Banks & Fintech

Banks and digitalization – four key problems


🐣 Disruption is coming to the banking and finance sector
💰 Stable profits doesn’t mean there aren’t problems on the horizon
🚧 Problems are structural and managerial


👀 To meet an uncertain future, incumbent banks need to fully understand and face four key problems:

📅 The last decade was easy – harder problems to come
📦 Startups are creating new bundles
🛠 Digital business development requires a new skill set
💪 How to manage change


🟢 Create an operating system instead of a strategy
⁉️ Be careful how you define your problem and challenges
☯️ Your values is a part of navigating change and development
🎯 You are telling a story about the future. Think in narratives. 
📢 Communicate extensively along the narrative. 


In the past decade we have seen many industries failing to reinvent themselves, and as a result they have experienced unparalleled stress to restructure business models and finding new revenue streams. We’ve even seen businesses with high barriers to entry tumble. In all of these cases – digitalization has been the single most powerful driver. 

In disruption forecasting – banking and finance have long been on the list of businesses in which change inevitably will come. For now though, banks have been delivering fairly stable profits during times of change, some of them even growing profits on a ten year horizon. But they might be in more trouble than the profits suggest. Changes are coming. But for now, it seems it is taking place mostly outside of the spotlight. 

So what?

So what are the changes taking place under the surface? What are the structural challenges facing banks and financial institutions? Depending on where you sit – should you be semi-scared, really scared – or as Jamie Dimon – scared s—less?

Jame Dimon is scared

To discuss this, I was recently invited to do a podcast (in swedish only) with Martin Centerman and Niklas Roupé who runs management, and digital consultancy Bombay Works.

I felt the urge to go just a bit deeper than what was possible in our discussion, and to clarify some of the topics we talked about.

Straying slightly from the structure of the podcast, I think there are four key areas in which the structural, process oriented and managerial questions will be decisive for the outcome of banks versus fintechs. The context is by and large Sweden and the nordic banks, although most of these issues are things that are applicable across borders and industries.  

Problem 1: Be aware of harder problems to come

The past decade was challenging, and lots of difficult changes were dealt with to initiate the digitalization of banking. These challenges were predominantly about digitizing already existing processes. For banks, this means paying your bills, transfering money, saving in mutual funds and stocks etc. The underlying structure of most banks were untouched, with branches catering for personal service, and providing holistic advice and solutions to undefined needs and by doing so, creating trust and loyalty. On top of that, there were digital solutions for self service and daily upkeep of your economy.

This logic is being reversed. With some certainty we can agree that the daily upkeep of your economy will be automated (self-driving finance). Like, just don’t bother me with what can be done by setting a few simple rules. The branch and its virtues will become a digital solution and as such provide holistic and specific advice based on my situation and context. The personal, relational aspect will be a part of this experience, just not a very physical one. 

Also, what most banks need to start figuring out is how banking and finance will be redefined in the coming ten years. The great business model reinvention. A hint; Look at the smaller fintech startup scene and the explosion of business development that is taking place. It is literally the epiphany of deciding to discard the idea of a faster horse for a car. New, novel ideas are being tested, discarded, pursued and integrated in an ecosystem that senior management do not fully grasp.  

A worrying development

Many fintechs for the last decade have been more focused on the front-end facing aspects of fixing the customer experience. Banks have been able to keep up with this development and fend-off competitors offering basic services such as “get a credit-card-and account” and a smashing app UX.  

As things now mature, two things are unfolding. Fintechs are starting to emerge further back in the tech stack, posing a serious threat to banks as an infrastructure play. Players like Plaid, Tink, Stripe are aggressively pushing BaaS (banking as a service). 

As the ecosystem of structural services grows rapidly, even non-fintech companies adjust to the fact that they too can add financial functionality to their offering. Two major things here: Shopify works with Stripe with a banking solution for merchants and Walmart is launching an initiative together with Ribbit to deliver “tech-driven financial experiences tailored to Walmart’s customers and associates”). Fintech is becoming embedded and leaving trad-banks out.  

And number two; startups, specifically the customer oriented ones are creating new bundles, which is my next point.

Problem 2: Startups are creating new bundles

Klarna can hardly be dubbed a startup any longer – by now, they’re a billion-dollar corporation. The interesting thing though, is the cycle of bundling and unbundling that we keep coming back to. It really is such a powerful concept that keeps playing out in all kinds of businesses. By starting out with a single product offering, you gain a foothold. You learn, and adapt – and then you grow. Today their offering is wide ranging and there is no foreseeable end game of what to come. On the previous point, made above – Klarna and their peers are more likely to be the ones defining financial services for the coming decades than the banks of yester years by creating new bundles and dimensions of what a financial provider is. 

And banks are unbundling

At the same time, the concept of the universal bank is dying, and has been for a while. Why is this? 

Well, for starters, the value of the bundle is diminished if better services are provided outside the bundle (Like Klarna for example). 

And the value proposition of universal banks, to provide everything under one roof is also diminished, as multiple service providers are but a click away. In fact, they already are in the same interface – just next to each other on your smartphone home screen. Switching cost and the cost of having multiple providers literally goes to zero.

Also, competing with software driven startups puts great demand on the entire organisation. And to integrate whitelabel is cumbersome and riddled with technical and security issues further putting pins in the wheel for large corps. Therefore they reach an impasse that is hard to cross. They feel the need to unpack, and break their own bundle to focus on profitable parts of their business. Which, in due time will be put under pressure by outside players. You starting to see how this goes down? 

Problem 3: Digital business development requires a new skill set

The last physical artifact of banking is branches, coins and bills. So, post branches and physical money banking is a completely digital business. In time, this will happen. Because of that, they’re being hit extra hard when it comes to digitalization. A reinvention is needed on every level of the organisation. 

  1. The need to create a completely new type of customer meeting and create superior digital experiences. 
  2. Create internal efficiency and handling legacy and technical dept and adding new functionality at a rapid pace
  3. Using data and insights to create new business opportunities and closely related, decentralise innovation 
  4. Transformation of methodology and working processes, from project driven organisations to lean agile  

The prison of the present

To address all of this simultaneously is a really difficult transformation for most organisations. And many tend to be stuck in something called the prison of the present. 

I think I dare to say that there isn’t a single management team that hasn’t discussed the idea of greenfielding and creating a separate entity all together. A new brand, a fresh start, unencumbered by the realities of history and politics and technical legacy. There are of course many legitimate reasons to not go down this route, but what really is making it so difficult? Well, at least three things coalesce to create the prison of the present. 

Data is misleading

As i pointed out earlier in this text, the profits might not be suggestive on the actual problem banks are facing. As long as we can find enough evidence of things being under control, we see few reasons to change. One of the reasons we find evidence that things are going well, is that we have a tendency to look at lagging indicators to predict our current situation and our strategic route forward. This is like driving a car by looking in the rear view mirrors. Once you realise you’re going the wrong way, it’s too late.

Customers won’t tell you what to do

If a customer tells you they want a better version of the services you provide, you can be certain that your competitors will hear the exact same thing in their focus group. That will lead you to average results at best. If instead, you interpret, envision and create new products, services and markets – your results at least have the possibility to outperform your competitors. 

Remember that if you change at the same pace and on the same trajectory as your competitors – you haven’t really changed. You’re still stuck in the prison of the present. It’s a game of relativity. 

If you want to escape the mainstream, look elsewhere. Dare to look from within. What values and ideas lie dormant in your organisation that is worthy of reinventing. What differentiates your business? Work with that. See where it will lead you. If you’re stuck on features. Get unstuck. Instead, place banking in the context of people’s lives and what needs you support and aid along the journey of life. Being careful and prudent with your finances could and should be inspiring and something enjoyable.

Business model is standing in your way

A cash cow is a blessing and a curse. Everybody knows it doesn’t last forever, and at some point cannibalisation must come into the equation. What would the board of directors at Blockbuster take if crunching the numbers of sending DVD’s to customers via post (Netflix 1.0), or even the subscription streaming model? Approximately 16 percent of Blockbuster revenue came from late fees. Their current business model was standing in the way of future possibilities. 

Problem 4: How to manage change? 

The analogy of Titanic might be overly dramatic. But it’s suitable insofar that there’s a time for rearranging deck chairs, and a time to start putting out the lifeboats. If we can avoid all this by steering clear of the icebergs, that would be optimal.  

But change is not a linear process. In fact, it is extremely volatile and full of random events that increases complexity. We might actually have to rearrange deck chairs and send out the lifeboats simultaneously. But where to start? 

One of the greatest problems with change is that it tends to lay bare any conflict of interest that persists in your organisation. To achieve change, these need to be dealt with. Crucial questions that demands clear answers include – where are we – where are we going? We need to agree on this in order to make any real change. 

Complacency trap 

Most organisations with a successful history suffer from the complacency trap. There’s actually a continuum of complacency and urgency. On the one hand of this continuum we take extremely well planned and anchored decisions which usually takes a lot of time, and on the other hand, we take rash, intuitive and often to spontaneous decisions. In most cases we need to find a point somewhere in between. 

Many companies are conservative, and a bit slow. But there’s a point to that. Just as in politics there is a structure to slow down decision making to avoid mistakes. You’d never steer a tanker by turning the wheel 180° – you do that by slightly adjusting the course. Once your organisation get’s moving along the new course, you are difficult to stop. 

Decentralizing innovation

The most successful organisations guide through values and a common understanding of direction, and give people influence and mandate to take decisions independently. There are many examples of decentralisation working far better than a top down model.

As businesses become more dependent on IT, two structures that previously interacted via a demand and deliver type interface now need to interact, cooperate and work together.   

What needs to take place is a shift from projects to team based continuous development. Organizations need to build a sustainable ability to create value, no matter how the technical or the competitive landscape functions at any given time. In a matrix organisation, far too much time is spent on waiting on assignments, moving people around and long term planning.  You spend your days on project management and allocation instead of creating value. 

Now what? 

We can strategize and plan ourselves crazy, but in the end, nobody really knows what the future will look like. That is why, an operating system is a better analogy and model to strive for than a long term strategic plan. Setting this OS up for adequately handling a torrent of new actors, regulations and industry dynamics is what will be the deciding factor of the coming decade.

Having a functional operating system means to have a set of heuristics, rules and values to handle things that lies deep in your organizational weave.

From a leadership perspective, understanding the above, and guide by setting a clear direction is probably the most crucial assignment. That entails, being careful how you define your problem and challenges. Understand the role your values and core ideas play when navigating change and development. Use that power.

Also, remember you are telling your employees and the world a story about the future. Think in narratives and communicate along that narrative.