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Delivering on the digital economy
Delivering on the digital economy
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Delivering on the digital economy

07/09/2016

To avoid being left behind, banks need to embrace a digital philosophy

Old habits die hard

As Mark Twain allegedly said, “It ain’t what you don’t know that gets you into trouble. It is what you know for sure that just ain’t so.” That conundrum captures the challenge that banks face as they move into the digital age, in which old models of development and management are torn up.

To survive and thrive, they must identify what is at the heart of the digital economy. To reap the rewards of the amazing technological innovation that is happening right now, firms will need to explore disruptive development models, rather than sticking to old ways of working.

Professor Ben Shenoy, Director of the Business Insights Lab, University of Surrey, uses the example of ice farming – cutting and shipping ice to customers to support frozen food. It was undermined when electricity led to the invention of the first refrigerators. However ice farmers’ strategic response was not a graceful exit but to increase productivity by 300%.

“There is something called the dominant response; we have deeply learned habits and under stress we exercise habits harder,” he says. “We pedal harder on the bike when maybe we should get off.”

Engaging disruption

For business, the challenge is really how to engage with disruptive technologies, in order to avoid disintermediation. Shenoy argues that much of what is taught in a business school is fit for a different world.

“There is a fundamental assumption in traditionally-taught corporate finance, strategy, marketing, and project management which is that when you start an initiative, you know what you are trying to do,” he says.

That is no longer true; development from experimentation encouraged within firms such as Google, creates tools that become the core of multimillion dollar start-ups. Traditional firms need to understand how they can lead, organise, and manage when disruptive technology is developing often without a defined objective.

Shenoy cites the evolutionary model of adaptation, in which random mutation typically lasts for one generation. A very small percentage of those mutations survive and propagate. In humans, examples include the opposable thumb, the large pre-frontal cortex, or the shape of hips that allow people to walk on two legs. Equally from the thousands of financial technology (fintech) firms that are in existence at present, only between 1% and 5% bear fruit.

“Across domains I have not seen any evidence to increase that rate above 5%,” says Shenoy. “To increase the rate, often firms increase the throughput, in the hope of getting more. One can quickly see that the recipe for ‘operation’ is basically the opposite of the recipe for ‘innovation’, in that the first drives down variance while the second maximises variance, knowing many will fail.”

Order in chaos

BNP Paribas Securities Services’ approach has included the creation of a new Innovation and Digital Lab on 1st of May 2016 grouping together people working on a number of digital topics. It reports directly into Patrick Colle, CEO.

The lab has several objectives; to define the firm’s digital strategy, where it needs to invest, and how to co-operate more with clients on the innovation of processes. Three major streams are currently underway; blockchain, big data, and automation (or robotics). Additional topics are being added to the lab including a project on product lifecycle management. The objective is to advance the firm’s services and look at any new business model that could be built or developed, with blockchain capability already launched in some areas.

The lab will be equipped with delivery capability and a number of engineers to incubate, accelerate and deliver prototypes that can be tested on the rest of the market. They can then design the business case and launch the new ideas. The firm has a team looking at innovation and fintechs with the following objectives:

  1. To foster innovation throughout the bank using methodology, design syncing, and the rolling out of tools that everyone can use. 
  2. To optimise processes, using the capability to work with robots and artificial intelligence so that concrete applications in day-to-day life can be developed. Ideas already being explored include enhancing client experience, account opening and tax processing.
  3. To handle the regulatory, legal and finance aspects of innovation. On this front, the lab is well connected with the regulator and has a lot of interaction with the public affairs teams on distributed ledgers.

Lessons in handling digital disruption can also be taken from other industries, notes David Harvey, Principal Consultant at Banking & Securities Practice, Dell Services, with companies that are delivering new technology and a superior customer experience such as Apple and Amazon being considered.

“I really enjoy the opportunity to talk with a lot of businesses about what they do,” he says. “I am genuinely interested in what they do, and what often differentiates them is that they have a very clear vision of what it is that they want to achieve. Successful companies have a clear vision.”

Shenoy notes that collaborating with and listening to customers enables firms to learn with them rather than just from them. The creation of ‘sandpits’ to build crude tools, then play with them alongside customers, experimenting in a controlled environment, can be useful. Radical ideas need to be considered, such as large banks sharing common IT systems in the future.

“I came out of the Credit Union industry running one of the largest credit unions in Australia, and that was fascinating because of the level of active collaboration and independent businesses sharing resources, they had a single IT system supporting all the different brands and operations,” says Harvey.

Philippe Ruault, Chief Innovation and Digital Officer, BNP Paribas Securities Services says “It is potentially something we should do, especially on the data side of the business. Bringing our data to our clients and helping them to play with analytics.”

Terms of engagement

There are thousands of fintech firms and the question for the industry remains how to engage with them, to leverage their agility and innovation.

Harvey says, “fintechs are often taking work that a bank does and doing it better to gain a competitive advantage. Banks have sometimes been limited in embracing new technology since 2008, due to the more urgent need to address ever increasing regulatory challenges, whereas fintechs are starting from a clean sheet of paper.”

This is highlighting the legacy technology banks are burdened with, he notes, and the failure of some banks to be able to launch new products or to deliver an efficient process on mobile phones, for example. It is also serving to highlight the changes that the industry needs to make in order to reduce other pressures.

Shenoy says, “This is a fascinating area philosophically because where blockchain started, the banks are the enemy. How as a bank do you establish a conversation with [fintechs] when they start from that position? There is a risk that if firms each create their own blockchain standard they are creating massive multi-intermediation at a huge scale. So creating an alliance is important.”

The industry can learn; with alliances forming around open source technology and projects like blockchain, cooperation is increasing. A hurdle for banks to overcome is that while they are focused on ways to reduce cost, experimenting implies some waste, which is very hard for firms to handle while reducing cost.

“From what I have seen of the data, I have not seen anyone figure out how to increase the conversion rate [beyond 5%],” says Shenoy. “Open innovation lets firms share the innovation and the waste by pooling resources. A lovely definition of entrepreneurship is: ‘The relentless pursuit of opportunity irrespective of resources.’ The point about creative destruction is that when you are facing destruction you get really creative.”

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