The Henry Ford School of bank digitization
Ask banking executives about their top priorities and you are likely to hear that they are pursuing “digitization.” But it’s not immediately clear what this term means. How is it different from automation? The easiest way to grasp the contrast is to think of how digitization has transformed music purchases, travel booking, grocery shopping and taxi services. Banking is moving in the same direction, but conventional banks aren’t leading the charge.
Successful banking digitization is occurring on a product-by-product basis at nimble new non-bank competitors known as “fintechs.” Conventional banks should be worried. Think of payments: PayPal, Apple Pay. Or personal loans: Quicken Loans. Or small business loans: Kabbage. These new entrants will continue to unbundle and cherry pick a conventional bank’s most vulnerable products, just as the Web stole classified ads and stock prices from newspapers. And when they find something they like, the fintechs quickly push automation and self-service levels to 100%.
From Automation to Industrialization
By contrast, conventional banks today are mostly operated manually. Although workers have state-of-the-art computers, current estimates peg automation in banking at only 20% or less. Our experience working with more than 100 banks bears this out.
Keeping banks competitive requires more than just shinier, new technology. Further automating what bank employees do now will only help them do unnecessary things faster. The better first step is to make sure employees are doing the right things the right way. Our analysis of tens of thousands of job positions reveals that around 40% of bank workers’ manual tasks can be eliminated without upgrading technology. Then, and only then, are the remaining activities ready for automation.
We call this transformation model “industrialization” because its principles originated in the early years of the 20th century – think Henry Ford’s development of the ModelT. It was quickly adopted by manufacturers and delivered the most effective wave of productivity improvement the world has seen. As manufacturers embraced industrialization, however, office workers ignored it.
In one bank, for example, unclear information on mailings to customers led to 40% of the calls received by its contact center. The marketing group routinely created mailings without having operations review the material. On the other side of the bank, the small business lending group classified loan applicants into one of 10 standard groups. However, no written instructions describing these groups were widely available. The bank instead relied on tribal knowledge. When disparities arose between group definitions, the back office rejected the loan application with no explanation. These types of rework would quickly be eliminated in a factory. However, they easily pass for business as usual in a bank.
Full-service banks have major advantages over fintechs: numerous existing customers, product variety, regulatory compliance expertise and extensive resources. But these competitive barriers are easily squandered. Survivors will transform themselves quickly, lowering costs and matching the upstarts’ digital convenience.
Prior transformation efforts, however, have a dismal record. The vast majority started with technology upgrades rather than business processes. Our surveys show that only about 20% have delivered any tangible benefits. Virtually all are late, and more than three-quarters are over budget by more than 50%. Banks need a new model for transformation.
Let’s go back to the Henry Ford example. Around 1913, his company was standardizing parts, eliminating wasted effort and documenting detailed work methods. These improvements were built into the workflow to enable the moving assembly line. That allowed Ford to reduce the assembly time of the Model T from 12.5 hours to 1.5 hours.
At the same time, these methods were proven effective in office jobs like engineering, advertising, sales and procurement. Hundreds of these experiments were described in books, white papers and pamphlets of the time. But office workers and their management ignored them. They continued to work autonomously, just like the craftsmen on the shop floor prior to mass production.
Today, in the modern bank, they still do. At one bank’s mortgage subsidiary, written instructions for escrow calculations are available and all new employees are trained. However, mortgage group employees conduct only minimal follow-up to ensure compliance, productivity and a consistent experience for customers. Consequently, most escrow calculations are based on a combination of tribal knowledge and individual improvisation. Over 30% of calculations do not comply with the instructions.
Sales officers provide low-ball escrow estimates to salvage a sale. Those low estimates are exposed only after the customer is approved. Consequently, over a third of escrow calculations require rework later, annoying the best customers and increasing default risk for the worst. Over in the mortgage call center, a quarter of incoming calls are escrow-related. Half of those require direct contact with the servicing departments, leading to the creation of a “First Call Resolution” team at a cost of millions.
Basic shop floor techniques could also easily standardize and eliminate this waste, but knowledge workers don’t see it as waste. They will tell you they are preserving revenue and making the sales staff more effective. They believe their work is essential, and it is. But it is also avoidable. They are closing the numerous small operational gaps created by undocumented business processes, inconsistent tribal knowledge and free-for-all work methods. They are engaged in “virtuous waste.”
Similar tasks existed in the early years of manufacturing before parts were standardized. Semi-skilled workers closed small gaps in imperfect parts to enable final assembly. Like today’s knowledge workers, they performed essential tasks that enabled assembly and preserved revenue. But as metallurgy and measurement improved, these fitters and finishers became unnecessary. Within conventional banks today, a large swath of each knowledge worker’s day is devoted to similar “fitting and finishing.” They work with data now rather than metal and wood.
Fintechs win customers by finding value in repetition and automating –“digitizing” – it. Banks need to be able to do the same.