Bureaucratic by nature and subject to an increasingly complex tangle of internal compliance and external regulation, banks approach change cautiously—especially when it impacts how customers interact with them. And with digitization, it’s hardly any different. While bank managers understand the potential business and personal downsides, they often want more proof of the benefits or upsides before they commit. Add the complexity and expense of technology decisions and it quickly becomes clear why many banks have been slow to embrace digital banking.
Kara Swisher, the co-founder of Recode (a website that reports on technology innovation and issues) is also a regular columnist for The New York Times. She recently wrote that she would never buy another car because of transportation options that already exist and digitally-enabled ones now emerging. Despite her close and long-time relationship with cars—even to the extent of giving them names—Swisher opined that “owning a car will soon be as quaint as owning a horse.”
Swisher cites several other examples where people have exchanged long-established habits for digital experiences: “Consider how swiftly people moved from physical maps to map apps, from snail mail to email, from prime time TV to watching on demand.” She doesn’t mention traditional banking in the column but could’ve included it as well.
Many bankers will insist that changing how we obtain directions, send and receive written communication, watch TV, and travel have little to no relevance compared to banking activities. Banks view themselves as pillars of their communities, stable sources of loans, protectors of deposits, etc.—while bank managers frequently regard themselves as entrenched in our society and how we transact our day-to-day lives.
But other disappearing activities were also once viewed as essential not even a decade ago. Like: Unfolding a map. Waiting in a post office line. Or hailing a taxi in the rain.
Some bankers actually dismiss those customers who work with digital providers. They argue that small businesses that use fintech lenders lack an acceptable credit profile, or that millennials going digital today generate low profits and will return to the traditional banking system once they get older.
But such reasoning has its flaws. Many of those small businesses borrowing from fintechs are already bank creditworthy; in fact, some borrow both from kinds of institutions. When they opt out of banks, it’s because they demand quicker decisioning and better customer experience.
Similarly, millennials and other consumers open accounts with fintechs that may target a customer’s desire to work with a socially aware company; use an investment advisor who emphasizes high-tech service with personal advice only when needed; and/or meet other specific desires that banks simply can’t address as expertly.
Even bankers who recognize the changes often predict (or wish) that they will occur over a long time frame. One banker recently suggested in an email that while customers may reach a tipping point, complete changeover to a digital world will happen slowly: “The shift will take generations of change rather than a few years, in my opinion.” He also talked of customers moving to another bank rather than a non-bank player, which seems an incomplete assessment: Many may not exclude banks, but may not include them, either.
By contrast, many financial services investors are putting dollars into the digital enabling of consumer banking, business banking, investments, payments and more. Their companies aim to either partner with banks or in some cases compete with them.
Given how rapidly other changes have occurred, it seems more a hope than business reality to predict that banking-related changes may take “generations.” Of course banking is a regulated industry, which makes direct competition difficult for new entrants. But as noted above, many do not compete head on with banks. They pick spots where they believe they can differentiate themselves—and while banks hope regulators will clamp down on these new entrants, there’s no guarantee that will ever happen. In fact, some members of the new Congress seem more focused on tying down banks rather than their competitors.
Swisher certainly sounds on target when she writes: “Simply put, everything that can be digitized will be digitized.” The digitalization of banking is inevitable. The banker quoted above was correct to say that banks could take generations to change. But let’s be clear: That is due to internal organizational issues rather than customer demands. More customers expect a digital bank experience today and will increasingly select financial institutions based upon their digital savvy.
Chris Skinner, a well-known commentator on digital and finance via his blog The Finanser, recently summarized one reason banks may take generations to change: “The challenge … for the CEO and Chair when engaging in digital transformation is to recognize that there are layers working against them.” He characterizes his recommended path to becoming digital as being “ruthless.” Basically, he calls to “wipe out” those who resist change: “To change the organization you have to change management first.”
Is it too early to say banks have lost the digital revolution? Perhaps. But a great number must refocus immediately and make digital a number one priority. That is particularly difficult when earnings remain relatively strong, the economic outlook positive, and many banks operate paternalistically: putting up with rather than dealing “ruthlessly” with internal and managerial roadblocks to progress.
But remember: Earnings once remained strong and the economic outlook positive for slide rules, taxis, and paper maps. And while maps store well when you fold them, banks do not. Lost and left behind on the information highway, they will find no app that points them back in the right direction.
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The president of Financial Institutions Consulting (FIC), Charles Wendel is a regular contributor to BAI. He can be reached at CWendel@ficinc.com.
Listen to Charles Wendel on a recent BAI Banking Strategies podcast, “Aiming to please SMBs.”