AI and ML
The Intelligent Bank: The Hidden Weakness in Financial Services Business Models
This is the second article in the series 'The Intelligent Bank: The Hidden Levers of Profitable Growth'. You can read the first article here.
Retail and institutional customers are shifting towards services and products with lower marginal profitability, such as, high yield savings instruments, low fee investment funds, lower advisory fees, and low spread trades. The asymmetric information advantage that the financial services companies have had over their customers is disappearing, and pricing transparency will force margins down further. Scale becomes even more critical to profitable growth; but to achieve scale, traditional firms will need to meet heightened customer expectations, forcing them to also focus on greater speed to delivery with new sources of customer value.
One strategy may be to drive volumes by creating the conditions for new entrants (such as autonomous intelligent entities) to trade or invest. Another strategy may be packaging products, assets and capabilities in new ways to create new markets or new categories. One thing is clear - banks will need to continually and quickly test new models and markets, to grow.
Shareholders place a premium on an organization’s ability to grow organically, and as a result, at above-industry rates, financial institutions always face pressure to find incremental organic growth. While meeting that need, we also advise industry leaders to create the conditions for exponential growth.
An exponential growth mindset begins with the insight from Article 1. What enabled Netflix’s consistent exponential growth over the past 20 years? Netflix never thought of itself as a mail-order company, or a DVD delivery company. It thought of itself as a technology company.
While that euphemism is now a cliché across the financial industry, being a technology company actually means something. It means consistently investing in digitally-driven business capabilities, being devoid of dependencies, remaining automated through algorithms, and being engineered with machine intelligence at the core. Instead of being dependent on business process integration, Netflix, like Amazon, can quickly launch new capabilities by building on its API-driven digital foundation. They focus on dynamic processes that adapt to business needs, not fixed processes that are as hard to evolve as physical canals.
Banking and investment management insiders have developed an automatic reflex to this thinking.
“Yes, but they don’t have 50 years of mainframe legacy code and 2,000 systems cobbled together.”
“Wait till they enter a heavily regulated industry.”
“We get it. But our compliance and security teams sure don’t.”
What these responses illustrate is a fundamental misunderstanding of the root cause. Traditionally operated banks do not have technical constraints. They have cultural, organizational, and mindset constraints. This kind of thinking leads to the 'bolt-on' approach to automation and machine intelligence - systems that support existing processes.
The results may be somewhat 'better, faster, cheaper', but rarely produce sustained innovation. They leave organizations with a faster horse, when what they really need is a car.
Here is a framework to understand the three organizational mindsets that either constrain or enable truly exponential growth.
This is the second article in a four part series on the steps needed to innovate and turn your financial services institution into an intelligent enterprise. Click to read Part 1 and Part 3.
We can't solve problems by using the same kind of thinking we used when we created them.
The financial services industry has proven to be remarkably resilient, recently earning record profits just 10 years after the global economic crisis. However, clear evidence shows that the primary revenue and profit engines of the industry face a complex set of pressures, and the historical approaches that the industry has always leaned on, will not be sufficient to achieve organic, risk-weighted growth. Digital giants such as Amazon, Google, Alibaba and Apple are already entering adjacent markets, and they may soon become direct competitors. Leaders of traditional financial firms will need to change their mindset towards people, process and technology to deliver the exponential growth needed to keep ahead of the digital natives.Retail and institutional customers are shifting towards services and products with lower marginal profitability, such as, high yield savings instruments, low fee investment funds, lower advisory fees, and low spread trades. The asymmetric information advantage that the financial services companies have had over their customers is disappearing, and pricing transparency will force margins down further. Scale becomes even more critical to profitable growth; but to achieve scale, traditional firms will need to meet heightened customer expectations, forcing them to also focus on greater speed to delivery with new sources of customer value.
One strategy may be to drive volumes by creating the conditions for new entrants (such as autonomous intelligent entities) to trade or invest. Another strategy may be packaging products, assets and capabilities in new ways to create new markets or new categories. One thing is clear - banks will need to continually and quickly test new models and markets, to grow.
Shareholders place a premium on an organization’s ability to grow organically, and as a result, at above-industry rates, financial institutions always face pressure to find incremental organic growth. While meeting that need, we also advise industry leaders to create the conditions for exponential growth.
An exponential growth mindset begins with the insight from Article 1. What enabled Netflix’s consistent exponential growth over the past 20 years? Netflix never thought of itself as a mail-order company, or a DVD delivery company. It thought of itself as a technology company.
While that euphemism is now a cliché across the financial industry, being a technology company actually means something. It means consistently investing in digitally-driven business capabilities, being devoid of dependencies, remaining automated through algorithms, and being engineered with machine intelligence at the core. Instead of being dependent on business process integration, Netflix, like Amazon, can quickly launch new capabilities by building on its API-driven digital foundation. They focus on dynamic processes that adapt to business needs, not fixed processes that are as hard to evolve as physical canals.
Banking and investment management insiders have developed an automatic reflex to this thinking.
“Yes, but they don’t have 50 years of mainframe legacy code and 2,000 systems cobbled together.”
“Wait till they enter a heavily regulated industry.”
“We get it. But our compliance and security teams sure don’t.”
What these responses illustrate is a fundamental misunderstanding of the root cause. Traditionally operated banks do not have technical constraints. They have cultural, organizational, and mindset constraints. This kind of thinking leads to the 'bolt-on' approach to automation and machine intelligence - systems that support existing processes.
The results may be somewhat 'better, faster, cheaper', but rarely produce sustained innovation. They leave organizations with a faster horse, when what they really need is a car.
Here is a framework to understand the three organizational mindsets that either constrain or enable truly exponential growth.
- Seeks efficiency in each discrete part of a value chain
- Designed to operate at scale through the division of labor
- Organized by functional areas of specialization with clear boundaries
- Defined by measures of success at the functional level
- Role of IT is to assist each functional silo to become more efficient
- IT is measured by adherence to scope, schedule, and budget
- Seeks to maximize efficiency by automating core processes
- Intends to enter new markets with reduced organizational and technical friction
- Introduces design thinking to foster greater customer-centricity
- Organizes around core business capabilities, introducing product thinking and cross functional teams
- Fosters greater innovation via learning through experimentation
- Focuses on reducing functional dependencies by building microservices and establishing nimble platforms for more seamless integration
- Enables greater collaboration and automation through DevOps practices and behaviors, leading to faster software production release cycles
- Automates the ability to address a broader range of customers, and serve a deeper set of customer needs
- Amplifies the impact of digital service through real time access to cross-enterprise data assets, and algorithmic automation
- Drives automated, granular decision making and dynamic updates leveraging enterprise & ecosystem data
- Integrates capabilities and data from broad ecosystem to curate and package holistic solutions for customers
- Dynamically individualizes offerings and pricing for customers based on their needs and the risks they may pose
- Creates a flywheel effect by reducing organizational and technical friction
This is the second article in a four part series on the steps needed to innovate and turn your financial services institution into an intelligent enterprise. Click to read Part 1 and Part 3.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.
