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Transformation, Banking-Style


“The bank is dead. Long live banking,” proclaimed a recent blog post. In today’s complicated and shaken economy, the business of banking has never been more essential. Other industries can only envy its central role in facilitating trade, protecting wealth, fueling growth, funding dreams and stewarding the golden years.

Yet who can deny that all is not well at many banks today? Their prime aspiration is all about change. Transformation. Out with the old, in with the new.  When the old ways aren’t working in the new environment, there’s nothing more alluring than wiping the slate clean and starting afresh. Transformed companies get great press and better profits; transformed people get a new lease on life.

But transformation isn’t for the faint-hearted. “We are here to transform J.C. Penney, not to improve” it. That was J. C. Penney’s CEO Ron Johnson reminding impatient analysts recently. They were disturbed that sales had faltered during the early months of Johnson’s radical plan to revive the ailing retailer by slashing sales, changing out vendors and redesigning stores.

Like banking, department stores have been on a downward trajectory. Like banks, they tried incremental change: consolidating, rebranding, redesigning stores, targeting new demographics, deploying technology. But still the downward slide. So Johnson opted for transformation, rolling it out rapidly. He curtailed test marketing in order to strike new vendor deals quickly and avoid muddying the message to customers and employees. And yet, despite extraordinary and visible progress, analysts fretted at the delay.

If transformation is that hard in the retail world, what is it like in banking?

It’s harder. Bankers don’t need to be reminded that they face more impediments to transformation than retailers do. They are constrained by more laws about products, prices, and capital requirements; they are overseen by more regulators and hobbled by ancient core systems. This on top of a damaged image in the wake of the credit crisis. Retailers make their own decisions about where to locate stores. They strike pricing deals with vendors, not legislators. When J.C. Penney deliberately decided “no more coupons” they knew they might lose certain customers, but they didn’t worry that lawmakers would force them to reconsider.

Although harder, transformation is equally urgent for banking. The industry’s returns have declined precipitously in recent years, with little likelihood of returning to former levels. Its traditional customer bases are deeply eroded: poor savings rates have forced even once-loyal seniors into risky non-bank investment; consumers in general have lost trust; corporate borrowers have cheaper options; and younger consumers aren’t feeling the love or the need. Fee income has been decimated by laws. New products are quickly copied. New technologies are quickly commoditized: Already about 30 million Americans use mobile devices for financial services.

So the need for transformation is more apparent than the opportunities. That is why it is vital to keep an open mind about where transformation can come from, how it can be coaxed to life, and what it looks like in practice.

Transformation is not always out-of-the-box. People tend to think of transformation as deriving from blue-sky, out-of-the-box inspiration. But sometimes it just perfects the box – infusing it with great new value. We recently asked a bank executive to name the top two recent banking inventions. “Paperless ATM and iPhone check deposit,” he replied.

Now, you could say those were merely incremental improvements to one small process of a tired payment instrument. Or you could say they delighted bank customers, slashed bank costs for a service that customers value and cemented relationships with at-risk, tech-savvy customer segments. And even though the changes were incremental, they involved years of legal, technical, and operational change for individual banks and for the industry as a whole.

Where in your bank are there entrenched legal, technical or operational ruts that impede customer convenience, add unnecessary cost, or expose your bank to risk? Addressing them can lead to waves of innovation.

Transformation can flourish anywhere.  Usually strategy execs look for transformation at the top of the pyramid – in lucrative market segments. But one of the most transformative trends in the business of lending thrives amid the poorest people of the poorest countries. Microlending is transforming the lives of millions of people from Bangladesh to Haiti to India. Now profit-making institutions are taking it up.

Consider the underbanked in your market – a huge and growing population even in highly developed countries, where they often are not poor, just not banked. As they gain access to cheap technology and connectivity and require greater payment capabilities, what opportunities present themselves to your bank?

Transformation doesn’t have to bet the whole bank. National Australia Bank moved 300,000 customers onto a new core banking system, a huge step. The new platform lets customers open an account online in less than five minutes, customize their view of the bank’s web site, use new calculator and funds tracker features and process funds in real-time, seven days a week. Clearly these are attractive features, but such a significant move, affecting a huge cohort of the bank’s customers, is not without risk. NAB mitigated the risk by creating a new brand, called UBank, for targeting younger, tech-savvy prospects.

If the changeover had faltered, disappointed customers, or caused defection, the bank’s long-time customers and respected traditional brand would not have been affected. In the end, the bank was delighted to find that their new brand also attracted mature, affluent, tech-savvy customers.

Transformation can be back office driven. One of the biggest drags on transformation at large entrenched companies is the tyranny of what’s already in place. If you are a large bank, your infrastructure contains older, acquired systems that are often poorly integrated. They hold transformation hostage. They might prevent customers who open accounts online from funding them online. They might force customers who want to open a checking account or take out mortgage insurance with you to go elsewhere. They prevent timely assembly of crucial information.

If “our systems won’t let us…” is a steady refrain that discourages new products and innovative thinking at your bank, then your transformation doesn’t start with killer products. It starts with aggressively standardizing, consolidating, and simplifying your systems for a fertile environment where innovation can thrive.

Finally, transformation won’t be a straight line. No matter how carefully you pre-test your ideas and plan your course, it won’t be perfect, and you will have to make course corrections without abandoning the goal. Early on in his bid to transform J.C. Penney, Johnson had to admit that one tactic was a failure. To wean customers off discounts, they tried replacing the word “sale” with “month-long value” and succeeded only in confusing customers. He quickly acknowledged the mistake and recommitted to the larger strategy, winning back customers and analysts.

The lesson? Begin the transformation without illusions of perfection, stay alert for problems, invite criticism (if you are not lucky enough to have analysts who criticize you for a living) and keep transforming, secure in the comforting knowledge that the alternative – not transforming – has no viability at all.

Mr. Goyal is group vice president, Financial Services, for Redwood City, Calif.-based Oracle Corp. He can be reached at [email protected]