Key Insights on Digital Transformation for Banks

A series of free webinars by Sigma Software continues its mission to guide businesses on the issues of coping with accelerated change associated with the pandemic. In a time of uncertainty and dramatic change, the need for digital transformation is essential to keep pace with the rapid movement towards the future.

Experts from Ukraine and Sweden joined the Digital Transformation for Banks: Trends and Challenges webinar and shared their experience about how to effectively drive digital transformation in banks. Hanna Khrystianovych, a Fintech Program Manager at Sigma Software, Rickard Eriksson, a Senior Adviser at the Swedish Bankers’ Association, and Sergii Danylenko, a VP at Middleware Incorporated, North America and ex-chief marketing officer of PrivatBank, the 8th largest retail bank in Eastern Europe, (moderator), covered the following topics:

  • The new reality – truly digital companies will survive.
  • What is digital transformation and what is it not?
  • What are the essential components of digital transformation?
  • Who will succeed in the end?

Webinar partners: Corezoid, Datrics, Sigma Software Labs.

Media partners: Nordic RegTech, Swedish Bankers Association.

Sergii: Let me introduce our speakers. Rickard Eriksson, PhD in economics and senior advisor at the Swedish Bankers’ Association. He previously worked at Riksbank, SNS, the Ministry of Finance of Sweden, and Stockholm University.

Hanna Khrystianovych, a FinTech Program Manager at Sigma Software. Hanna focuses on helping financial institutions and FinTech companies move in an efficient way in the digital world where we already live.

Sergii: I would like to start with common mistakes people make when they start digital transformation projects. A simple search in LinkedIn shows approximately 1,100,000 people with a professional title relating to digital transformation. But where are the one million digitally transformed companies?

I started digging deeper and I went to search for Google trends. I wanted to know when the term “digital transformation” started to take off. I found out that it happened around 2013. Why did everybody start looking for digital transformation? One of the reasons is that in 2013, one billion smartphones were sold in the world. Banks obviously needed to react. That was the tipping point where banks understood that the world has changed and they needed to go mobile: to have in place the necessary API infrastructure, microservices infrastructure, etc. Everybody needs to be really prepared for this digital world because we are not tied to branches or desktops anymore.

Many banks started doing digital transformation but a funny thing happened. Many banks started behaving like people in cargo cults focused on rituals instead of the real goal.

Ritual #1 is hiring developers. For example, JP Morgan Chase had 30,000 developers, Sberbank hired 22,000 developers. Looking at these figures, we might think that both Google and Apple are struggling because they have fewer developers than those banks, but those banks did not create anything like Google storage or the Apple iPhone. So, we cannot obviously solve digital transformation issues with just hiring more people to the team and it actually makes things only more difficult.

Ritual #2 is bloating IT budgets. Some companies started investing money in IT and their IT budgets skyrocketed. I know a company that states they have a 1 billion dollar IT budget per year. This figure seems huge but the research says that only about 30% of a companies’ IT budget actually goes to innovation while approximately 70% (according to other research – 80%) is spent on maintenance. They just keep paying DevOps to support server infrastructure and are not moving anywhere. Obviously you can’t approach innovation and transformation this way.

Ritual #3 – ideas from startups. Some banks attempted to organize startup contests hoping that startups from the external world would bring some ideas that they would be able to incorporate into their reality. However, I did not see any single startup that actually took part in such a contest and successfully transformed into something big inside of a bank.

Ritual #4 – a dedicated digital place. Many banks decided to open a digital hub or digital lab and transfer all functions related to digital there. However, it doesn’t work like this. If you have a chief digital officer inside the company, you might have a problem too because everybody starts thinking that this person will just take care of all the digital needs so they can just ignore these digital needs themselves.

Ritual #5 – request for proposals (RFP). This is another thing that you may know well from your banking experience. Banks announce an RFP but they do not result in innovations. The whole process usually takes years: first you collect proposals, then you develop software based on proposals, implement it, and you end up with a legacy system and with siloed pieces of software distributed all across the organization.

Ritual #6 – let’s just buy a magic pill. Some think that if they buy some super cool new software from an SAP or any other major vendor, all their problems will be solved. Very few companies understand that you can invest whatever money you think is relevant, but for a successful digital transformation you need more than funding. For example, Lidl invested five hundred million in SAP and it just failed because it’s not about the money in the end. You cannot buy something and stop worrying about going digital. Digital transformation is a process where all the stakeholders are involved. It’s not a one-time action or a decision – it’s constant movement in the right direction.

So, the question to our speakers is what should we do? What can possibly be done in this situation?

Rickard: Some innovations change an industry completely, while other innovations can be very useful, very valuable but don’t transform an industry. For example an airbag is a very useful thing, which saves a lot of lives, but it has not transformed the car industry. Although the airbag is an excellent innovation, roughly the same car manufacturers are still around before and after its introduction.

You can think about innovation in the banking industry in similar terms. The banking industry has digitalized to a very large extent. I’m from Sweden and the banking industry there is almost completely digital. But of course there are still a lot of things you can do better, smoother, or cheaper.

I think that the core thing about banks that has been around for hundreds of years is bank accounts. The good thing about a bank account is that you can be sure your money is safe and is not forged. It is the core banking idea and it will be around with the digital transformation that’s taking place.

Hanna: The digital transformation is very often about technology. However, to really transform the bank it is very important to think not only about the technology but also about people and processes. Actually, transformations should happen with all three of these components. My hobby is triathlons – you need to swim, ride a bike, and also run. One of the most well known triathlon competitions is the Ironman, a long-distance race consisting of a 4 kilometers swim, about a 200 km bicycle ride, and a 41 km marathon run. It takes 12 to 14 hours to finish this race and to prepare yourself for it you need at least 2 or 3 years. It is a kind of personal transformation, and lots of things change when you do that. When an organization decides to go through a significant change, that is a digital transformation, it needs to go through a similar process.

The start is very important in this process. If at the starting point a bank has many software systems, it creates a lot of complexity. The same is true with processes. Over the years of a bank’s history, processes can become extremely complicated and so it’s very difficult to even try to change them. The way you deal with this is very specific and should fit the organization. You cannot just ‘copy-paste’ that from another company.

It is important to understand that this kind of change is always painful and people play a crucial role here. People should change their approach to do changes in the organization, the way they communicate, the way they understand the client needs, etc. The bank should definitely support its people during such a challenge.

The next component is processes. It’s not a good idea to use all the existing processes when you start doing something new, you definitely need to change the approach. If you want to create an innovation or do an experiment, you don’t need to spend two years on it because it will cost a lot. You should change the process and find the way to check the ideas very fast. Thus, you’ll get quick feedback from the market if you are going in the right direction or not. That is a big challenge for many banks with a long history.

The last component is technology. Coming back to the triathlon metaphor, you can buy a twenty thousand dollar bike, but that doesn’t automatically mean you will perform better. Moreover, if your mindset and your body are not ready for the race that kind of device will not help you. Actually it can even make things worse and create some complexity for you. However, if you have the right mindset and if your body is ready, this technology can give you an edge in the race to win, to beat your competitors, and to be the best.

It is very important to remember all three components to achieve a truely digital transformation.

Sergii: A question from George: “In banking has Gartner’s Bimodal approach been helpful or a hindrance to digital transformation implementation?”

Just to remind what the Gartner Bimodal approach is. Gartner says when managing two separate coherent modes of IT delivery, you have one group of people focus on stability, and the other on agility. Mode one is traditional and sequential emphasizing safety and accuracy and mode two is exploratory and nonlinear emphasizing agility and speed. Going back to the question, so is it actually helpful or a hindrance to digital transformation?

Hanna: There are very efficient examples. From my point of view, it sounds like a good approach. Very often people can create some innovation but it’s very difficult for them to simultaneously focus on security and stability.

Sergii: I used to work in PrivatBank where we had a center for electronic business, where world-class innovations were born with dozens of patents. Some of these things were invented for the first time in the world. A shared credit card for example. Alexander Vityaz, the founder and CEO of our company, developed the technology that allows shared access to credit and debit cards, instead of doing money transfers. We were also the first team in the world that opened our APIs in 2010 while many banks in Europe were struggling to approach these European requirements.

I think we can talk here about some “secret sauce”, that is that you need to be driven by curiosity. That’s Alexander Vityaz’s idea: if you are curious, nobody can stop you. If you are not, then you talk about safety, regulation, compliance, and things like that. I think it’s a matter of character.

Here is a question from Hamid Hassan. Are there any common strategies to start a banking digital transformation? What are they?

Hanna: The first step is always to make the decision to transform and be very honest in that decision. It always starts from the CEO of the bank, the person who really influences and cares about the future of the bank. All the following steps on the path of transformation will highly depend on this starting point. For some banks, that process will not be as painful because of the preparations they did before.

Sergii: From what I see, successful projects are the ones where the CEO is an investor in change. In some cases, it’s good to have charismatic product owners who invest their energy in the process. Then you can start with using such a person and then engage the CEO at some point later towards the end.

We have a new question about talent:

A lot of young people think that a bank is just a boring place to work for. Do you agree or not? How could that be changed? How can banks compete and win the battle for the best engineering talents against, say, Google? How can you attract the best engineers to work on digital transformation inside banks?

Rickard: It was worse a few years ago when working for Google, Facebook, and other tech giants was very cool. Now things are changing. Some places are still cool to work at and if you work at Google and are really into making all these complex algorithms, it’s for sure great fun. But banks are also very big IT organizations that do important and complicated stuff. So, I think if you want to work for a big, important, and challenging organization, this can be found at a bank. If I were to make a commercial for a bank, I would say that the bank has been around for 200 years and probably will be around for 200 years or more and it will be digital now. So working at a bank utilizing digital transformation or digital development is a great option.

Sergii: A question from George: How can banks move from a project to product mentality? Or is that not important to digital transformation journeys?

Hanna: It’s a very interesting question. I have had such an experience – we once did a transfer from the project approach to the product ownership approach. I can tell you that that was one of the biggest challenges I’ve ever faced because a product owner in a bank is very often the person who just creates the pricing of the product and nothing else. The most important thing when moving from a project to product mentality was to groom people who would take responsibility for the product strategy, design, etc. In addition, we created cross-functional teams, including business and IT specialists. That was really complicated, but in the end it produced a very good result. We got mature people who could manage the product as a separate entity, which helped the organization earn money.

Sergii: Hanna, from your experience working with major vendors globally, what are the positives and negatives of working with huge European vendors? Should you rely on them as the basis of digital transfer?

Hanna: Huge vendors very often means projects for years. It’s difficult to understand what you will get in the end. The risks are very high and the environment is changing very fast. I can say that I’m not a fan of such big monster projects. When you talk about digital the main thing you need to do is change your IT architecture and infrastructure so that you can experiment. When you deal with a client these days, the changes are so fast and before investing a huge amount of money, you need to verify that the idea is really something that your client needs.

We created a huge number of projects, and inside each there were business requirements based on certain ideas. At the beginning of those projects, we vetted the ideas and discovered they had low chances of success. Imagine if we finished all those projects, spent two years and then understood that all those things were not working. This fact significantly changed our approach with vendors and projects. It has changed the way we make decisions about investments.

Sergii: Let’s talk about the skill sets needed to be an economist. What is your advice?

Hanna: An MBA is always very good for strategic thinking. It’s also important to at least try to have cross-functional knowledge. When I did digital transformation, I discovered that when people from business teams start thinking more and study things about IT, they understand technical stuff. After they understood what API is, over time all of them became API thinking people. At the same time the IT team understood more stuff about the business. Such cross-functional thinking helps make changes much faster. I would suggest not to just focus on one domain, but to try and be open to knowledge from other domains. We live in a world where everything is mixed, and it’s very good if you’re open and flexible to acquiring knowledge from different spheres.

Rickard: That is a very good point. If you are an engineer, when you start working, try to pick up what is the economic value of things and so on. If you are on the business side, it’s an excellent idea to understand the basics of APIs for example. When you’re out there working just try to get knowledge from everywhere.

Sergii: Let’s talk about modern digital banks. Are there any banks or particular features in banking apps that you admire?

Rickard: In Sweden all bank accounts are connected to Swish. If I know a person’s phone number I can transfer money to that person. After sending money, I get a personalized picture. That is something cool that people like to play around with. It’s also a way to make it hard to counterfeit a Swish payment.

Hanna: I use a Ukrainian neo bank, which is totally digital. For me the speed is very important. When I use that application, I feel that someone cares about me, I do not need to make a huge number of clicks. One thing impressed me a lot with that application. Once a month I pay my utility bills and it used to be a very painful process for me because I spent a few hours doing that. When I started using the neo bank, I was surprised that each time I paid utility bills it took me three minutes. Also, they added emotions with the help of badges and nominations. I believe that speed and emotions are very important. That is something that helped them to onboard clients and that is the reason why clients stay with that bank.

Sergii: And here we come to a question about the role of the branches. If you have cats and dogs, and majors and achievements, and fun and emotions, do you think banks need branches?

Hanna: I see one very important role of branches these days. There are still quite a large number of people who are not used to digital tools. It’s very important to educate these people and the branches can do that. Instead of doing some services, which can be easily done in the mobile application, they can teach people how to use their tools. From one point of view, it would be very good support; from another point of view, this is another step to digitalization in the context of the environment. I personally don’t know what would be a reason why I would go to a branch, maybe for some type of complicated service.

Rickard: In Sweden, a lot of branches have already gone, but still there are some branches around for making payments and taking out cash, while other services are almost non-existent. They have been phasing them out for almost 20 years. The last time I went to branch was when my kids were opening bank accounts because then you have to show up in person, show who you are, show your ID, and so on. Before that, maybe it had been four or five years since I went to a branch. However, if for example you are a company and want to discuss a loan, maybe you would like to meet people in person. So branches are still around, although they don’t do the same kind of business they did 20 years ago. The market will determine if there is a future for branches or not.

Sergii: Rickard, if at some point Google or Amazon become fully fledged banks, will you bank with such companies? Will you switch from banking? Will you welcome them to the Swedish Bankers Association?

Rickard: Of course, if they’ll become a bank.

The market capitalization for some big firms like Apple, Facebook, Nordea, and JP Morgan can be very impressive. However, Apple is worth over 1.3 trillion US dollars, Facebook is worth over 600 billion, while Nordea, the biggest bank active in Sweden has a market capitalization of just 27 billion US dollars. JP Morgan, the most highly valued bank in the world, is worth about 300 billion dollars. We see that tech giants are much bigger in market value than large banks.

If these big tech firms decide to get into banking, maybe they could really outcompete the banks. But we should look deeper into shareholder equity and assets. It is important for a bank to have a lot of equity to take care for possible losses in order to withstand tough times. JP Morgan has almost 10 times more in assets than Apple.

Getting into the banking industry would really require a lot of money and a lot of equity. If you compare the total size of the banking market with FAANG (Facebook, Amazon, Apple, Netflix, and Google), then you can see that banks hold $3.5 trillion, and big tech holds $0.5 trillion and this is only the 30 biggest banks in the world.

Apple and Google can start a bank, but they would need to invest a lot of money and the competition in banking is quite intensive. It’s not an industry where you get high return on investment. There are hundreds or thousands of other big banks in the world and that makes sense given different regulations in different countries. I think it’s a totally different kind of market. Tech giants could do it technologically, but it would require a huge amount of money.

Sergii: What about you Hanna, would you bank with Google, or Apple, or Amazon?

Hanna: Definitely, yes. With financial institutions it’s very important that they take care of and know a lot about their clients. The services they provide can be put online in a very fast and efficient way. In my opinion, the optimal strategy for tech giants is to form partnerships with banks. Regardless, it is feasible to build financial services inside Facebook and clients will use them. From the client’s perspective, I believe that it could be a very successful solution. From a compliance point of view, it would be a big challenge for them.

Sergii: How do you think the COVID-19 pandemic will influence digital transformation in banking?

Rickard: Banks are actually one of the few industries that haven’t been affected that much.  People still want to lend money. The big difference is that banks have been working mostly remotely, using Zoom and other conferencing apps. For companies like Sigma Software, it may even be beneficial because outsourcing and remote cooperation will feel more natural for banks and other companies.

Hanna: I guess the influence of the COVID-19 pandemic depends highly on the starting point I mentioned earlier. I believe that banks that have already begun their digital transformation and prepared themselves more or less for the new reality will survive. Those that are truly digital have a chance to succeed in the new environment. The ones that have lots of extra weight and nowadays need to run a digitalization marathon risk a lot. The sports metaphor works very well in this situation. The banks already functioning in the digital reality have a higher chance to survive and to succeed with the changes that are happening.

Sergii: I will also share my experience from last month. Three companies from Europe reached out to us asking if we could help them with the technology necessary to compete against Revolut in Europe. Nobody is talking about branches anymore and everybody is just thinking digital.

Hanna: Digital transformation is something very difficult, but very interesting when you are a part of such change. It educates you and you can be really proud if you succeed in the end. If you are ready to be a leader of such change, do that.

We hope that the insights that our speakers shared will help you bring more digitalization and introduce the right mentality into your organization. We will keep bringing you outstanding experts that are transforming businesses in various domains. Follow us on LinkedInFacebook, and Twitter to stay updated about our news and events.

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