In the early- to mid-1900s, banking and excitement went together, well … like water and oil. So much so, that very few people considered making it their career.
American economist Paul Krugman puts it this way: “…when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.”
This all changed in the 1980s.
Risky wheeling and dealing replaced what was once a staid atmosphere. Salaries and bonuses shot up. And bankers even got the Hollywood treatment, with films like Wall Street and the aptly titled The Bank portraying bankers as rich, hard-partying, glamorous types.
Lehman Brothers’ collapse in 2008 and the ensuing financial crisis brought the excitement to an abrupt end. Suddenly, politicians, the media and the average, everyday people who bore the brunt of the fallout were all railing against bankers’ excesses. And financial commentators — from Krugman to 2016 presidential hopeful Bernie Sanders — called for banking to become boring again.
But what does “boring” mean for banking in the digital age?
Must banks be cautious and conservative at all costs?
More importantly, if they don’t take any risks, how do they fight back against the tech companies that are cutting into their market share?
50 shades of “boring”
If “boring” means regulating the industry in a way that prevents another financial meltdown from happening again, Krugman, Sanders and others who say we should “make banking boring” are dead on.
In a 2009 research paper, economists Thomas Philippon and Ariell Reshef argued that periods of excitement in banking inevitably precede a catastrophic event. Case in point, while bankers lived the high life during the roaring 1920s, rampant speculation eventually caused the financial system to collapse in 1929, leading to the Great Depression.
The Great Depression was followed by a period of “boring” banking. But once regulations were relaxed in the 1980s, the banking industry became exciting again. And the cycle started over.
In this respect, it’s clear that making sure banking stays “boring” is desirable. The problem is that a heightened regulatory environment — since 2010, banks have had to deal with thousands of complex, highly technical regulations — has also made banks risk averse in areas where this isn’t good for business.
When “boring” doesn’t wash
While banks are expected to be “operationally boring,” they have also developed a cautious and conservative attitude towards innovation. And this creates more problems than it solves.
For instance, a 2016 study on British attitudes to know-your-customer checks found that 40 percent of customers who apply for a financial product abandon their application because it takes too long. Fifty-five percent also say they’d be more likely to finish their application if they could complete the process entirely online.
This isn’t an unreasonable expectation. By that point, fintechs had been letting customers open accounts online in minutes for several years. Yet, in 2019 many banks still rely on phone calls, paper documents and in-branch appointments.
More to the point, RegTech can speed up compliance significantly and cut costs by as much as 30 percent. But many banks remain reluctant to take the plunge despite being clearly overwhelmed by the current manual-oriented workload, worrying that replacing tried and tested systems with new tech could destroy the goodwill they’ve built with stakeholders post crisis.
Karine Demonet, BPI France’s director of compliance and internal control, puts it this way: “You need to be brave to implement technology because it’s inherently risky. What if it goes wrong? What will the regulator think? How will our customers react? There’s a lot to consider. And, given what’s at stake, we’re not as flexible as we’d like to be.”
The need for a tech-positive culture
There’s no doubt that implementing new software in a large organisation with decades-old processes is a huge undertaking that can throw up all sorts of problems. More compellingly, failure could lead to expensive and reputationally damaging fallout at a time when banks are under more scrutiny than ever been before.
As The Compliance Foundation’s Sandra Quinn notes, “Banks nowadays are constantly being picked up on everything. It’s impossible to get away with making a mistake.” In comparison, when fintechs suffer outages, they generate far less public outrage.
That said, it’s also true that banks’ fears — as justified as they may be — create resistance. And resistance can only be overcome if tech-minded people within the organisation can build a strong business case for innovation, take ownership and see things through to the end.
Gonzalo Hurtado, Santander Corporate and Investment’s head of internal control, finance, sums it up this way: “If someone doesn’t have the time to think about tech, digital transformation won’t happen. To make tech a priority, you need tech-minded people.”
Boring is good. But only in moderation
With fintechs’ star on the rise, banks are at a tipping point. Citi’s CEO for global consumer banking Stephen Bird explains: “We think of it as we are living through an extinction phase… We’re going to need a tense and deep reengineering of processes to enhance speed, convenience and trust and get at what is most important: the customer.”
The road ahead is clear: banks can no longer have one flavor of “boring” across the board.
Boring banking can be a good thing if it means a steady, measured approach that protects consumers and keeps the financial system on solid ground. But boring banking can have a downside if it means relying on outdated systems that ultimately don’t work for customers, investors, employees or even banks themselves.
Andrey Brozhko is the head of product at ClauseMatch, a London-based regulatory technology company whose software helps financial institutions streamline regulatory change management.
Jeannette Kescenovitz, who leads development of banking-as-a-service at Finastra, joins us on the BAI Banking Strategies podcast to share her views on how BaaS might grow its presence at U.S. banks and credit unions this year.
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