Congratulations! The banking industry is now stronger than ever. Don’t take your bows yet, though, because the work doesn’t stop here.
Despite rising interest rates, low credit losses (though they are going up) and other strong macro-economic factors, many banks need a major transformation. That’s because a disproportion of time and investments has been focused on regulatory changes and cleaning up the mess of the financial crisis. As a result, banks haven’t paid enough attention to the technological changes that have altered banking forever.
And now many banks risk being left behind.
It will take thoughtful planning and intensive work to seize the future. Banks still need to wring out costs from legacy systems to free up investment dollars. Organizations must focus on delivering satisfaction to increasingly demanding customers who want to open accounts online, receive personalized offers, and relevant advice. After all, customers have plenty of places to turn for financial services, and a growing number of those choices aren’t coming from banks.
Bank leaders are also under pressure from boards and investors who are seeing the same revolution. They want to know where their institution fits in the new world of banking. If they don’t like what they see, they won’t hesitate to pursue change.
The decision to embrace a transformation typically is triggered by a potential crisis. It’s unclear if we’re at the crisis point yet. However, we believe that the signals for more radical change are becoming stronger. Becoming more proactive on acting on them will be the difference between moving more boldly into the future or potentially stuck in a more panic-stricken burning platform situation.
Leading A Transformation Is Hard Work
Most transformations over-promise and under-deliver. There are myriad reasons for that, but one of the largest is that organizations don’t keep close enough tabs on their customers. That is inexcusable today because it is very clear what customers want: more convenience so they can bank when they want, where they want, and how they want.
Another prime reason for failure is because organizations that need to transform themselves tend to underestimate the competition. Again, there’s little reason for that to happen in today’s environment. Bank competitors already are beating on the doors of traditional bank customers, resulting in market share gains.
Novantas believes that banks must take specific steps to improve the chances of a successful transformation.
First, transformations typically require material changes to cut costs, grow revenue and fund new investments. As an example, despite closing thousands of branches, banks must continue to overhaul their distribution networks. More branches need to be consolidated; Novantas estimates that one-third of all U.S. branches are still unprofitable. Reinvest these savings into new digital services for customers that highlight the bank’s brand.
Second, management needs to change too. Transforming a company is hard work that is made even tougher in an industry that is notorious for its silos. Changes in work flow, performance metrics and governance are all on the table.
Third, a successful transformation needs to start with a vision of the next horizon. That doesn’t mean leaders have to be fixed to a particular path, but they must commit to this “point of arrival” even if the future is murky.
How To Tackle A Transformation
Transformations can take many forms. They can include the material reshaping of a business portfolio, the elimination of layers and other cost reductions, or major innovations.
The expense-oriented approach can seem like a quick fix to yield benefits in the short-term, especially for investors. But they can also inhibit future revenue growth, especially if investments aren’t made appropriately for the future.
Bolder approaches aimed at radical innovation may appear to succeed in a closed environment, but can fail to gain the financial and management support from traditionalists who have been the revenue generators. Initial excitement can be difficult to sustain, leaving an organization fatigued without accomplishing the goal.
Novantas believes that the most successful transformations are those that focus clearly on the customer’s needs, providing a clear path to achieve distinction and, ultimately, satisfaction. They can take the form of well-designed small innovations that carry fewer risks, but can have big pay-offs when executed successfully.
Better Transformation Principles
Ultimately, the goal of any transformation is to evolve into a healthier, more agile company that can generate revenue, grow its customer base and gain market share. To do so, banks must consider four key questions:
- What are our key products and associated services? For most banks, the operating accounts and the associated services (online, mobile, bill pay, merchant, and other services) and the savings and credit tied to these relationships, represent the best measure of customers’ attractive revenues and profitability. This holds true for consumers, businesses and commercial customers, both for existing and new customers. This historical focus is fundamental, but perhaps not enough. Banks need to follow customer behaviors that will likely redefine value-added products. That may require the bank to think outside the box, create new value-added services and/or require forming new, non-traditional alliances. If banks continue to define products as they already exist, they may miss an important opportunity to differentiate themselves.
- What is our distinctive differentiation with target customers? Once agreed on the key products, it is easier to focus attention on the most important customers and their needs. In the case of most banking customers, convenience (defined as easily accessible, reduces efforts, saves time, avoids hassles, and better informs) is table stakes, though the expectations of convenience are changing. National banks have invested heavily as they see customers turn away from branches and the traditional sales and service functions to more digital services that customers increasingly prefer. Banks can also tap the emotional needs of customers, providing services that may be valuable to them, such as helpful face-to-face assistance and making them feel that the bank is doing what is best for them. Such tactics can help build a brand.
- How will we continue to “innovate” to further improve our differentiation? This is a step that helps the best companies succeed — stay tightly focused on the core products and gauge customer needs. This will translate into above-average customer growth and revenue, creating a virtuous cycle in which a bank can continue to reinvent offerings. We believe this is a key step in a well-designed transformation effort where an organization begins to discover a new way of working that needs to be guided and managed internally. It is one where customers and what is important to them is front and center. It is also where the organization learns and comes to accept that not all efforts succeed, and that agility is critical.
- Managing the transformation for longer-term success. Once the organization can answer questions 1, 2, and 3, it is notably easier to consider the other issues that will need to be addressed in establishing a successful longer-term transformation. These include employee engagement and ownership of the change, sticking with the plan to hit the “point of arrival,” and development of the necessary new competencies required for success.
Transformation is an ongoing process. What works today may not work tomorrow. The best companies are the ones that can identify the need for change, and then take the bull by the horns to achieve it.
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