That sound you’ve grown accustomed to—the grinding of dulled gears and the banking of humbled heads against office walls—is banking industry disruption wrought by technology moving faster than ever. A generation ago something revolutionary like Excel happened every few years. Today the “next wave” seems to be measured in days, especially when you factor in the juggernaut known as artificial intelligence (BAI’s 2018 Trend of the Year).
In the first of two pieces, we’ll look at how the shrinking of high-tech lead times has forced banks to rethink their strategic planning. Rest assured, there’s no point in finger pointing when it comes to who can’t keep up and why. There simply isn’t time to digest all the tech changes overtaking financial services. Yet market realities won’t stand still, especially when upstart startups rush to take fill the voids banks can’t—no matter how good the reason.
Setting the high-tech stage: Moore is more
It was not a banker but a tech genius who foresaw the current fintech environment perhaps better than anyone. Intel co-founder Gordon Moore noted in the 1960s how the number of circuits on a chip doubled every year: the now famous Moore’s Law. The first silicon chip in 1961 held just four transistors. Today, we’re up to 8 billion. In light of Moore’s Law, it’s easy to see how AI seemingly rose out of nowhere.
Not that the forefathers of fintech stood still. In 1982, SRI International first applied AI in banking by trying to adapt its Prospector program for mineral deposit exploration to find gold of a different kind: that is, automate a bank’s corporate lending decisions.
And in 1983, internet banking debuted when the Royal Bank of Scotland offered its modem-connected internet e-commerce product. Fast forward to May 2017—when RBS announced that it could process real estate loans of up to $2.7 million in less than 45 minutes.
The bottom line is that time is compressing in two dimensions at once, as the time between technology innovations and the time it takes to apply them in banking are both shrinking. This dramatically compounds the pressures placed on bank strategic planning.
All of this also makes it critical to inform a bank’s strategy based on knowing where technology will most likely go. The best laid plans of banks back in 2016, you could say, don’t compute.
Resource reality check: 20 to 30 times less is more, too
At most banks, the budget and head count dedicated to existing tech can run as much as 20 or 30 times more than what you’d need to understand the technology curve in the near term. Yet that smaller investment can arguably make a greater impact on a bank’s strategic plans. As a consequence of avoidance, personnel slip behind in meeting the challenge to deploy new tools in banking and payments at the same pace as nonbank competitors.
Additionally, banks are much more likely to become unprofitable or get merged out of existence when they fail to predict and incorporate new technologies—as opposed to falling short on branch management, regulatory pacing or advertising spend.
Tweaking the ratio of people and dollars dedicated to the future also works hand in hand with an attitude change. Smart bankers and technologists alike realize that tracking future technologies should go beyond shop talk to walking the talk and embedding that value within strategy.
Waiting to accommodate a new technology until it pops up is a non-starter. In a recent BAI podcast, “Humanizing the digital banking experience,” Digital Banking Report owner and publisher Jim Marous summed it up well: “The change is right now is going faster than it ever has before and will never go this slow again.”
How other industries do more, better
And yet in the midst of the whirlwind, banks need to stop—now—and take a hard look at how and why they’re missing the boat. Arguably, few industries have quite so great a disconnect between their future tech forecasting efforts and strategic planning.
Look closely at, say, the aerospace or successful social media sectors and you’ll see much tighter integration between what a company believes the tech future holds and how it plans to exploit, produce or strategically dominate it.
The rideshare platforms likely to last longest have long planned for self-driving cars in their strategic visions. These startup firms’ financials show that eliminating paid drivers (crass as that might sound) will more than cover buying and maintaining a self-driving fleet to support a growing business.
And in general, the time horizons embraced in other industries’ strategic planning processes often outdistance the banking sector by years—or even decades. Large U.S. tobacco companies pegged marijuana as strategically important to their future in the mid-1970s. That’s more than 40 years before recreational marijuana became legal anywhere in the United States. Back then in banking tech, the very first ATMs were less than 10 years old.
Putting it all together: Tick, tock, tech
So how far behind are banks in their strategic planning as it squares to tech capabilities? In some cases, it amounts to 10 or more years. We can do better.
And in doing so we can maintain and expand regulated financial institutions’ role in the economy. We can reduce how often we’re surprised when a nonbank actor or challenger bank steals the new technology thunder.
Harmonizing the dissonance between our technology forecasts and our strategic plans will not be easy—and unfortunately, there’s no machine we can simply plug the problem into to calculate our way out. But at the very least, tuning up to the high-tech times ahead will have a far sweeter sound than listening to heads bang against a wall—again—in the corner office.
In part two: Action steps banks can take to make the alignment process successful.
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George Warfel has worked in banking and payments for more than 30 years. Currently he is general manager, fintech and payments strategy at IBM partner Haddon Hill Group, Inc. in Oakland, California. He can be reached at [email protected].
