David Brear is CEO of 11: FS, a fintech consultancy
Gavin Allen: What is the most common mistake legacy banks make when it comes to going digital?
David Brear: Banks approach everything like a project, working on 12-month budget cycles, picking two or three big bets, investing for two years, and at the end of it having a “thing”. But the world just doesn't work like that.
The advent of the internet and the digital wave that hit the shores of financial services fundamentally changed how an organization has to operate. It needs to be iterating quickly and listening to customers because of the increased competitiveness of the market. It's the old Darwin quote: it's not the strongest of the species that survive, but the ones most adaptable to change.
And the market is changing so quickly—that’s what organizations need to focus on. You've really got to connect with customers and understand how technology fundamentally changes the operating model of your business.
Gavin Allen: And have they been slow to do that?
David Brear: The challenge is when the things that made you successful are no longer the things that are your greatest advantage in today’s market. What we’re seeing is a veneer of digital—the pursuit of features and functionality over really embracing digital as a way of being. This is an industry in transition. We’ve gone from a predominantly analog establishment with physical money, physical branches, and physical people to the pursuit of replacing those things. So, why are banks doing that? It isn't to solve customer problems. It's to solve their own problems.
It's about reducing operational costs. It's about being able to do the things that they did analog-wise, but doing them digitally. People basically manifest pieces of paper on the internet, and really, that misses all of the real advantages that digital can bring. So, I would say that they are failing. Despite billions and billions of pounds being spent, they’re not really embracing digital in the way that they could.
It's why we're seeing gigantic banks spend £12 billion a year to keep their technology estate alive. That wouldn't be the case if they were doing it properly. If the market’s shifted, but you're still playing the same game, in the same way, with the same 200- to 300-year-old business models, then you’re never really going to maximize your advantage in the way that a start-up might do, or somebody coming fresh into the industry and really taking a new look at it.
Gavin Allen: What would it entail to get past that veneer and, as you say, “do it properly”? What are they currently not doing?
David Brear: A technology organization iterates and will deploy, in a singular product, code-to-live maybe 100 times a day. And that organizational rhythm of small increments of testing and learning, of de-risking change, of having tech that allows you— if there are mistakes—to re-build systems in seconds, is fundamentally different from a bank’s culture. If it takes you longer to build the capability and get it to market than it does to talk to your consumers, then you're probably always building something out of date, for a market that was two years ago when you started that project. The most important thing about any project is that somebody actually cares about it at the end. We find that because of banks’ culture and elongated approach of getting things to market, they spend more time on strategy than they do on execution. Companies that have really embraced digital spend much more time executing because, fundamentally, ideas are easy. It's executing and getting them into the hands of customers, which is the bit that really drives the business forward, increases sales or customer satisfaction, or decreases costs. Not talking about it.
Using more than 1% of your digital potential
Gavin Allen: You've spoken about the difference between digitizing bank operations and full-on digitalization, and said that most banks have embraced only 1% of their digital potential. Is that the cultural issue you're referring to?
David Brear: Definitely. Every organization is made up of people. It’s the constraints around those people, the culture of the organization, the budgetary controls—everything that manifests the way in which those people can behave. And when you look at large US banks with multi-state licensing or gigantic global banking organizations with 20 different monolithic structures in 60 different countries, then the sprawling estate of technology becomes almost impossible to manage in any coherent way. And this is why they become paralyzed.
It's easy to manage marketing. The hardest thing to manage is real change. There’s a need for organizations not to be driven by next year's profitability and revenue but to take a long-term view of what is required to fundamentally change the fabric of that organization. We joke that digital banking is 1% finished because of how little impact it’s had. There are opportunities ahead to solve real problems for customers and make financial services better. We have the tools to do it, and, more fundamentally, we've got competitive pressure in the market. That means banks will no longer have the ability to do nothing about this problem.
It can’t be taught, and it can’t be bought
Gavin Allen: You've previously said that culture and a new mindset are things that “can't be taught and can't be bought.” But if you can't teach or buy it, how do the legacy banks get there?
David Brear: Digital product management is a dissemination of decision-making to the edges, and that's difficult in a traditional command-and-control power structure. Product managers need to make decisions because things are going live 100 times a day. They’ve got to have a deeply ingrained connection to their customers and solve problems for them. The problem with trying to buy the outcome is that if you don't really understand fundamentally how hard it is to deliver, then the management and maintenance of it are much more difficult than the building of it in the first place. If you outsource all of your intelligence to somebody else, then what are you left with as an organization? Every IT department thinks they can build anything. But does your organization actually have the ability to sustain the development, the progression, and the integrations that are needed to really make that thing flourish?
We've seen examples of people building core banking systems completely themselves, but three years and £400 million later, they’re thinking very differently about those things because they're not their core capabilities. Fundamentally, they are not technology businesses and are not structured in that way. They don't have that talent or the basics of the cultural budgeting processes to really make those things happen. It's a dangerous world because people who are brilliant at these things make it look easy, in the same way that Michael Jordan made shooting a three-pointer look really easy. It takes hard work, determination, and real dedication to bring together the right people and enable them to do the right work. Without that, you can bring in big consultancies or big tech firms or whatever and pay them to solve these problems for you, but that's like getting your personal trainer to do all of your press-ups and sit-ups for you. When all those organizations have gone and you're left with your own organization, you need to have the talent, skill set, and culture to really make things happen.
In vino veritas
Gavin Allen: So, you can have these partnerships—the external advisers, consultants, infrastructure as a service, and all the rest of it—but you've got to have some core abilities in understanding as well. You can't outsource everything; you can't outsource knowledge.
David Brear: Yes, I think there's an insourcing of ability. Don’t outsource your intelligence is a mantra of mine, but equal to that is ensuring that you have senior leadership with an appreciation of it as well. There are far too few C-suites and banks with real, deep technology experience. And that leads to a distortion of reality about what can or cannot be done. I've got no idea about wine, so the idea that anybody would allow me to pick what bottle of wine to have over dinner is a travesty to anybody who knows anything about wine. It’s the same for senior leadership in organizations: you've got to break the cycle. If you don't have the skill sets to understand what good technology looks like and what the impact of bad technology is, then you've got to get that talent into your organization now. You've got to have people who have been there, done that, and really made it happen. You want the frame of reference for decision-making to be of today, rather than yesterday—leadership that evolves their thinking and understanding of advancements in technology, the competitive landscape, and therefore their position in the market. All of these things lead to fundamentally better decisions.
Gavin Allen: Huawei offers core support services and solutions to a lot of legacy banks. You obviously support partnerships but are saying that bankers need to work together with these technologists, to truly understand the tech.
David Brear: Absolutely. The relationship has moved from a traditional master and slave—we pay you to do these things, and then you go away—to much more of a partnership. A big part of that is not just doing, but learning. It’s the pursuit of a different outcome with a different culture that creates sustainability. It's like construction: get the foundations right, and you can build a pretty tall tower.
Gavin Allen: A couple of years ago, you said you'd still not seen a truly digital bank. Is that still the case?
David Brear: I’d still say that digital is an emerging thing. When you look at financial services organizations, we're in this weird, first combustion-engine car phase. The things that are out there look oddly similar to the old organizations, but under the hood, they’re fundamentally completely different beasts. The first car looked like a horse and cart to stop people from freaking out. But it didn’t have horses; it had a combustion engine. The new banks that are out there now look very much like the traditional retail banks, but under the hood, they're very, very different things in terms of what it costs to run them and their ability to deliver at pace. What we'll start to see is the march towards self-driving money.
We’ve got to a point where the industry offers quite basic self-service, but people's financial literacy or understanding of basic financial terms is getting worse. Financial services need to move to a place where they’re fundamentally there to make people better off.
Machine learning, algorithmic banking, and AI, along with the opening up of data platforms to gain access to information, allow you to present people with better decisions. The concept of self-driving money is where my bank is there to make me better off. It will move my money around to make sure that I'm always getting the best products at the best rates. I’m always being looked after, and I effectively sign away power of attorney for that. That feels like the future to me. I don't think people really want self-service. They want a service. In the race to digitize analog, the bit that we lost most was empathy, the management and translation of those difficult subject matters. The human part is the missing ingredient.
Gavin Allen: You’ve compared legacy banks and startups to the race between the tortoise and the hare—that legacy banks move really slowly. But, of course, the tortoise ultimately won that race. So, do you think legacy banks will come good in the end?
David Brear: Except that the hare should have won that race 100 times out of 100. It was the hare’s overconfidence and arrogance that meant that the race wasn't a formality. And maybe that's a good warning for the industry. This race has a long way to go, and legacy banks have still got hundreds of millions of customers globally, with deep pockets to invest in solving these problems. Fintechs have still got a long, long way to go before they even remotely catch up in terms of scale. So, the race is definitely not over. You wouldn't bet against the people with all the money and customers to mount a comeback. But what’s stopping them is themselves. They have to let go of the things that have made them successful and understand that the market has fundamentally changed. It needs a shift in mindset to allow a new one to really take root. Every 10-step program starts with admitting that there’s a problem.
Gavin Allen: That sounds like a top tip for any bank exec mulling over how to achieve this successful transformation. First, do you recognize you have a problem?
David Brear: It’s my wine point—admit I have no idea what I'm talking about in order to learn what it is that I need to know. The industries that are most highly regulated do this stuff so much better than financial services. The medical industry can literally go from having no idea about something to getting a drug out to save people's lives without killing millions. Similarly, the military can decommission submarines and take new things to market. Bankers sometimes try to warm themselves under a blanket that says this is too hard and nobody else is doing it. But the reality is that they’re being left behind because every industry is doing it. That leaves opportunities on the table for other people. The biggest threat to banks probably isn't fintech—it’s the big technology companies that get this better than anybody else does. They can get in front of the consumer and solve real problems for them with a brand that they don't just tolerate but really love. That fundamentally changes the way in which the industry shakes out. They've got more budget, more customers, and bigger brands than any of the banks. That becomes super interesting, but equally incredibly scary. You’ve got to have the emotional intelligence as an organization to let go of “owning” the customer when it comes to the distribution of the products you sell. That’s well-trodden territory for tech players. But that's really new for big banks. So, that's a scary thing or a great opportunity, depending on which side of the argument you’re on.
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