and Google Maps both started as pet projects by staff. How many bank products start that way vs on a powerpoint slide?

Embrace DevOps There is simply no excuse in 2015 for not embracing DevOps. DevOps (short for Developer Ops) means instead of having one set of people that provide new services, and another set of people who develop code. The developers use automated tools to spin up new servers in real time *click* new server, *click* new server. That simple. Unleashing developer creativity is central to the entire company’s strategy of becoming more technology focussed.

2) Become Laser Focussed on Scaling Customer Growth

Growth Hack. 4 Million users isn’t cool, you know what’s cool? 400 Million. AirBnB and Uber as challenger brands started with a laser focus on user growth.  What does your mobile suite need to look like to grow at that speed? Simply put make mobile and digital not just an acquisition channel, but THE acquisition channel. Yes, it can be done, and the business depends on it. Do not take no for an answer from compliance or anyone else. You might see a ~1% increase in Fraud, but that is more than worth it for a 1000% user growth in Mobile ARPU (Average Revenue Per User).

To implement Growth Hacking go find the best growth hackers from silicon valley, and put them in golden handcuffs. Support them in their battles with the organisational anti-bodies.

Build or Buy a Challenger Brand: What if banks had a challenger brand, that they owned 49% of, with an option to acquire at a later stage, and it had the ability to growth hack the overall customer base?  This would give the bank a far greater scope for experimenting and bringing what works into the bigger machine.

3) Define the Key Strategic M+A and Product Development Areas

Think about the Alibaba example earlier in this post, they know exactly what they’re going after and why. As CEO do you know who’s the single person responsible for partnering with start-ups and M+A in that space? Or does it vary on geography and business line?

Make it a priority to know who that person is and empower them to think about questions like: How do we partner with P2P lenders? What are the opportunities in blockchain technology? What bets should we be making (Like BBVA with coinbase)? Does every employee know where to send these ideas to?

Group the key areas into themes that have their own tiger team with a handful of developers, strategists and risk people. The areas would be no surprise. Customer Growth, Use of Data, Alternative Payments, User Experience etc.

4) Give a Clear Mandate for Innovation

Give Innovation It’s own Budget and Structure.  Teams focussed on innovation should have their own budget (or ideally sit inside a challenger brand / subsidiary) and a clear mandate to execute when they identify M+A, partnerships or products that meet their criteria. That mandate normally only exists in multiple committees, making getting anything done impossible.

If this group sits inside an existing Group Function, it will be subject to that functions finance processes, HR processes, risk teams etc. Your organisation can’t innovate in it’s current shape, so create a new shape and then think about how the business lines that are there today should interact with it. Feeding in a shopping list of needs, sense checking outputs etc. Innovation will not succeed with 25 different risk areas trying to fight over the eventual user experience and T+Cs.

Staff the Innovation / Strategy Capability with key skill sets. Consider the type of employee that would fit in a new function / challenger brand. Where do they work now? How will you convince them to come work for you? They want autonomy (to be able to deliver and execute) and mastery (to get really good at something). A new interior design won’t cut it. They don’t want to see corporate comms that talk about “how a committee met and agreed 12 principles to strategic alignment for forward planning purposes”. They want an internal video from an impassioned leader who’s getting the best from them and empowering them.

Ensure Innovation is being Reported to you Correctly.  If someone tells you mobile usage is up 200%, the next question is how does that benchmark against PayPal? If someone tells you mobile transactions are up, ask them what the ARPU is (Average Revenue Per User).

  • Ban any KPI that doesn’t come with a benchmark against competitors in banking and in tech
  • Ban “doesn’t need to worry about that” – I’ll decide that!
  • Sense check your directs – do they get it?

Bringing It All Together

Lisa Phillips had a great suggestion “Start with a Summit for the CEO’s direct reports (and 1 -3 others who should be)”, perhaps around the themes above. Aim to leave with a new organisational structure. Heritage (we’re not going to touch it) and Growth (The new org structure for being a Tech Led company). The key with this session will be identifying who’s grasping the importance of this change and who’s paying lip service.

From here think about the reshuffle at the top and new hires needed. If they’re paying lip service, perhaps they fit will keeping the
heritage business going, or somewhere else. If you’re creating a subsidiary or new unit priorities will be finding

  • A Chief compliance officer with amazing relationships but that gets tech and surround him with technologists (e.g. Circle the Bitcoin wallet has hired tremendous experience and surrounded them with Tech talent)
  • Strategists or VCs who are experts in the emerging Fintech space
  • An HR and Finance Exec who could lead a new unit and fundamentally understands the challenges of being a technology company focussed on user growth

Assuming the board understands the need to grow the customer base as being the key to shareprice raising and the story you outline the hard part will come once the change is made. Seeing it through, getting personal daily updates as CEO on Daily Active Users, Cost of Acquisition and ARPU…

Well that’s my £0.02, and if you’re still with me, I’d love to get your thoughts. Do you disagree? What would you do?

Banks Can’t Have Innovation Because? False Certainty Kills It

I define the need for false certainty as trying to think through every possible issue before committing a change. It strikes me as being
like trying to predict the weather in 1 years time without any data, just a lot of people who’ve experienced different kinds of weather before.

Large institutions and especially Banks exist in a the 20th century world of false certainty. A bank reacts to things it doesn’t know or understand by setting up committees, and spreading responsibility to various experts who all have to weigh in. As a result nothing gets done without going to 5 different committees and involving hundreds of people. Everyone involved bemoans the bureaucracy, but there is no way around it. This leads to slow decision making and makes innovation look an awful lot like risk.

You Can’t Innovate by Committee

This isn’t unique to banking, regulation or any paper based exercise has the same issue  - Banks just happen to be the worst offenders I’ve seen…

Banks live in a world of complexity: RWAs, cybersecurity, and compliance are all highly specialised subjects that require people who really know their stuff to get right.  Whilst this is very effective for keeping the lights on, it’s killing innovation.

I believe this is because specialists only see a part of the big picture, and the generalists (management) don’t understand the detail enough to know who’s right in a given argument. Innovation as a paper exercise moves forward, usually by compromising the design of the user experience or getting an executive to sign off to some ludicrous sum of money in case a perceived risk becomes reality.

The output of this process is a painfully forged compromise. I imagine it like trying mould clay whilst the left hand is fighting with the right hand. What you finish with is the result of an argument, not what society or your customers want and need.

No Wonder That Delivering Anything is a Victory in a Bank

No matter how terrible it is, this forged compromise is then forced into the world with the might of a great machine. The one click login is gone, and now you’re posting out card readers to every customer. Nobody is using the product, but rather than kill it, the bank plows forward in the belief that once the 100% of functionality is available people will use it. “If we just had marketing”, “It’s rooted Android devices holding back adoption” 3 years and £50 Million later, you have yourself a zombie project and you can thank the need for false certainty. It just won’t die, and it will never deliver. Face it.

(It’s at about this point bank executives will point to impressive mobile app growth figures, but I’ll come to that later…)

VCs Smell Blood

Is it any wonder then, that disruptive innovation is coming to both the finance and legal professions? With finance it’s started to gain real momentum

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The venture capitalists smell blood, and whilst generally I’m not expecting banks to disappear as rapidly as Kodak or Myspace did there is definitely an argument for death by 1000 cuts with two major headwinds hurting banks

  1. The pressure from regulators to increase capital ratios and competition in the market place, meaning that the days of easy profit are over
  2. Alibaba, Amazon, Tencent and Facebook all have banking licences. Alibaba offers lending, credit scoring (link) and insurance products and uses massive scale to do this with an entirely different pricing model.

The parallels are often made with the taxi industry where heavily regulated incumbents were able to keep prices and margins high. I doubt there will be an Amazon of banking, but there may be an Uber (in fact Mark Carney worries banks are facing an Uber moment). I’d define the Uber disruption as a large machine, willing to lobby to win that benefits from the economies of scale offered by technologies such as cloud, crowdfunding and p2p lending.

If large incumbents want to survive and thrive there are good alternatives to innovation by committee.

1. Buy Innovation

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Funds, Incubators and Accelerators are all the rage these days. Every major bank or financial service vendor has something, which tells you at some level they take the threat of innovation seriously.

Buying innovation allows start-ups to innovate outside the organisation then buy them in the product, subjecting the product only to vendor processes or M+A which is far less painful than trying to give birth to something inside a large corporate. By the time a product is being considered for purchase by a corporate, it’s already escaped the death grip of false certainty and design by committee.

I look at IBM as being good at this strategy. Their internal R+D has historically given birth to many concepts we now take for granted only to have someone else commercialise them, yet inversely they have proven their ability to buy innovation makes a material difference to their balance sheet, with 8 acquisitions in 2013 alone

2. Acquire / Build Challenger Brands

There are numerous definitions of a Challenger Brand, but the one I like is that a Challenger Brand wins through mindshare rather than market or marketing spend share. Today the challenger brand is the rule rather than the exception. Airbnb, Uber and even the mighty Apple are all considered challenger brands by CMO.com.

The Fintech names on the chart earlier in this blog are all challenger brands, characterised by a strong core message that is backed up with product experience. Banks are hiring the same world class marketing consultants, but aren’t backing up the messaging with real culture and product experience change. You can see this in the net promoter scores with funding circle seeing +89% with banks running in the -10% to -30% region

The large incumbent banks know their core customer base will be around for a few years yet, but they’re simply not winning the next generation of customers. In doing so missing a large opportunity as a whole generation becomes aware of and starts to use challenger brands before needing or relying on a bank for all of their financial needs. Perhaps when buying innovation, banks could think about what external brands they keep alive and the value in separating that from their core brand. Typically products born inside the organisation will come out very on brand, because the brand police sit on one of the many committees…

There are however, some good examples of banks buying a challenger brand (e.g. BBVA Acquiring Simple), and keeping it’s brand alive. Would a Moven, or a Final Card gain traction with strong core capabilities underneath them? Can banks embrace this before they sleepwalk off a cliff?

3. Build an Engineering Culture

Even in 2005  ”Agile” was a buzzword, and 10 years on inside large organisations there is still an epidemic of paying very detailed lip service to the idea of Lean / Agile without actually understanding it.  Going on a training course for Agile is doing it wrong. Just imagine replacing that with a 1 day Raspberry Pi hackathon for all your staff, and nobody is allowed to say the world Agile until they got something working.  Seem out of place or weird?  How about for Google, or Airbnb? … 

The real issue here is the lack of an engineering culture. Companies don’t do, they talk. The fear of an engineering culture is that tech must be seen as owning the “technology how” but have no input on the “what”.  The business “owns” the what.

Taking a voice from engineers and spreading it throughout a committee limits empowerment, autonomy and collaboration.   This is especially acute in such a hierarchical organisation that will always look upwards for sign off and permission as a way to resolve any conflicts that arise from the committee structure or between business and tech.

The Silicon Valley magic isn’t that they have better MBAs writing the internal business cases, it’s that their engineers are typically the age and demographic of the customer base they’re going after.

The cultural bias of Generation Y is baked into every line of code.

Amazon’s Jeff Bezos has a concept called Pizza Box teams. The idea being a team working on a product or project should be no bigger than you can feed with one pizza box. This is typically harder to do inside a big bank, because the entire committee structure will want to sit on the team of 7, but wouldn’t it be fun if they tried?

4. Face the Facts

When internal reports read like a press release crated from cherry picked KPIs, it makes you wonder why. It probably has something to do with ego,  bonus culture and a lack of bandwidth for management to be critical of every KPI that is waved under their nose.

If your mobile transactions are up 200%, how does this benchmark against the competition both traditional and new entrant?

I’ve never heard a conversation in an incumbent bank about how “the MAU (Monthly Active Users) trended higher when we took 0.5 seconds off the App Intro screen”, or that “DAU (Daily Active Users) spiked 30% when the interface was refreshed”. These are the things challenger brands obsess over. User engagement isn’t a buzzword, it’s how your customer feels about your product reflected in how they’re using it.  Everyone should be talking about it.

5. Empower Autonomy of Decision Making

If you’re in a rapidly changing marketplace like crypto currencies, how do you empower employees with autonomy to execute? There is a need to “power down” and push decision making to those who demonstrate a solid understanding of the changeable nature of the market. Often these employees will be younger and new to the organisations culture. How do you create safe space for this exploration and how do you ensure the organisation can embrace it? The key is finding the right place to give visibility and having the management talent that can harness the creativity. There is a good chance this exists somewhere in the organisation, the challenge is putting the two together.

Perhaps the Pizza Box teams concept holds the key.

6. Fail More

Definite Failure is vital. Nothing ever fails in a large corporations, typically failures fit into two categories, money bonfires and zombies in the wilderness. Money bonfires have so much political support, false certainty and a lack of data to the contrary that the project keeps stumbling forward. Zombies become marginalised until eventually you just stop worrying about them and they go away. This robs the organisation of the ability to learn from failure and collect data. The very keys to success.

The really odd thing is that at a personal level most executives will admit their biggest failures made them who they are. Yet media training and culture prevents organisations from allowing this level of honesty and frankness internally. It’s very difficult to tell the truth without hurting someone’s feelings, but I’d argue it’s more dangerous to avoid the truth to save someone’s feelings when the regulator and innovators are breathing down your neck.

The Moment of Truth

Is there a bank account there with the bravery to really embrace these ideas? Becoming genuine internally is the key to being authentic externally and winning a whole new generation of customers, and it will show in the products and services. Are bank employees empowered to make this change? Time will tell…

Simon Taylor – Making Innovation Work