Goldman Sachs attributes its success in consumer banking to their renewed tech strategy and execution playbook. For example, before they ventured into consumer banking, they conducted more than 10,000 interviews across the country to understand the financial needs of their customers. They launched Marcus online savings account with an attractive rate, no fees and no minimum deposit as a direct response to what they learnt from their customers. Over the 5 years, it has grown more than $60 billion in deposits and $7 billion in loans across the US and UK. They are also adopting that playbook into their existing business operations.
At the same time, JP Morgan failed to excite the market with their digital bank Finn because it did not offer any differentiated features to their customers compared to their Chase online banking app. Finn also had no compelling market feature to attract new customers compared to other challenger banks. Ultimately, they were unable to succeed because they did not have the focus or the processes to truly understand the needs of their potential customers. They failed to understand that digital-only challenger banks represent an architectural innovation.
A similar narrative played out with Investec’s “Click and Invest” robo-advisor and RBS's digital bank Bo, consuming millions of dollars of investment without achieving traction in the market.
Digital business is an architectural innovation
With a stream of new market entrants betting on reinvention rather than recharging, pressure on Financial Service firms is increasing, bringing the realization that it isn’t enough to simply buy new components and drop them into an existing model. This brings architectural knowledge to the fore, requiring reimagination of existing business and operating models.
Executives need to recognize that it is no longer sufficient to build only technology capabilities (often focused at the component level) to fully realize the opportunities available to them. By focusing on the components themselves as the endpoint, executives risk undervaluing the knowledge required to successfully develop and integrate these new elements. For example, having a sophisticated AI based credit decision engine is limited value if your current application process captures only standardized data. Firms are forced into a constant flow of change to cater to internal and external consumers, who now expect continuously improving products and services with reduced cycle times. In this situation, the capabilities associated with creating need to be reweighted relative to the traditional focus of operating.
Modern digital businesses – those organizations whose disruptive influence is being felt in Financial Services and well beyond – recognize that a broader set of capabilities contribute to digital success.
Transforming as a Modern Digital Business
Embracing the reality of constant change, modern digital businesses have shaped themselves around their customers as the anchor point, and are relentlessly focused on understanding and meeting their needs. Adopting processes suited to the creation of compelling digital propositions, they have a strong learning orientation built on integrated feedback loops and strategic use of data. They use a value-driven approach to prioritize their investments, managing their activities with the expectation of change. A focus on manageable workloads and speed of decision-making gives them the ability to rapidly change direction.
This digital mindset can be seen not only in their processes but in their structures, governance approaches and leadership styles. Applied right across their business activities – rather than narrowly within the digital domain – this mindset drives the development of capabilities which allow them to innovate at every level. The relative success of firms like Goldman Sachs and DBS Bank is the result of their reinventing themselves ground-up.
Developing the digital mindset
Whether digital natives or organizations who have successfully transformed, those businesses who are competing successfully in an era of significant digital change share a number of characteristics.
Organizations wishing to accelerate their transformation should question themselves on the existence of these characteristics within their own businesses.
1. Customer value focus
Is customer value truly driving all our operations, or is it simply a by-product of our activities?
Lemonade is focused on customer satisfaction by having quick turnaround on claims. To be able to make these decisions, it sells insurance through chatbots, rather than online forms, allowing it to collect 100x more data.
2. Outcome aligned organization
Do our structures, measures and funding processes reflect this customer focus?
RBS’s major IT failure in 2012, which cost them £70 million in customer compensation, was attributed to its reactive incident management structure with inadequate risk oversight.
3. Responsive to Market Shifts
Do we manage our workload on feedback and flexibility? How rapidly can we change direction?
Responding to the changing customer expectations and competitive pressure, Charles Schwab used a rapid prototyping approach to deliver their Robo advisory offering which now accounts for $43 billion in assets under management
4. Test and Learn Culture
Do we use experimentation to learn and reduce uncertainty, or assume we know everything now?
UBS failed with its SmartWealth robo advisor because they assumed that given their minimum $2 million assets requirement for private banks, customers will consider $15000 minimum investment criteria a huge consumer surplus.
5. Strategic use of information assets
Is data easily consumable, fuelling our decision making and maximizing value?
DBS Bank is integrating AI into every operation including compliance, onboarding, sales and even recruitment powered by their data platform-as-a-service. They estimate major efficiency gains that can eliminate 15000 jobs
6. Structures and Governance
Does the way we are organized result in speed or friction? Where are decisions made?
Among the many reasons for their failure, TSB relied on an overburdened three lines of defense to manage risks for a highly complex programme of work to migrate to a new platform. The resulting IT meltdown cost them upwards of £330 million in penalties.
7. Technology is at the core
Is technology a part of our business strategy, or a separate, even second class, concern?
Goldman Sachs recognized that developers were first class citizens and client developer experience was the key. They have embarked on a platform approach with externalized APIs that can be integrated within the client workflow and systems for a seamless user experience.
Building digital capability
While a digital mindset is the starting point for successful reinvention, ultimately this change is delivered through capability. We have identified five areas of capability which are critical to digital evolution – investment in these areas will have the greatest impact on creating sustainable change within the organization.
As the building blocks of a modern digital business, these foundational capabilities run across the organization, impacting the core operations as well as innovation, and addressing every layer of the organization from senior executives down to developers.
Building Blocks of Modern Digital Business