Conventional banks need radical strategic change to turn the tide

23 March 2022 5 min. read

Drawing from Arthur D. Little’s newly released book ‘Disruption: The future of banking and financial services’, co-author and ADL Middle East managing partner Philippe De Backer explains why the world is falling out of love with traditional banks, and how the right leadership can turn the tide.

Traditional banks are falling from favor. It is their newly emerged competitors that are in vogue: the digitally native banks with their agility, scalable models, low cost structures, and freedom from stringent regulations.

Confronted with these digital disrupters, conventional banks may well have a future, but it will be a different one. To remain relevant, it is time for radical change, and stakes are high: if leaders fail to act now, the days of conventional banks could be numbered.

Philippe De Backer, Global Leader of Financial Services, Arthur D. Little

The scale of the challenge

The magnitude of the challenge facing traditional banks is immense. To get a sense of it, we need look no further than Ant, the financial arm of Chinese marketplace Alibaba. Its technology can handle 544,000 loan applications every second and reach a decision to grant or not within three minutes. Meanwhile, Europe’s three largest ‘neobanks’ – Revolut, N26, and Monzo – have over 18 million registered users between them and that number is set to soar.

There are also incursions into the market from those with business profiles very different from traditional financial institutions. For example, Amazon Cash enables customers to load money from their Amazon account on to a card and use it to buy products at physical retailers. Meanwhile, supermarkets and high street brands have become post offices, banks, and bureaux de change.

It is here, where industry lines begin to blur, that customer loyalty to conventional banks starts to erode and the convenience offered by digital newcomers proves too tempting to resist.

Customer inertia, borne of trust and convenience, once secured the business of traditional banks for the long-term. That’s not true anymore. In fact, only just over half of Generation Z say they trust banks most with their money. Simply put, customers are falling out of love with their banks, opening the door for disruptors to enter.

The ambidextrous answer

Against a challenging backdrop, banks need to adopt an ambidextrous approach if they are to survive, let alone thrive. That means balancing short- and long-term priorities and exploiting existing markets while experimenting with new ones.

In isolation, exploitation of an existing market works brilliantly for prolonged periods – then fails. Take video hire company, Blockbuster. It fixated on trying to improve on what it had always done and failed to innovate. Meanwhile, streaming services like Netflix began taking over and the rest – including Blockbuster itself – is history.

Exploiting scale and productivity will only take a business so far. If they are to go further, banks need to learn from ‘explore-oriented’ businesses. Such firms are typically smaller and less complex than those in the exploit-orientated cohort and they focus on experimentation, risk-taking, discovery and innovation. But they are also rare; in a study by Arthur D Little, only 8% of organizations were identified as explorers.

In the wider economy, such businesses are easy to spot and include the likes of Amazon, Google, and 3M. Yet in the financial services sector, far too many banks lean heavily into exploitation at the cost of experimentation.

Finger on the pulse

For a bank to become ambidextrous, the first step is to perform an honest and exact stock take of its current position. A initial ‘pulse check’ can give banks an idea of their current capabilities. They can then follow this up with a benchmark survey to see how those capabilities stack up against other banks.

After this ‘ambidexterity audit’, banks will have a much better idea of how to achieve a better balance between explore and exploit. For traditional banks, this will necessitate a total rethink of the business model to enable them to differentiate themselves in an increasingly commoditized market.

Disruption: The future of banking and financial services

Leadership matters

While the right tools and a little introspection can go a long way, the most important thing banks can do as they embark on their journey of transformation is find the right person to lead them to the promised land. Here, boards must play their part by choosing a chief executive with the capabilities needed to lead a bank of the future.

The person they are looking for is a rare breed. He or she is a mix of innovator and optimizer: someone who can replicate in a large legacy bank the drive and innovation of a digital start-up, while simultaneously squeezing the most from an organization in the short-term.

The board must also bring in new blood that will stimulate change. Research clearly shows that diverse teams perform better. This means a widespread mix not just of age and gender, but of technology skillsets and digital acumen too – all of which are vital to challenging a board’s traditional assumptions that can hold it back from change.

Bankers who hide behind the excuse that transformation initiatives will disturb business-as-usual miss the point. In a brave new world of neobanks and digital fintech, disrupting business as usual is precisely what needs to be done.

Philippe De Backer is managing partner and global practice leader of financial services at Arthur D. Little and co-author of ‘Disruption: The future of banking and financial services – How to navigate and seize the opportunities’.