BNP Paribas' published plans to go digital are great as far as they go, but Dharmesh Mistry hopes the French bank has a much more detailed strategy to make the most of the opportunity.
Last month BNP Paribas was the latest big French bank to reveal plans to go digital, following hot on the heels of national rivals Credit Agricole and Societe Generale. This is a significant and welcome level of investment, bringing the promise of greater efficiency, top-notch customer services and exciting new products to millions of customers.
BNP Paribas revealed some of its plans to the Financial Times, including that it sees digital as a way to transform its business, and that it was spending some E3bn over the next three years to increase revenues, boost its European ranking, cut operating costs, close branches, redeploy and retrain staff, and hire data analysts.
But I suspect – and hope - that this is only part of the story. Digital transformation is a lot more than buying some technology and retraining some staff. It demands thorough strategic, organizational and cultural review and change. Here are my thoughts.
Banking is changing, and it's changing fast. In the near future, the sector will be hardly recognisable. Open banking initiatives and new regulation such as PSDII as well as fintech innovation are lowering barriers to entry and already thousands of new companies are taking bites at the market, some more successfully than others. Soon the full impact will be apparent.
Following painful consolidation, I see a few scale players that will provide core banking services run on hugely powerful digital platforms. Financial services will be provided by a myriad of other players who will contract core banking from the scale players. At the same time, I expect cost/income ratios to fall from the current 80 to a tough 40. Big banks at the time of digitization need to decide in which camp they want to be – a scale player, or a financial service provider – while there's still time.
This demands a fundamental review of strategy and positioning. It's a whole new way of thinking about banking.
When a bank starts to consider going digital, it must look carefully at where it wants to end up. Without that established clearly, it will waste money and time, and is more likely to result in failure. Its ultimate goal will dictate the whole strategy, decide the type of technology it adopts and the operational changes it will have to make. But perhaps most often ignored, it will dictate massive cultural changes.
Some of this change is about the big picture. For banks that have decided to make data a core asset to be monetised, for example, there is an important internal shift in power. No longer are the traders, deal-makers and heads of retail the main revenue drivers. Whole new departments based around data will spring up, while existing departments might have resources removed or reduced.
Within those new departments will be new roles including data analysts and labellers. Data labellers, for example, will be hugely important, tagging when, where a customer shopped at Tesco, for example, what they bought, whether it was healthy and the size of the shop to determine customer behaviour and adapt services and offer products accordingly. And there are many more.
Any bank opting to be a scale player needs to recognise that it will not be able to offer the whole customer experience on its own. As customer demands and expectations grow, it will need to try to develop an ecosystem of fintechs and financial service providers to help it meet them. It will simply be impossible financially and technically for a scale provider to develop a comprehensive offer at the pace demanded. Customer intimacy will drive banking and it will only be those that get it right that will succeed.
But it won't be as simple as banks choosing who to work with and signing up partners – they will have to compete for attention and spot the winners from the losers. The likely high numbers of fintech failures make this latter point vital as banks need to avoid getting drawn in to that crash.
It's great that banks are biting the bullet and investing in digital transformation, but it's vital that they look hard at their business during the journey to digital Nirvana. To maximize the chances of success and minimize risk, strategy must be based on three business issues: the business proposition – whether to be a better digital bank and eventually a scale player or become something different in financial services provision or even a data centre; getting the right technology enablers; and developing the right cultural environment and supportive ecosystem.
Achieving only two of the three will put a big question mark over any bank's long-term survival. It's a lot to do, but digital change isn't called transformative for nothing.