Digital transformation is on the rise, what are the key elements of a successful transformation that is required for a legacy bank?
A purpose of digital transformation is to fundamentally change how the business operate and interact with its customers. This requires comprehensive understanding of the new operating model, new essential business processes and architecture to support a target state. In order to be successful on transformation journey companies have to learn how to change fast at the risk level acceptable. One of the key pillars of every single change is the team to both drive and deliver changes. Acquiring new talents, retaining key employees while changing their roles and responsibilities is very challenging for an organization. Last but not least is also transparency on customer communication. It is relatively easy to lose customer interaction while changing an organization, introduce confusion or even detach from customers permanently. Banks should keep always in mind customers’ needs and constantly explain how the process is going to progress. In the end of a day customer can’t become just a single record in a system database.
What are the key fintech disruptors that you think will reshape the banking industry as we know it in 2018?
Banking sector is already under a pressure of reshaping its business models. A primary battlefield is on customer interaction that starts to be paramount more important than backend banking processes. Thanks to open banking and other regulations such as PSD2 in Europe banks have to accept other non-banking participants in a value chain. Customers still need banking services, but not necessary banks are supposed to deliver these end-to-end as in the past. Fintechs are trying to find their sweet spots on the market. There are already many good examples such as Stripe, Transferwise, Coinbase, etc. that introduced a lot of fear to the industry. Yet banks are not sitting and waiting and trying to transform themselves according to changing customers’ needs to stay relevant. There are multiple incumbent banks established over last that are very successful. On top of that there are many examples of fintechs and banks cooperation that provided significant improvement in customer experience and accommodating new business models. In short banks are getting more open to innovation while still maintaining banking licenses and actively transforming either by competing or cooperating with fintechs and other partners to meet XXI century demands.
Can banks embrace digital transformation and innovative technologies while ensuring minimal risks?
Introducing new or innovative technologies is always associated with risk. Historically, banks are superior in managing risks. Risk of introducing new technologies is not any different. There are multiple strategies how to transform and innovate while keeping risks managed at a desired level. Typically, banks (as well as other organizations) start small by prototyping, introducing early versions of their new services to so called “friends and families” or very well targeted customer groups. It helps to fail fast and quickly improve to start again. If successful, the key challenge is to scale the new innovative service up while managing changing operating models. This is very challenging for banks, in particular by managing legacy part of organizations and working in multiple contexts at the same time. In oppose to fintechs and start-up banks, legacy financial institutions do need to take care about existing customers at first while preparing for new customers acquisition and changing existing offerings. This is very significant undertaking hence not all banks are very successful in this field.
According to you, what threats/challenges would traditional banks face with the emergence of innovative financial technologies?
I think there are many. The most important is an ignorance. Banks cannot longer ignore changing business environment as new trends are emerging as well as changing technology landscape is creating new opportunities. It is however very difficult to guess which technologies are going to sustain and mature and which are going to disappear unexpectedly. Perhaps nobody remembers “second life” being a hype few years back and banks opening virtual branches there. That phenomenon does not exist any longer and money invested in it is undoubtedly lost.
Do you see AR/VR as the future of payments?
AR/VR is a technology that can boost many banking services not solely payments. It can significantly improve customer experience. I can imagine point of sale or POS transactions being extended with additional on hand information re credit limit, currency conversion, other product recommendations, etc. Payment process itself may also transformed into more seamless shopping experience by introducing additional information about available account balance, beneficiary information, spending patterns, etc. Generally, payments start to disappear as an isolated banking service and moving towards “invisible” step of shopping or purchasing activities.
Banks are reluctant to use Blockchain? Do you Agree or Disagree? Why?
It is somewhat right. Since an official legal framework doesn’t exist banks cannot make real use of the blockchain technology. An industry still lacking regulation on money on the ledger. There are however few countries trying to make it possible. Singapore, Malta are example of these. Before it happens there would be very limited set of (non-banking) use-cases that banks may be interested to invest in. Trade finance area is emerging very fast as well as a lot of is happening in identity management or exchanging market data. Yet, these are far from banks’ core business. In some extend it’s very compelling to experiment in some niche areas until ultimate disruption hits core banking business models. Undoubtedly, blockchain will play significant role in a future and as in every single revolution early adopters will be on much stronger position than slow followers. It somehow explains massive investments in the blockchain technology and exponential growth of expenses over the last few years. It is worth to mention that the technology itself is still in its infancy stage and there are many childhood disease problems that are still to be solved.
Blockchain/IOT/AI/Big Data/Cloud, which of these can change the banking landscape? And Why?
I think all these technologies will have a visible impact on banking landscape. These technologies however have different role to play or in other words different problems to solve. For example, cloud will help to improve flexibility in terms of acquiring business and IT solutions, help to avoid upfront investments, change spending patterns. AI will be extensively used for next generation of personalization, automation, more efficient process execution, preventing frauds, etc. Blockchain will help to simplify value streams by limiting intermediaries, helping to build ecosystems and increase trust across business collaborations and so on.
Big Techs are shifting to financial services. Do you think such a shift would threaten existing banks? If so, what are the risks that you foresee?
I think tapping into financial industry is a natural step for Big Techs to find new revenue streams and opportunities to grow. Big Tech are already known of redefining traditional business models into new, digital and desired by customers. On top of that the Big Techs do have massive global customers base that makes their position extremely powerful and influential. I don’t think any of the Big Techs will apply for a banking license shortly. It would expect them to seek for “financial infrastructure providers” that will undertake all the licensed banking operations behind the scenes while Big Techs keep maintaining customer experience and interaction. At least that would be a way for a first step. Sometimes we use to simplify term “banking” to very basic financial services such as account management, card transactions, payments, etc. These are however just a top of an iceberg when looking at banking service portfolio. It requires a lot of knowledge, experience and professional personnel to undertake credit risk assessment, operate on capital markets or invest funds. More over these are very strictly regulated businesses. I don’t think any of Big Techs are going to be happy to satisfy all the necessary regulations and requirements across all the jurisdictions they operate on.
In your opinion, how can an organization boost its fraud detection capabilities?
The next generation fraud detection will emerge based on two pillars. One is more efficient data exchange between market participants both direct and indirect. Banks cannot basically work in isolation as it is known today. Second pillar is to employ more advance preventive mechanisms. Historically, based on best knowledge and experience, banks were developing fraud detection models, rules and execute these. If there was a new fraud rules were adjusted and re-implemented. This kind of approach is no longer sufficient. Thanks to new AI technologies such as unsupervised learning there is an opportunity to detect and prevent frauds from happening in real time. This kind of technology is still emerging, so it would take time until full benefits are available. Yet a lot of companies can already demonstrate significant progress in the field.
What are the key benefits and challenges that you foresee with open banking?
Personally, I am a big believer in open banking. I consider this trend more as an opportunity than thread for banks. First and foremost, open banking makes it possible to create true ecosystems across multiple industries. Thanks to this organizations will be able to freely exchange data, make transactions, simplify operating models and foster innovation. Naturally, there is a lot of work to be done until open banking will operate as desired. Still, there are no data global interoperability standards, set of data exchanged is pretty limited, legacy technologies cannot accommodate real time information flows, etc. This trend however is emerging at a fast pace and there is a big pressure to continue developing even faster.
Piotr PISKORSKI, Head of IT Strategy and Enterprise Architecture, Nordea, Denmark will be speaking at 7th Edition of New Age Banking Summit Qatar.