by Susanne Chishti, CEO FINTECH Circle & FINTECH Circle Institute
Over the past five years the fintech market has continued to thrive. Global fintech venture-capital investment has soared from $8.5 billion in 2014 to $36.6 billion in 2018. China, the US, UK, India and Germany emerged as the top five countries in terms of fintech investments globally. Over this period, we have seen many more corporates and corporate venture capital funds participate in ever-increasing funding rounds for fintech scale-ups – accounting for a third of global fintech investments.
That does not come as a surprise considering that most leadership teams in banking are concerned about the changing competitive environment across financial services. Digital transformation is a frequent agenda item in board meetings, as the market has shown how much more it values digital companies than traditional banks.
According to BCG, personalisation can boost product sales by 30 to 40 per cent in some retail banking areas, and cut customer churn by 10 to 30 per cent while at the same time doubling or even tripling customer engagement scores. So being digital clearly has a strong bottom-line impact.
It’s not a surprise, therefore, that all banks go through digital transformation programmes. But what is surprising is that the majority of them fail. Last December, The Wall Street Journal reported that businesses predicted digital transformation to be the biggest risk factor in 2019. McKinsey research showed that 70 per cent of complex, large-scale change programmes do not reach their stated goals.
Michael Wade, Professor of Innovation and Strategy at IMD Business School, went even further and found that 95 per cent of digital transformation programmes fail, due to inflexible company structures and culture. He found that the biggest barriers to innovation are rigid business silos and the resulting non-collaborative culture.
So what are the top five reasons digital transformation programmes fail?
1. Lack of ownership and “digital transformation” skills at the C-level
Company strategy that includes digital transformation must be owned by the CEO and the top management team. Digital transformation initiatives in banking without top leadership backing will not work. And even if the CEO and his team truly show ownership, most leaders do not know how to lead digital transformation.
Many of us learned core business and financial principles combined with strategic planning skills decades ago, which worked for the majority of our careers. As a result, leadership in financial services has great intuition in traditional business models and industries – however, our education and gut feeling often clashes with the new-platform economics of tech giants, their business models and digital competition from non-banks.
Top management in banking need to learn how to compete in this new world, where success is not only measured by keeping pace with industry competitors but having appropriate strategies in place to compete against tech giants and collaborate with fintech start-ups and scale-ups.
Few leaders know how to change a traditional culture, encourage an entrepreneurial and transformative mindset and collaborative behaviours from the top-down. This naturally leads to lack of employee engagement and the inability to sustain the impact of a transformation programme long-term.
As a result, not having a strong fintech and digital transformation leadership at the top leads to a range of complex and expensive issues which are almost impossible to fix later.
2. Narrow focus on new products and services instead of a wider focus on new digital business models
It is a great step forward to launch digitally empowered products and solutions which retail and corporate customers truly find valuable. We can, however, often see disjointed and tactical initiatives which do not reach their full potential because they are being seen as disruptive or not a priority for the existing business heads.
It is difficult to develop and launch new products and services successfully, however reinventing one’s business model is even tougher. Business model decisions are made at board level as they often require capital reallocation across different business units such as retail, corporate and investment banking, asset management or private banking. In order to digitally transform a bank, digital platforms and data sets need to be unified across the bank and wide-ranging decisions have to be taken.
In summary, digital disruption is happening faster than ever and we have reached a tipping point where incumbent business models are threatened. Bold banks will survive and do well and create new digital business models; other banks will respond too late and fail or move into niche markets because they only succeeded in introducing new products or services but not digitally transform their whole organisation.
3. Lack of customer focus and not understanding the reasons for change
In today’s world we all suffer from information overload – daily we skim-read about new industry trends and technologies from big data analytics, blockchain or distributed ledger innovation, artificial intelligence, the internet of things and virtual and augmented reality. In fact, the FINTECH Circle Institute has conducted a study which showed that 97 per cent of all financial services professionals suspected their peers to use buzzwords such as “AI”, “blockchain” or “robo-advice” without understanding their meaning.
So when considering digital transformation, it is easy to get focused on the latest, cutting-edge technology which promises unrivalled results. However, there is a risk that we forget the main reason for digitally transforming our businesses: our customers. We need to be able to ask why digital transformation should take place, and understand that the ultimate objectives should always prioritise improving the customer experience and delivering enormous value to customers. This requires the bank to test, learn and adapt its strategy to meet and exceed customer expectations and pivot when necessary.
4. Inability to build a fintech ecosystem
McKinsey reports that winning companies will have to think in terms of ecosystems, stating that “by 2025, almost a third of total global sales will come from ecosystems”.
For banks creating a platform-based strategy where the bank provides the technology and operational platform which allows the best fintech companies to connect via open APIs and offer their services (either white-labelled under the bank’s brand name or under their own brand) to the bank’s customers, is critical. A successful fintech ecosystem allows banks to become the orchestrator of fintech start-ups and scale-ups, tech suppliers, tech giants, investors, regulators, financial media and fintech influencers, service providers and customers. Banks need to create their own ecosystems or partner with firms such as FINTECH Circle which has built such an ecosystem over many years.
Having a strong ecosystem allows banks to move faster and develop a learning advantage. The goal is to test and learn in iterative cycles, launch minimum viable products (prototypes) in short time spans and reduce the development and go-to-market time across both business-to-consumer (B2C) and business-to-business (B2B) propositions.
5. A skills deficit and compensation model which does not reward entrepreneurship
Firstly, staff need to be empowered by high-quality training to understand the world of fintech, which fintech companies exist and what they offer, how their business models work, how start-ups operate and how entrepreneurs launch successful businesses with limited resources. Understanding lean start-up methodologies and agile development frameworks are also invaluable knowledge when leading and implementing large digital transformation programmes within banking. In fact, having a diverse and experienced team with these skills – consisting of many entrepreneurial talents – is a critical competitive advantage for any bank. Talent and skills development via FINTECH MasterClasses, for example, builds the innovation muscle of an organisation, which need to be as strong as possible across all areas of the organisation to correctly analyse and respond to digital disruption.
Secondly, after people have been empowered to understand and execute digital transformation objectives, it is important that they are rewarded accordingly. If the old-style compensation model and bonus system continues where risk taking and being part of successful change initiatives is compensated less than generating revenues in the front-office, corporate transformation roles will not be an attractive career choice in financial services as it will be tedious to fight the headwinds of large bureaucracies being surrounded by people who do not want to change. The entrepreneurial people also have the option to jump ship, leaving their banking jobs and entering the world of fintech as founders, advisors to start-ups or non-executive directors of fintech firms. The risks and rewards of running your own business or advising fintech firms are very different to the risks and rewards of being an employee in a bank.
Still, being a successful innovator and intrapreneur in banking is one of the toughest jobs out there. So it follows that it should be one of the highest paid, as it is hard to lead and execute digital transformation which often contradicts the private agendas and personal objectives of many senior leaders in the organisation. Digital transformation leaders need to be compensated for the personal and professional career risks they take and know that they are fully backed by the CEO and the top management team.
As digital transformation is the biggest concern for CEOs and senior executives in 2019, and more than 70 per cent of all initiatives fail, the true leaders who can make them work are rare and worth their weight in gold.