It's What We Know for Sure That Just Ain't So
By Mark P. Dangelo
June 27, 2017
(Mark Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA Insights. He can be reached at firstname.lastname@example.org or at 440/725-9402.)
It was back in 2009, at the height of the government releasing $700 billion in Troubled Asset Relief Program money, I was driving in a suburb outside of Cleveland, Ohio when I noticed a recently closed Donato's Pizza with a signage overlay stating, "Coming soon, your new banking branch to serve you better."
Really? Another banking branch on a street where two others were just closed and four others still exist?
Even eight years ago, physical branches were transforming drastically because of smart phone emergence, consumer behavioral shifts and an economy that had leveraged itself beyond its ability to repay. As I shook my head in disbelief on the reasons not to expand a brick and mortar footprint in a deep recession, I was reminded of Mark Twain's quote about reality: "What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so."
Now in 2017, it's a cycle we seem to be on the verge of repeating with expanding artificial intelligence and virtual reality solutions, the demise of bricks and mortar retail and with household debt nearing $13 trillion (spurred by the trillion dollars rise in student loans). Today, this is where financial institutions find themselves--struggling with the past, while trying to comprehend where to direct precious funds for future growth and profits.
Yes, there are many leaders who still cling to axioms that have long since expired--unable or unwilling to see the vast changes taking place from consumers to technology to widespread commoditization all within one of the most regulated industries in the world. Many of these leaders are surrounded by staff of their own choosing, consultants who rely on project payments and investors who demand staying the course over transformational boldness. It's a quandary to be sure--but the alternative is to recognize too late that "what we know for sure that just ain't so."
As examples, before the Great Recession of 2008, we knew the breadth and depth of financial institution staff and partners surrounding all aspects of financial products and services would create a new utopia of leveraged profits. Before the recession, we knew investments would appreciate with little downside risks. Before the recession, we knew the safeness and soundness of the financial systems--global and domestic--were unshakable and likely never come into question. Before the recession, we knew many things for sure--but that is what got our stoic financial institutions into trouble, while following the Davos celebrities off a cliff of their own making.
In revisiting this popular Mark Twain quote, I started in 2013 viewing financial institutions and their operations from a world that was no longer of their design and farther from their control--i.e., I saw the reality of Dodd-Frank fracturing their grasp). For you see, their design and operating beliefs have changed only incrementally, compounded from the mid-1960s, even with abundant adjustments from technologies, processes and regulations.
What was substantially and consistently missed were the consumer changes and attitudes toward financial institutions especially as empowerment in purchasing, social interactions and brand voice rose beyond the brick and mortar of the once valued branch (only deemed valuable by a dwindling Baby-Boomer generation). Bankers believed that with efficiency and technology they could stay ahead of a curve that they strategically envisioned--because they created the world they wanted to change.
Throughout this year, I have put forth a year's worth of articles talking about the rationale and implications of financial institutions markets, operating structures, personnel, outsourcing and the likelihood that with "Bricks, We're Never Coming Back to This." And with all the changes afoot, the real demand is to eliminate misguided axioms and focus on the future--transformations, mergers and acquisitions, partnerships, retirement, product mixes--using competency lanes mapped around centers of excellence.
Whereas the complexity of the approach can be on the surface intimidating, the general foundation for improvement cluster around seven distinct poles: innovation, competition, data, customers, operations, markets and technology. A common trap for most organizations is that their efforts are concentrated singularly around innovation and competition. The former is something they believe will lure new customers or improve profits and the latter in response to external pressures resulting from other's initiatives. Yet, over the past decade, most corporate efforts are concentrated around these two poles of (re)action ignoring the five other areas that are within the financial institutions; control.
For financial institutions, unrealistic frameworks promoted to incorporate the external drivers of innovation and competitive pressures into their going-concern environment resulted in a very high failure rate--using a prescription model that neglects the side-effects inherent within populist delivery approaches. Moreover, because the internal Centers of Excellence work is not as glamorous or prestigious as external events (i.e., everyone wants "innovation" on their resume), the competency levels needed for adoption and adaptation are made apparent only after bumbling and stumbling to failure as items needed low priority became critical path. Organizations also erroneously internalize requirements that everything must be in flux at the same time rather than segment and iterate current state people, processes and technologies (see figure below).
Too often, financial institutions and particularly those within the lending space, ignore the foundational items needed for success. There are others who take it to the extreme by trying to control and vet all elements of competitive pressure and innovation before they can get anything put into motion--believing in an old waterfall axiom that design is everything even when you are operating in an environment that is outside of direct influence.
To shed additional light on why financial institutions must move beyond the "innovation panacea" and spend equal initiative efforts towards the five internal groupings, I have extracted a passage from "Bricks--We're Never Coming Back to This."
The past decade has produced countless innovations across financial institutions--Voice Response Units, ATMs, due diligence, kiosks, biometrics, standards, mobile banking, loan processing, funds transfer and many more technology enabled solutions within payments, deposits, settlement, customer service and credit processing. Nearly every idea being pushed to executives has "innovation" somewhere in the title. Innovation is the answer to all the problems--yet, it has become meaningless in its overuse: "Innovation to grow organically..." "Profit by innovation ..." and our favorite, "Innovation will expand our customer base ..." Seldom is the question asked, "What, why, how and does it make sense to adopt or create an innovation--will it help?"
The reality is that when each of these taxonomies are broken down into more digestible line items, a path map becomes apparent as you work from the growth to the goals to the results (see figure below).
The idea of using lanes of improvement corresponding to required centers of excellence provides iterative focus in what otherwise may be deemed to impractical to accomplish within set time frames (e.g., time boxed delivery).
Additionally, using this framework spurs questions on "What's Next?"
--Where will boundaries be created by customers with regards to the use of their data as accumulation grows and methods of collection blur boundaries of ethics?
--How will banks adapt to a reality that customer engagement will be controlled by channels outside their venue and the customer profiles once deemed mandatory are separate of their offerings?
--How will non-traditional customers be served in a mobile banking-as-a-service economy where loyalty incentives are limited?
--Where can financial institutions capitalize on investments in a global push to match lending needs directly to borrows and risk-willing lenders (beyond a deposit to lend model)?
--Beyond disintermediation and commoditization, how will traditional institutions compete with alternative providers and platforms?
--Can financial institutions hope to drive change or will they be regulated to behind the scenes plumbing (if they cling to their history)?
--With pressures on spreads, channels, customers and products where should financial institutions be seeking opportunities and how should they build, buy or partner for it?
--With "lanes" of delivery increasingly being specialized and defined, where and how should financial institutions prepare to adapt--or divest?
Using these illustrative questions to focus the frameworks presented above, we can then objectively examine why the idea of innovation draws the attention and money of banking executives. We can cast innovation with acceptable expectations and realistic priorities. Challenging innovation is warranted if financial institutions hope to achieve their place in future markets and wallets. Innovation must be relevant and responsible--not a cliché that can be latched upon in the hope of defending the castle. I've included one final reflection on why merely deploying innovations across the product mix will merely patch catastrophic foundational cracks (excerpt from "Bricks--We're Never Coming Back to This").
If innovation is clichéd, then the idea of digitization is also worn-out as most banking innovations, especially with factoring in Fintech announcements and media attention, involve some form of big data digitization. Consensus thinking suggests the future of banking is all about automation (goes back into the 1960s), efficiencies (going back into the 1980s), redesigns (starting in the 1990s) and mobility (now going back around a decade). But, is the future of banking singularly about one of them, several of them or is it something new based on the culmination of history--about a fresh start?
For banking leaders, change across channels, markets and customers will be fast and uncompromising. To take time focused on strategy or approach to the detriment of delivery and results can be career-ending delays.
Yet, to find a better approach or framework to ensure that all elements necessary for success are identified and delivered, moves consumer adoption and satisfaction beyond the statistics where 75% of banking customers firmly believe these institutions offer no value-add to the evolving financial supply chains. It is still the ghosts of our predecessors walking down their mahogany corridors reinforcing what "just ain't so."
Will it end with financial institutions creating vastly different financial supply chains and applications? Will it end with banking-as-a-service models pushing traditional providers into the infrastructure and white-labeling industries? Will it end with vast mergers and acquisitions--with the mighty pushed to the future fringes?
I close with a quote attributed to Wells Fargo's 2004 annual report, "Banking is necessary. Banks are not." It's sounds advice in a world that is swiftly becoming very foreign to many leaders.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)