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Digital banks making inroads

Digital banks making inroads

Digital banks making inroads

Zal Thomas | Partner,

The need for transformational change at Swiss banks

The Swiss banking industry has been a key driver of Switzerland’s economy and continues to face wide ranging and well known challenges, such as rapidly evolving customer expectations, emerging disruptive technologies and new digital-bank competitors as well as leveraging robust but inflexible legacy systems that worked well in the past but may not be fit for the future. The large Swiss banks continue to dominate the market, with digital challenger banks slowly making inroads. As the banking industry gears for the technology driven changes of the future, the traditional incumbent banks need to consider how fast and in which direction they would need to move. Should they seek change that is piecemeal, transformational or greenfield?

The Swiss Banks have traditionally focused their investments on optimizing capital and cost savings as well as in meeting emerging regulatory and compliance challenges. A key shift in the market place has been the emergence of digital players such as Fintech start-ups or ‘big data’ technology giants such as Apple and Google offering financial services. Customers have started embracing new banking models, which are decentralized and driven by compelling digital user interfaces, more aligned to their needs and lifestyle choices.

Alongside changes in customer expectations, banking regulations such as the ‘Open Banking’ directive require incumbent banks to open up their systems and data to third party market participants. Banking supervisory institutions are also pushing for banks to provide more frequent and real-time reporting of key risks and organisational changes impacting the banking industry.

Switzerland’s banks are of course investing in their futures, recognizing the need to drive innovation, enhance agility and become more customer centric. But for too many investments are focused on incremental change and patchwork upgrades to legacy systems. Even ambitious system upgrades are unlikely to produce sustainable competitive advantage over the long term. New digital challengers are able to design agile business and operating models from scratch. This is a luxury most established financial institutions do not have and greatly compounds the disruptive effect of the new digital market entrants.

Under pressure: digital banks making inroads

I usually dislike statements such as “this is what the industry will look like in 2030” as there are far too many variables to consider. However we cannot deny that technology will fundamentally transform the banking industry over the next decade, with new models and architectures emerging. We already see it happening as challenger banks such as Starling Bank, Atom Bank and Tandem have existed in the UK for some years, as have SolarisBank in Germany, Nubank in Brazil and Chime in the US. March 2019 saw the Hong Kong authorities grant banking licences to three digital banks that will go live later this year. These digital banks are growing quickly and beginning to make inroads in the market share of traditional banks.

How Swiss banks should respond

The Swiss banks have over time invested millions in innovation programs focused on leveraging the transformation ability of technology to become more agile and grow their market share. In my experience, banks have pursued a number of options in this journey including legacy system upgrades, establishing a digital bank, or buying a digital competitor.

  • Legacy system upgrades: making traditional ‘change the bank’ investments such as upgrading credit systems to approve loans more quickly, making systems compatible with application programming interfaces (APIs) and open banking regimes or integrating more robust data analytics.
  • Purchase a digital bank: this enables giving the buyer the flexibility to change or retain the purchased brand, migrate existing customers over, or pursue organic growth and enable cross promotion.
  • Establish a digital bank: producing improved services and greater agility. Although this option can be significantly expensive in terms of time and resources involved in getting in place senior management and securing licensing and funding. An option may be to partner with an existing digital banks (as RBS has done with Starling Bank).

Define a clear, ambitious business model

Whichever path a bank takes, it must be accompanied by a willingness to fundamentally rethink their strategy and organisational culture in order for the transformation to be successful.

A critical success factor in this regard is the cultural shift required in embracing innovation throughout the organisation as such transformational change would entail the need for staff to acquire new skills and capabilities. Banks would need to adopt agile organisational structures comprising of small flexible teams with business and IT staff working more closely across traditional organisational boundaries.

Change management would need to be an upfront and ongoing part of the transformation. The velocity of technology change and speed to market would also require more accountability to be delegated to entities and divisions, which may be closer to the customer’s pulse in the bank’s value chain.

In developing your approach, I suggest considering seven key questions:

  1. How will I create and monetize value?
  2. What changes are needed to bridge the gap where I am today and where I want to be?
  3. What is the cost-benefit of the necessary steps?
  4. Will modifications to legacy systems deliver the flexibility to compete in the future?
  5. If not, how might I build or adopt new technology?
  6. What are my time constraints and how long will the different options take?
  7. What systems, structures and partners can I leverage for my transformation?

This a highly complex issue that requires significant investment. But I firmly believe that Swiss banks that are willing to make radical changes today will be better positioned to lead their industry tomorrow.

Get more insights in our report: The future is open - reshaping the banking experience (PDF)

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