by Mark Warren, Neil Gardner

The race to stay relevant

Bank executives know what macro trends show: The banking landscape is rapidly evolving, with both seismic and subtle shifts that will define winners and losers over the next 10 years.

Non-traditional entrants (e.g., Chime, Square, Affirm) are providing new ways of doing business driven by innovative and integrated technology. Consumers and small- to medium-sized businesses (SMBs) are embracing them, adopting services from both neobanks and fintech companies and establishing relationships at the expense of traditional banks. Along the way, new business models, such as embedded finance and banking as a service (BaaS), have emerged to support tech-enabled approaches to financial services.

The rapid growth of non-traditional entrants is redefining the marketplace. Traditional banks wanting to exploit the opportunities and mitigate the risks of this sea change need to make IT a differentiator. What’s holding back many banks that know they need to change? And why are only 29 percent of financial services and insurance industry (FSI) transformations seen as being successful by business leaders?

New operational value, new operating model

Making IT a differentiator in this dynamic environment is more complicated than it might appear at first glance. How will you determine what you should be differentiating on? How will you make it happen? Who needs to be involved? How will you engage and support your people to make the transformation a success?

In our experience, banks that are successful in using IT to differentiate from competitors are not only solving technology or process problems. They are also creating fresh new operational value—actual value for their customers. To do this calls for implementing an operating model that balances speed to market and low-friction security to deliver on the things that customers care about most.

Using IT differentiation to create operational value

IT differentiation is a business problem, not just an IT problem, and must be understood and funded accordingly. It takes business and IT working together—most likely in ways they’ve never worked together before.

  • Start with a clear IT strategy. To deliver on the promise of your target operating model, technology transformation must include five key dimensions to be successful: business alignment; architectural debt; operational value; data continuum; and organizational dexterity. In our experience, all five dimensions are critical in avoiding blind spots and mistakes.
  • Understand your future-state architecture. Think of architecture as the building of technical guardrails—a series of decisions you make upfront to avoid headaches later. For example, you might decide “here’s how we’re going to connect to any external parties.” There are times when you need optionality, but when you don’t, building such guardrails will save time and reduce ambiguity.
  • Put customer experience at the center of change. This means always having the customer in mind as you make decisions and set priorities. Be explicit about who your customer is and what kind of value you’re trying to deliver to them. Use customer-centered thinking to influence the choices you make. For example, organizations tend to measure effectiveness from their point of view when it’s equally important to measure it from the customer’s point of view.

IT transformation is culture transformation

When companies fail at IT transformation, we find they’ve focused too much on technical problems and too little on people and ways of working. Transformation means culture change, which will require a robust communication plan to build ownership every step of the way. Instill empathy and understanding into your change management strategy by creating a way to measure employees’ readiness for change on an ongoing basis. Where are the impediments to moving forward? How can you support people to move beyond them?

An example: At almost every bank, most IT organizations and their CIOs grew up a world where their organizations think of themselves as a service organization, and they themselves as service providers. This is a deeply ingrained model within IT: “Business tells us what they need, and we do it.”

The newer, digital model to succeed demands more of a partnership between IT and business. If you’ve been trained as a service provider, it’s a big change to begin taking co-ownership of creating end customer value. Giving their IT colleagues a seat at the table as equals is a deep culture shift for business partners as well. It is a shift that leadership and managers need to address from the start. To do this, it’s essential to understand and address the impact on your people. Build the case for change upfront. Who are your stakeholders? Why are you doing this? What’s in it for them? What are their concerns? What retraining and reskilling will people need?

Across society and within the business world, people struggle to keep up with the rapid technology change around us and what it means for us personally and professionally. Banks that help their people and customers address this human struggle will be leagues ahead of those who focus too narrowly on technical problems and processes. Technology is a tool. Where do your customers and employees want it to take them? How can you know that IT is delivering on what matters to them?

Make sure your strategy to create operational value:

  • Aligns IT with the bank’s target operating model
  • Cultivates strong alignment between the business and IT
  • Addresses operational complexities to improve business velocity
  • Creates a cost-to-serve model that provides a complete view of tech costs
  • Has a consistent delivery framework to manage work (i.e. SAFe)
  • Operationalizes an enterprise risk-management model in IT, with cybersecurity aligned
  • Creates a capability-centric view of the enterprise to productize technology
  • Includes a talent-management strategy
  • Anchors on customer experience.

The Bottom Line

To succeed in the marketplace, IT differentiation needs to focus on creating operational value. This can be a complicated problem that requires a well-thought-out strategy, engages IT and business as partners, and puts customers first. What do they value most? How can you use IT to deliver and delight? The question now is not which banks will embark on a transformation, but which banks will lead the way and succeed in their journey.