3 point to-do list every manufacturing leader must tackle quickly in 2022


By Ewen Fleming

Leader, Financial Services at Moore Global

Banks pride themselves on being the glue that holds together business empires and, indeed, whole societies. Boring, solid but indispensable: those have been the watchwords since the Medici invented modern banking 550 years ago.

Unfortunately, for the august institutions that have grown to dominate the industry, that’s no longer enough. We have seen more innovation in the last five years than in the previous five centuries – and it has become clear that many of the traditional players are ill-equipped for the new world order it heralds.

Hungry financial technology start-ups, or fintechs, have developed smart mobile technology to offer new products and services that turn old-school banking conventions on their head. They are also rapidly evolving.

Traditional banks need to rethink their purpose, diversifying their customer base to build more profitable lines of business while still managing risk more effectively.

The very essence of what a bank should be for is up for debate – and it is clear the existing model is deeply flawed.

In its most recent Global Banking Review, McKinsey calculated that 51% of the world’s banks have a return on equity that is below the cost of equity. That is nobody’s idea of a great investment proposition.

One of the reasons valuations of traditional banks struggle to rise above book value – against the 1.3x average for all non-bank financials – is because they are seen as capital-intensive in a low-margin sector.

Branch networks add to an already high fixed cost base while staff numbers in contact centres are higher than they need be because inefficient processes drive failure demand and too many mundane tasks are not fully automated.

The fintech “challenger brands” have spent the majority of their early-stage private equity investment developing artificial intelligence (AI), machine learning and sophisticated data analytics to develop apps for smartphone users.

In the past, current account data represented the focal point of all ‘in and out’ customer transactions. Today customers may hold one account with a traditional big player but route other transactions through a neobank like Revolut or Monzo.

Smartphones and digital wallets are now the main point of contact between consumers and their banks. These transactions generate a mountain of actionable intelligence – but it will be dispersed among several financial services providers, rather than funnelled to just one big hopper.

Of course, banks are among the biggest technology players in the world so why can they not take on the fintechs and develop game-changing apps?

At first glance they may appear to have a head start but much of their underlying IT infrastructure belongs to another age, with some of the core elements dating back to before the Moon landings in the 1960s. That means they actually have an increasing reliance on big tech players, particularly Microsoft Azure, AWS and Google, to provide their cloud services.

One consequence of banks all using systems that have evolved in pretty much the same way over decades is that they all end up with roughly the same offering to customers.

However, there is a better way for banks to optimise their investments that would allow them to differentiate themselves from rivals and engage more directly with customers.

By following the fintechs down the path of embedding AI and data analytics in their back-office systems, traditional players will more easily be able to spot slivers of the market where they could grow their “share of wallet”: those business lines where they have a strong market position or where they identify growth potential via tech-led innovation.

There seems little point in banks spending billions on new proprietary systems that will themselves almost certainly become obsolete in five to ten years. Instead, it would be more cost-effective to pass on responsibility for designing and running their systems to IT partners whose technology is often far in advance of anything the main banks and insurers can currently claim.

Indian IT outsourcers are making a big play to dominate this market, investing huge sums in systems that run autonomously. That reduces the need for physical interaction – and the potential for human error.

Payments, mortgages, credit cards and other service lines would sit in the cloud while responsibility for making everything work seamlessly and to future-proof the technology would be devolved to their IT partners. Banks would then be free to focus on developing new online offerings such as ethical buy-now-pay-later lending that is gaining in popularity.

With more administration tasks digitised, fewer people would be required in contact centres to handle routine tasks. This would reduce costs and improve customer satisfaction, two metrics on which banks face constant criticism.

Meanwhile bank branches, which are still a great marketing tool in the heart of the high street, should be repurposed as community advice or business hubs depending on the local demographics.

In more affluent areas the focus might be on in-person investment advice and private banking solutions, while those in poorer areas might offer basic financial and digital education, advice on managing benefits and affordable credit.

The post-Covid world also offers the opportunity to champion WFB – Working from Bank – encouraging young professionals to check into a branch lounge to escape the confines of their cramped city centre flats and fire up their laptops over a latte.

In this scenario, banks would be released from the tyranny of sticking plasters on ageing IT systems to concentrate on their customers’ needs, on how to excel in each key location, expanding their target customer base and launching promising new service lines.

Their focus would shift from the nuts and bolts of running computer mainframes to the analysis of data to generate insights on the customers and market segments they can add most value to – and extract most value from. It is a much more efficient deployment of people and capital that will improve their return on equity.

As in most industries, the exploitation of data will be fundamental in giving banks a much better understanding of risk … and might even pave the way for those on low wages or with bad credit scores to enter the mainstream financial system.

In South America alone there were 200 million people outside the normal finance system before the pandemic. With the rapid rollout of phone-based products and payments services, all many of these customers need now is a smartphone internet connection to sign up for the loans, current accounts and savings products the rest of us take for granted.

It’s the kind of innovation that would have won the resounding approval of those original Renaissance Medici bankers.