Their names are often short and intriguing, like Bo, Marcus, Vio and Simple. Then there are the more official-sounding versions, such as PurePoint and Citizens Access. Finally, there are the familiar names that are popping up in new places, like PNC and Capital One.
They are different versions of the same goal: attract a digitally-inclined audience without building branches or re-pricing the existing customer base.
Novantas considers these to be “successor bank” strategies that can be structured outside the confines of the existing business system. Once developed, they can guide the digital enablement of the entire institution.
The successor-bank format varies based on a bank’s goals. For some, it can take the form of developing an ultra-thin network that has just a couple of branches in a new geography. For others, it may be a branchless offering that is separate from the traditional bank. In all cases, it should represent a break from the historic model that was dependent on branches.
The development of a digitally-focused successor bank requires skills, processes and technology. Some banks may think that it will take too long to build, given the pace of disruption in the industry. But the price of waiting could be fatal.
A successor-bank transformation is necessary regardless of the economic environment. When the economy is good, banks have more time to make the transition. The current landscape of falling rates, the threat of recession and customer adoption of digital banking, are forcing banks to address the issue now.
That is because banks need to operate more efficiently and in a more responsive manner to changing customer needs. It means new systems, new organizational structures, new processes and measures of success.
There’s no argument that banks rely heavily on old operating systems that are too complicated and sluggish to meet the demands of disruptive technologies. But it is far too time consuming and expensive to discard existing systems all at once, especially given the cost pressures that typically accompany tighter net interest margins. A successor bank can help ease that transition by introducing new systems on a smaller scale that can eventually be expanded, potentially replacing the legacy system.
After all, disruption is upon us. There is a secular shift underway in customer attitudes, demands and money worries that is only likely to accelerate as millennials and Gen Z consumers age. (See Figure 1.)
BUILDING A SUCCESSOR BANK
The key measure of a winning successor bank is the volume of new-to-bank customers acquired digitally. That requires distinctiveness in the marketplace. Banks have many distinctiveness levers to pull when competing for younger customers. (See Figure 2). Distinctiveness can be rooted in a specialized sales force, targeted marketing, brand affinity, innovative products, personalization or price.
Novantas has identified a range of different models that mix a target segment with a distinctive proposition and a unique delivery model. They range from a branchless national strategy to an in-footprint bank with a full digital offering that is distinct from the legacy brand. Why not build a bank that has no branches, but rents a second-floor office space for customer meetings? Or how about adopting online “meetings” so that a banking specialist can discuss wealth-management opportunities with a customer who is sitting on her living-room couch?
To get there, senior management must act urgently to determine if it wants to build the key components, buy, rent or share them. (See Figure 3.) The goal is to quickly create a company that focuses on digital acquisition, loyalty and cross-sell opportunities.
THE HUMAN FACTOR
Such a strategy can present some unique cultural challenges. Tensions are certain to emerge when a new technology or corporate culture is introduced within the legacy bank. Thus, there is logic for creating a separate division that protects the new organization from the complexity of traditional internal siloes.
The successor bank also must employ new technology and marketing campaigns rapidly and continuously. This will create conflicts within the existing priorities of the legacy organizations that aren’t accustomed to quick change. For example, traditional advertising and targeting programs can take months to develop — an eternity in today’s quick-moving world.
Dedicated leadership can reduce these conflicts and speed decision-making outside the legacy bank. Eventually, this new entity can serve as the blueprint for a new system down the road.
INTEGRATING OLD AND NEW
In order to ultimately make a material difference in an institution, the capabilities and technology of the successor bank need to be exported to the legacy bank. Indeed, the reason for pursing a successor bank should be to eventually transform the legacy bank. There are numerous examples of this in other industries. For example, Netflix developed its streaming business at a time when the company was focused on physical DVDs. And online brokerages evolved to supplant phone-based discount brokers.
Every year of delay in creating a successor bank means the cost of action will increase. Whether the disruption is coming from traditional rivals or new fintechs that offer razzle-dazzle apps, standing still isn’t an option. If you don’t create your own successor, you may be succeeded by someone else.
Kevin S. Travis
EVP, New York
CEO, New York