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Magic wand or magic wallet?

What traditional banks must do to embrace digitalization

An interview with Dame Jayne-Anne Gadhia, Founder of Snoop / Former CEO, Virgin Money

Gavin Allen: What does it currently mean for legacy or established banks to “digitalize”?

Jayne-Anne Gadhia: In many areas, not just banking, moving legacy systems from COBOL programming and AS/400 hardware and the complex division of customer records is really, really hard. And I think that is what has caused a number of more established businesses to think very hard about their digital strategy. Some have decided that the best way forward is to digitize their front end so that customers can interact digitally with their bank while the established back end is still there and running. Others—the new tech banks like Monzo and Starling, etc.—have built a completely new digital stack, which means that both the front and the back end are supporting the customers through new technology. I think it's interesting to consider which is better.

It’s really, really important that banking systems are robust, accurate, secure, and fit for purpose. But I do understand why some of the legacy banks are very committed to systems they know work and have been giving very good service to customers for many years. That said, I think it's inevitable that over the years, some of those old legacy stacks will wear out. And in the end, all of the banks, like all companies, will have to move off their legacy systems and onto new technology in order to be supported and capable of keeping up with what customers need.

Gavin Allen: Is it about just embracing the future and doing both front and back end now?

Jayne-Anne Gadhia: If I had to come down on one side or the other—keep your legacy technology or digitize and adopt new technology—I would definitely come down on the side of new technology. But we all have to understand that it's not as simple as waving a magic wand. It’s complex, expensive, and risky. It’s a big project that people will have to plan for over many years.

Gavin Allen: Is it less a magic wand and more a magic wallet? Are they investing enough in digital transformation?

Jayne-Anne Gadhia: There are certainly huge numbers being bandied around by the big banks. So, I think all of the big banks are taking this seriously and, where possible, investing as much as they can in digitizing.

The big issue for all companies, not just banks, is that any sort of data migration is complex, and so even if you overhaul all your systems, you’ve then got to move the data from the legacy system to the new system. Doing that well, properly, and seamlessly for the customer takes real skill and needs to be done slowly and with real care. It's certainly not impossible, but I’m certain that banks will be planning how to do that well.

Gavin Allen: Do you think banks were quite slow to see the challenge of tech giants and challenger banks?

Jayne-Anne Gadhia: It's easy to create fintechs. But we do have to recognize that the “fin” part, the financial part, is as important as the “tech” part. The big banks are very well versed in how to run a bank well, in how to control, protect, and develop it, based on the systems and technology they’ve developed over the years.

I don't think banks have been slow to move; I think they've been cautious in moving properly, and I think that's the right thing to do. I don't think you can just throw away the old and start over with something as critical as this.

What I was planning to do at Virgin Money was to continue to run the bank on its legacy system and, in parallel, build a digital system. In that way, we could, over time, move customers from the legacy system to the new one. But they would run in parallel for quite a long period of time. A number of banks, or at least their products and customers, are likely to be developed that way.

Gavin Allen: Yes, you're carrying a bit of a porcelain bowl in terms of trust and security, and you have to handle it carefully. So, do you think banks need to employ digital experts, or is it enough just to partner with people who are experts?

Jayne-Anne Gadhia: Both, I think. As new technology is developed, there are inevitably subject matter experts that are outside all areas, not just that of a bank, and all institutions would want that knowledge and expertise. But I also think banks will want to make sure their technology is controlled by their own people, because it needs to be constantly operating correctly and providing a really secure environment.

If I were running a bank today, I would be saying, “I do want to work with external experts who are really on top of the particular technology that I’m using, but I also want to bring in-house digital expertise that can protect my bank and develop my own know-how.”

Gavin Allen: I’m struck by the fact that Snoop is very much about money management. Do you think banks slightly lost sight of that prudence of the past—that they became more focused on getting people to buy more products rather than helping people to live within their means?

Jayne-Anne Gadhia: Yes, I do, although I don't think that's necessarily where some of the system issues for banks have come from. The thing that was different in the past, and has affected a number of legacy systems is that banking businesses were developed on a product basis, rather than on a customer basis. For nearly all of the years that I worked in banking, the Holy Grail was what we called the Single Customer View: to be able to go into my banking platform as Jayne-Anne Gadhia and see all of the products that I've got with various banks in one place. And because the system tended to be built product-first and customer-second, you couldn’t do that.

But digital banks are able to start with the customer. That, for me, is the fundamental difference. The new technology has put them at the top of the hierarchy, where they can see the entire relationship they have with each other in one place, making it easier for customers to manage their money and see their financial position across the range of products provided.

Gavin Allen: What currently excites you most about the future of digital banking? And what's the next big opportunity for a visionary CEO?

Jayne-Anne Gadhia: It’s certainly exciting for customers to be able to see their money all in one place and manage it effectively and efficiently—to see how to get the best deals and the best service.

For banks, though, there's a lot of work that can be done to automate a lot of processes. I'd be surprised if CEOs and CIOs aren’t thinking about that at the moment.

Banking is process-driven, and I'd be very surprised if banks are not thinking about how they can reduce the overhead of more manual processes and enable customers to deal with them in one go. That will lead, in the end, to more efficient underwriting.

At the moment, the underwriting processes for any sort of lending, whether that’s secured mortgages or unsecured loans, are based on complex rules learned over time and tend to come as a result of customers being in different groups. If I applied for a mortgage, I wouldn't really be underwritten as Jayne-Anne Gadhia; I'd be underwritten as part of a pool of people that look a bit like Jayne-Anne Gadhia, if you know what I mean. With AI being able to understand everyone’s individual personal financial behaviors and habits, getting that much more tailored underwriting will enable banks to manage the cost of credit better for their bank and their customers.

Gavin Allen: In terms of the debate over AI, you sound as if you’re in the camp of “Press on” rather than “Press pause.”

Jayne-Anne Gadhia: Yes, I've been on a journey with that. I've definitely been in the alarmed camp, but I've concluded that, as with all progressive innovation, there are substantial benefits that can come out of it, and I think we should definitely press on and achieve those highlights.

But make sure we’re protecting ourselves against the downside. For example, somebody was saying to me that they had started to use AI to underwrite customers, and they discovered that AI was underwriting male customers better in all senses than women.

The problem is that AI is taking in the data that evolved over the years, where human underwriters had tended to favor male customers over female customers, and AI is embedding that in the future. They have to watch out for things like that. Once we’re able to both protect ourselves against the downside and make sure that the learning of AI is based on not just historic data, but on the data that we want to use going forward, then it can only be good, I think.

Gavin Allen: What are the other challenges facing banks when it comes to competing in a digital landscape?

Jayne-Anne Gadhia: I remember Barclays saying years ago that, effectively, banking would become a technology business. The competitive position would be decided based on who had the best technology and technologists.

I don't completely agree with that, because banks are complex things, and it's really important to be able to understand your credit risk, have relationships with your customers, and understand how your balance sheet works. Those are the real core USPs of retail banking. But provided you can get that right, then I suspect that being excellent in terms of digital technology will certainly be a competitive advantage.

Gavin Allen: Does digitalization bring universal financial inclusion closer, allowing more of the unbanked and underbanked to be banked?

Jayne-Anne Gadhia: If you assume that the vast majority of people have some digital capability – they have a phone – then clicking and accessing banking is easier.

But I think financial exclusion exists not just for reasons of access and technology. There are much broader issues around numeracy. It's really important that we help everyone develop numeracy, as you can't just use a banking app; you also need to be able to understand the inputs and outputs. In some ways, that easy access and easier response mean that we all need to be more numerate to understand what we're doing. That is still something we need to work on. The big banks, in particular, have said they don’t really make any money out of the people who are financially excluded. It’s a vicious circle. So, if we could find a way to provide straightforward access, improving numeracy, and if the delivery of the products to people currently excluded could be cheaper, then perhaps the big banks would start to service that contingent even better than they do today.

Gavin Allen: Finally, do you think that what some see as the ongoing global decoupling between East and West is having (or will have) an impact on digital banking’s regulation, values, and data security?

Jayne-Anne Gadhia: I hope we can learn from each other in terms of product, technology, customer service, risk, and regulation so that we don't have that decoupling and can constantly offer customers better value.

In the West, we haven’t been able to develop anything as ubiquitous as WeChat, but I’ve always looked at that as something to aspire to, and that's motivated me, in terms of how you might serve the customer. I would hope the core of banking remains. The ability to transfer money, to have access to money, and to save is something that customers want, wherever they are in the world. But I think there will be differences in how we offer products and services, and it'll be great to learn from each other and to give all customers a good deal.

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