Transformation case study

Jana Werner and Barry O’Reilly have a great case study and commentary of transformation at a couple organizations, primarily a bank. I was lucky enough to get Jana on for an interview on Software Defined Talk, talking about the case, information theory, and Nietzche. It should be in the podcast feed next week.

Here’s some of my highlights:

  • “In one Financial Services organization we’ve been able to implement an increase to contactless card payment limits in days where the previous increase took months. We stood up a work from home solution for call centre staff, automated processes and relieved pressure on teams having to manually capture customer data over the phone in 3.5 weeks—a record for service delivery and a credit to the teams and individuals who made this possible.”
  • Focus on the outcome, not following the process, or working a lot: “The subtle yet powerful shift to outcome-based measures of success — reducing and resolving customer issues — over traditional output-based deliverables of being on time, budget and scope had a pronounced impact on productivity and employee satisfaction.”
  • When the meeting (the bureaucracy) becomes the product: “Slide decks, paper proposals and steering group sessions all take a significant investment to prepare, avoiding “difficult” conversations by socializing and re-socializing in advance of exec meetings, deferring decisions, requesting a raft of meeting minutes to document, correcting, amending and signing them off—the majority of which few people read.”
  • This effects how the entire organization runs, and, indeed the pace of delivery: “The speed of these cycles determines the heartbeat of the organization.”
  • Management starts asking different questions: “Responses can now shift post-release from ‘How could you have got this wrong?’ to ‘What is our next best action?’ Seeing how shipping smaller slices allows us to iterate, also means leaders can set direction and monitor metrics over setting targets and failing anything but perfect results.”
  • Often, management has failed to build a system (vision, strategy, norms, “culture,” etc.) that makes staff’s job clear. That’s a problem! “Test your strategy cascade methods to maintain the clear purpose, problems and outcomes teams are working towards. Ask teams if there’s a clear line of sight between the objectives, and how their work contributes to achieve your shared success. If they can’t see it, fix it. Maximising both organizational alignment and autonomy can be the biggest accelerant for sustainable pace, employee engagement and amazing customers experiences.”
  • And: “The biggest hurdle to change is people not believing it’s possible.”

There’s a lot good in there. Check out the case study.

🗂 Link: Digital banks on track to treble customers in next year but profits remain elusive

.As they mature, digital startups are now turning their attention from customer acquisition to becoming profitable. With no branch networks and legacy IT systems, digital challengers have a substantially lower cost-to-serve than incumbents of £20-£50 per account compared to £170. Meanwhile, deposit balances for challengers have increased from £70 to £350 per customer. However, this is still dwarfed by the £9000 average for incumbents.However, the majority of new entrants are still not profitable, with the average digital bank losing £9 per customer

Source: Digital banks on track to treble customers in next year but profits remain elusive

Banking “disruption,” or whatever – part 01

There’s near universal sentiment that traditional banks need to shift to improve and protect their businesses against financial startups, so called “FinTechs.” These startups create banks that are often 100% online, even purely as a mobile app. The release of Apple Pay highlights how these banks are different: they’re faster, more customer experience focused, and innovate new features. 

The core reason FinTechs can do all of this is because they’re good at creating well designed software that feels natural to people and allows these FinTechs to optimize the banking experience and even start innovating new features. People like banking with them!

These FinTechs are growing quickly, For example, N26 grew from 100,000 accounts in 2015 to 3.5m this year. Still, existing banks don’t seem to be feeling too much pain. In that same period, JPMC went from 39.2m digital accounts to 49m, adding 19.8m accounts. Even if it’s small or hard to chart, market share is being lost and existing banks are eager to respond. And, of course, the FinTechs are eager to take advantage of slower moving banks with the $128bn of VC funding that’s fueled FinTech growth.

I wanted to get a better handle on all this, so I’ve put together this “hot take” on digital banking, FinTech’s, whatever. My conclusion is that these new banks take advantage of having a clean-slate – a lack of legacy baggage in business models and technology stacks – to focus most of their attention on customer experience, doing software really well. This is at the heart of most “tech companies” operational differentiation, and it’s no different in banking. 

Large, existing banks may be “slow moving,” but they have deep competitive advantages if they can address the legacy of past success: those big, creaking backend systems and a culture of product development that, well, isn’t product development. Thankfully, there are several instances and case studies of banks keeping transforming how they do business.

That Apple Card sure looks cool

As with you, I’m sure, I’m curious about the excited around the Apple Card. It looks cool, with features like quick activation and tight (perhaps too tight!) integration with the iPhone. The card benefits aren’t too great compared to what’s widely available: the Apple Card gives you 1% to 3% cash back on purchases, with 3% only for Apple purchases.

Two other features got me thinking though.

The cash back amounts show up in your account by the end of the day. In contrast many credit cards offer cashback, it can take weeks or even months for that show up on your account – that cash back period, is perhaps not surprisingly hard to fine for cards. 

The Apple Card has a really quick activation process. Traditionally, getting your account setup, activating a card, can take days to weeks – usually, you need a card snail mailed to you. But once you setup your account, you can start using tap-to-pay with your phone. When I moved to Amsterdam, I setup an ABN AMRO account, and last week I setup an N26 account. In both instances, I had to wait several days to get a physical debit card. I could start transferring money instantly, however. 

There’s no guarantee that the Apple Card will be a competitive monster. Per usual, the huge customer base and trust Apple has boosts their chance. As Patrick McGee at The Financial Times notes: “JD Power survey published last week, before the card was even available, found that 52 per cent of those aged between 18 and 29 were aware of it; of those, more than half were likely to apply.” Apple usually has a great attach rate between the iPhone and new products. Signs point to the Apple Card working out well for Apple and their partners.

Shifting the market with innovation…right?

That snazzy UI and zippy features make me wonder, though, why is this new? Why aren’t these boring, commodified features in banking yet? Let’s broaden this question to banking in general, mostly retail or consumer banking for discussing here. 

Perhaps we have an innovation gap in banking, something that’s likely been ignored by existing banks for many years. These FinTechs, and other innovation-focused companies like Apple, have been using innovation as crowbars to take market share, coming up with better ways of servicing customers and new features.

Is that innovation getting FinTechs new business and sucking away customers from existing banks? To get a handle on that kind of market share shift I like to use a chart I call The Dediu Cliff to think about startups vs. incumbents. It’s a simple, quick way of showing how market share shifts between those two, how startups gain share and incumbents lose it. You chart out as many years as you can in a 100% area graph showing the shift in market share between the various players. Getting that data for banking has so far proved difficult, but let’s take a swag at it anyhow.

Whatever the business models, financial services executives seem to think so as one PWC survey found: 73% of those executives “perceive consumer banking as the one most [banking products] likely to be disrupted by FinTech.” Being lazy, I found a pre-made data set to show this, in Sweden thanks to McKinsey:

Sweden - Screen Shot 2019-08-14 at 4.55.06 PM.png
Sources: “Disruption in European consumer finance: Lessons from Sweden,” Albion Murati, Oskar Skau, and Zubin Taraporevala, McKinsey, April 2018; “New rules for an old game: Banks in the changing world of financial intermediation,” Miklos Dietz, Paul Jenkins, Rushabh Kapashi, Matthieu Lemerle, Asheet Mehta, Luisa Quetti, McKinsey, Nov 2018. 

As the report notes, Sweden is very advanced in digital banking. In comparison, they estimate that in the UK the “specialist” firms have less than 20% share. In this dataset, “specialist” isn’t exactly all new and fun FinTech startups, but this chart shows the shift from “universal,” traditional banks to new types of banks and services. There’s a market shift.

If I had more time, I’d want to make a similar Dediu Cliff for more than just Sweden. As a bad, but quick example, comparing JPMC’s retail banking customer growth to N26’s:

100% area - Screen Shot 2019-08-14 at 4.55.09 PM.png
Sources: “How JPMorgan Is Preparing For The Next Generation Of Consumer Banking,” CBInsights, August, 2018; JPMC 2018 annual report; “N26 is now one of the highest valued FinTechs globally,” N26 Blog, July, 2019.

 

This chart is not too useful because it shows just one bank to one FinTech, though. And JPMC is much lauded for its innovation abilities. At the end, in the summer of 2019 JPMC has 62m household customers, with 49m being “digital,” and N26 has 3.5m, all “digital” we should assume. Here’s the breakdown:

 

bar chart - Screen Shot 2019-08-14 at 4.55.11 PM.png
Sources: “How JPMorgan Is Preparing For The Next Generation Of Consumer Banking,” CBInsights, August, 2018; JPMC 2018 annual report; “N26 is now one of the highest valued FinTechs globally,” N26 Blog, July, 2019.

Growth, as you’d expect, is something else: JPMC had a CAGR of 8%, while N26’s was 227%. If N26 survives, that of course means their growth will flatten, eventually.

Even if it’s hard to chart well, we should take it that the new bread of FinTechs are taking market share. Financial services executives seem to think so as one PWC survey found: 73% of those executives “perceive consumer banking as the one most [banking products] likely to be disrupted by FinTech.” 

To compound the fogginess, as in the original Dediu Cliff, charting the dramatic shift from PCs to smart phones, the threat often comes from completely unexpected competitors. The market is redefined, from just PCs for example, to PCs and smart phones. This leaves existing businesses (PC manufacturers) blind-sided because their markets are redefined. Customer’s desires and buying habits change: they want to spend their computer share of wallet and time on iPhones, not Wintels. 

Taking this approach in banking, there are numerous FinTechs going over underserved markets that are “underbanked” and usually deprioritized by existing banks. This is a classic, “Big D” disruption strategy. One of the more fascinating examples are ride-sharing companies that become de facto banks because they handle the money otherwise bankless drivers earn.

There’s also a hefty threat from behemoth tech companies outside of banking that are stumbling into finance. Companies like Alibaba and WeChat have huge presences in payments and Facebook is always up to something. These entrants could prove to be the most threatening long term if they redefine what the market is and how it operates.

Differentiating by focusing on people

So, there is a shift going on. What are these FinTechs doing? Let’s simplify to three things:

  1. Mobile – an emphasis on mobile as the core branch and workflow, often 100% mobile.
  2. Speed – from signing up, to transferring money, to, as with the Apple Card, faster cash back. While it’ll take awhile to get my card, actually signing up with N26 was quick, including taking pictures of my Netherlands residency card for ID verification. I signed up at 11:29am and was ready to go at 4:05pm, on a Sunday no less.
  3. Innovation – sort of. It’s not really about new features, but innovations in how people interact with the banks. N26 let you create “spaces” which are just sub accounts used to organize budgets and reports; bunq lets you create 25 new accounts; many FinTechs (like the Apple Card) bundle in transaction type reporting and budgeting tools. All of those are interesting, but not ground breaking…yet. 

From a competitive analysis stand-point, what’s frustrating is that feature-by-feature, traditional banks and FinTechs seems to be on par. Throw in services like mint.com and all the supposedly new features that FinTechs have seem to be available don’t look so unique anymore. Paying with your phone amazing, to be sure, but that’s long been done by existing banks.

For all the charts and surveys you can pile on, the difference amounts to a subjective leap of faith. FinTech companies are more customer centric, focusing on the customer experience. When you look at the broader “tech companies” that enterprises aspire to imitate, customer experience is one of the primary differentiators. Their software is really good. More precisely, how their software helps people accomplish tasks is well designed and ever improving.

There’s a sound vision to be plucked from that for banks: “Live more, bank less,” as DBS Bank  in Singapore puts it.

Unshackled

Responding to all of this seems easy on the face of it: if these FinTechs can do it, why not the thousands of developers with their bank-sized budgets do it?

As ever, banks suffer from the shackles of success: all the existing processes, IT, and thought technologies that was wildly successful and drives their billions in revenue….but hasn’t been modernized in years, or even decades.

In part 2, we’ll look at what banks can do to unshackle themselves, and maybe slip on some new shackles for the next ten years.

(There are some footnotes that didn’t get over here.  For those, and if you want to see me wrastlin’ through part two, or leave a comment, check out the raw Google Doc of this.)

🗂 Link: The Cost of Banking Is About to Go Up: What the Capital One Breach at Amazon Could Mean for the Industry

“The adoption of cloud platforms is a movement that will not be stopped,” says Jerry Silva, research director, IDC’s Financial Insights Group. “But there will be a slowdown as regulators step in to ensure that the security and resiliency structures that have always applied to banks directly are applied to the cloud providers with which they do business.”

Source: The Cost of Banking Is About to Go Up: What the Capital One Breach at Amazon Could Mean for the Industry

🗂 Link: Financial services and cloud: Delivering digital transformation in a highly regulated industry

“The most difficult part of what was a 10-month programme of work was that we were working to transform the current application, which was manually built, on-premise, and converting that into infrastructure as code,” says Niculescu.

“So we essentially took what would be manually-built environments that would usually take us weeks and months and numerous contract amendments to essentially grow and scale environments, and transformed it so that we could do them within the day – but now we can do all of this within 40 minutes, roughly.”

Source: Financial services and cloud: Delivering digital transformation in a highly regulated industry

🗂 Link: Rich countries must start planning for a cashless future

These problems have three remedies. First, governments need to ensure that central banks’ monopoly over coins and notes is not replaced by private monopolies over digital money. Rather than letting a few credit-card firms have a stranglehold on the electronic pipes for digital payments, as America may yet allow, governments must ensure the payments plumbing is open to a range of digital firms which can build services on top of it. They should urge banks to offer cheap, instant, bank-to-bank digital transfers between deposit accounts, as in Sweden and the Netherlands. Competition should keep prices low so that the poor can afford most services, and it should also mean that if one firm stumbles others can step in, making the system resilient.

Source: Rich countries must start planning for a cashless future

Link: IT outages in the financial sector: Legacy banks playing tech catch-up risk more outages, UK MPs told

said 65 per cent of outages are in retail banks. She said the regulator received 853 notifications of outages in 2018/19 “that is a huge increase on the previous year”. However, she added some of those incidents were relatively minor, with part of the increase being due to a change in regulatory reporting requirements.

Source: IT outages in the financial sector: Legacy banks playing tech catch-up risk more outages, UK MPs told

Link: Big three Dutch banks trail rankings, cost and service and issue

While 94% of the 14,000 people in the survey said they used internet banking and 66% used mobile banking apps, ING customers were unhappy about the decision to phase out the use of ‘tan’ codes for approving payments and require mobile approvals instead.

Read more at DutchNews.nl:

Source: Thousands of rejected migrants unable to return to their home countries
Big three Dutch banks trail rankings, cost and service and issue

Link: Applications of data science and machine learning in financial services

There’s a customer acquisition piece and then there’s a customer retention piece. For customer acquisition, we can see that new technologies can really add value by looking at all sorts of data sources that can help a financial service company identify who they want to target to provide those services. So, it’s a great place where data science can help find the product market fit, not just at one instance like identifying who you want to target, but also in a continuous form where you can evolve a product and then continuously find the audience that would best fit the product and continue to analyze the audience so you can design the next generation product. … Once you have a specific cohort of users who you want to target, there’s a need to be able to precisely convert them, which means understanding the stage of the customer’s thought process and understanding how to form the narrative to convince the user or the customer that a particular piece of technology or particular piece of service is the current service they need

Source: Applications of data science and machine learning in financial services

Link: BankingYoung people and their phones are shaking up banking

In such scenarios incumbents risk ending up as “dumb pipes”, holding bloated balance-sheets and originating products such as mortgages and loans that someone else sells to consumers. If they were to lose the ability to build a brand and the transaction data needed to understand their customers and cross-sell, their wares would become interchangeable. Margins would be driven down, even as they continued having to abide by onerous banking regulations and hold balance-sheet risk.

Source: BankingYoung people and their phones are shaking up banking

Link: Banking apps over banker handshakes

There is an old-timey model in which the key elements of banking are, like, having a local branch, looking customers in the eye and giving them a hearty handshake, knowing their parents, etc. But in modern banking the importance of having a website and a payments app and, uh, “keeping track of customer deposits” is relatively higher, and the handshaking is relatively less important. For big banks, this means that they are increasingly and self-consciously becoming tech companies, building apps and hiring developers and blathering about blockchain. For small banks, it means that they are increasingly and unhappily becoming franchises of tech companies.

Source: We’ve detected unusual activity from your computer network

Link: The platform play: How to operate like a tech company

One of the global leading banks created about 30 platforms. One such platform was payments, which consisted of more than 60 applications that previously had been managed independently from each other. The top team decided to bring the 300-plus IT people working on development and maintenance of payments together with the corresponding people on the business side. Under joint business/IT leadership, this entity was empowered to move quickly on priority business initiatives, to modernize the IT structure, and to allocate the resources to make that happen.

The team shifted its working model and started running the payments platform as an internal business that served all the different parts of the bank (think payments as a service). This approach made it clear where to focus specific tech interventions: removal of nonstrategic IT applications; modernization and accelerated shift of the target applications into the cloud; connectivity to enable swapping solutions in or out easily; and, most important, a major step-up in feature/solution development for the internal business clients. This platform-based way of running the business was then progressively rolled out across the group. Prioritization is set by the top team (because empowerment does not mean anarchy), and all IT interventions are run the same way, to ensure consistency and replicability.

Their notion of a platform is more like the old API economy thing:

A platform-based company will have 20 to 40 platforms, each big enough to provide an important and discrete service but small enough to be manageable. To simplify platform management, it helps to group them into three broad areas: customer journeys, business capabilities, and core IT capabilities (Exhibit 1).

For example, in personal banking, the customer-journey platforms cover the customer experiences of searching, opening an account, getting a mortgage, and so on. The business-capability platforms deliver the banking solutions, such as payments and credit analytics, and the support capabilities, such as employee-pension management, visual dashboarding, and management information systems (MIS). Finally, the core IT platforms provide the shared technology on which the journeys and business capabilities run, such as the cloud platform, the data analytics environment, and the set of IT connectivity solutions.

Source: The platform play: How to operate like a tech company

Link: HSBC chief architect: Why machine learning is accelerating cloud adoption

If you build it, you own it, big data ed.:

“We got some value out of that but to be honest we found it hard to keep on top of, just hard to build skills at the pace required to integrate new technologies,” Knott says.

“No matter how hard we ran there is always something new coming in that we wanted to get access to, but we couldn’t get there quite fast enough to have really finished deploying what we were deploying previously.

“So it was hard to manage, hard to keep on top of, and also hard to scale. We had reasonable success but we were having these challenges.””

Original source: HSBC chief architect: Why machine learning is accelerating cloud adoption

Link: Square expands its bank-like offerings, letting sellers charge customers in installments

Disrupters gonna disrupt, loans edition:

This type of loan is typically reserved for retailers who bring in more than $1 million in revenue, and requires a lot of paperwork.
Original source: Square expands its bank-like offerings, letting sellers charge customers in installments

Link: Cloud Next 18 – HSBC to run business banking on Kubernetes in Google Cloud

“HSBC plans to build its all-new business banking service to run on a Kubernetes-managed container infrastructure using Google’s toolset.”
Original source: Cloud Next 18 – HSBC to run business banking on Kubernetes in Google Cloud

Link: Ride-hailing app Grab partners Maybank for mobile wallet launch

To be a little Friedman in a taxi here: when I was in Jakarta, you could see the huge banking expansion available in converting much of the country to cashless. All these merchants and buyers (people, if you will) who are purely cash based and don’t have bank accounts. And that’s just one (albeit it, giant) city:

Ooi Huey Tyng, MD, GrabPay Singapore, Malaysia and Philippines, says: “The whole industry needs to come together to make the cashless economy a reality in Malaysia. We are honoured to partner with Maybank which not only shares our vision of a cashless payments future, but also recognises Grab as ideally poised to help make this a reality.

“With GrabPay mobile wallet as the leading payment method on our Grab app, it will build an interconnected ecosystem of our services, thus making Grab an everyday app to complement consumers’ everyday lifestyle.”

Also, I love this “cashless” term. So much better than “mobile payments.”
Original source: Ride-hailing app Grab partners Maybank for mobile wallet launch

Link: Ride-hailing app Grab partners Maybank for mobile wallet launch

To be a little Friedman in a taxi here: when I was in Jakarta, you could see the huge banking expansion available in converting much of the country to cashless. All these merchants and buyers (people, if you will) who are purely cash based and don’t have bank accounts. And that’s just one (albeit it, giant) city:

Ooi Huey Tyng, MD, GrabPay Singapore, Malaysia and Philippines, says: “The whole industry needs to come together to make the cashless economy a reality in Malaysia. We are honoured to partner with Maybank which not only shares our vision of a cashless payments future, but also recognises Grab as ideally poised to help make this a reality.

“With GrabPay mobile wallet as the leading payment method on our Grab app, it will build an interconnected ecosystem of our services, thus making Grab an everyday app to complement consumers’ everyday lifestyle.”

Also, I love this “cashless” term. So much better than “mobile payments.”
Original source: Ride-hailing app Grab partners Maybank for mobile wallet launch

Link: The Sorry State of Digital Transformation in 2018

Organizations talk a lot about transformation, but their actions don’t always back it up:

“To find out the state of digital transformation, we surveyed 1,600 business and IT decision-makers in North American and European enterprises. The answer? Sorry, I’m afraid. As you can see from the picture below, 21% of firms think their transformation is dusted and done. Really? Done? And another 22% are investigating or not transforming at all. And while 56% of firms are transforming, their level of investment and scope of transformation are still mostly small. For example, only 34% of banks and insurers are even bothering to transform marketing and only 45% are transforming customer care — a too-small percentage given consumers’ of mass adoption of mobile devices.

“Why? As one respondent put it, “It’s a war between old-school technophobe leaders and the technology innovation that represents a completely different way of doing business.”
Original source: The Sorry State of Digital Transformation in 2018