Traditional banks increasingly recognise the need to innovate and embrace new technologies to remain relevant and competitive in a world of rapid digital disruption and the emergence of challenger banks. Yet while there is a willingness to transform, organisational culture can sometimes get in the way.
“There is a lot of desire to innovate and change and that’s very different from a few years ago—incumbent banks know that they need to change but the reality is they have to remain focused on safeguarding their customers’ funds and on being compliant and on things not going wrong,” says Lewis Nurcombe, global vice-president of sales at Currencycloud, a cross-border payments provider.
Regulators also say it is essential. Pentti Hakkarainen, member of the European Central Bank’s Supervisory Board, said in a speech earlier this year that digital transformation is a must for banks as changing customer demands and pressure to reduce costs and increase efficiency leaves them no option but to embrace modern technology.
“The desire is there to change, but it’s just they have to prioritise protecting what they’ve got already,” adds Nurcombe.
Much of the legacy infrastructure that banks have is focused on those priorities—keeping the lights on and protecting the status quo.
“Culture falls in behind that because invariably when innovation projects don’t work, we blame it on culture,” says Nurcombe. “But usually it’s just someone from a technical team saying you can’t do it because it exposes the system to risk. So culture and legacy technology as a blocker to innovation are completely intertwined.”
The old school way of thinking was that every organisation must own and control every aspect of what they do
One of the challenges that large financial institutions face with their corporate culture is that they tend to focus on specific skills, experience and education when hiring staff, rather than on personal traits that could indicate a more creative mindset.
“What you tend to find within corporate culture is that people become dispensable from the perspective that if you are unable to perform a specific function, they will replace you with somebody who can, and that decision is usually based on a couple of checkboxes,” says Arno von Helden, head of Shyft, Standard Bank’s FX-focused fintech app. “The reality is there are more significant factors to an individual’s success or failure such as drive, ambition and passion—things that you can’t measure by ticking a box. And so it is very much through that lens that corporate culture struggles to advance significantly and be innovative and entrepreneurial in their thinking, because banks are looking for individuals that tick certain boxes.”
Part of the issue is that when organisations reach a certain size, they often lose the entrepreneurial spirit that led to their creation in the first place. Take Standard Bank as an example. When it was founded in the 19th century, it was created to fill a gap in the market—providing loans for sheep farmers in the Eastern Cape of South Africa. Yet as organisations grow in size and stature, risk-taking naturally starts subsiding, says von Helden.
“You become more focused on protecting your brand and not losing customers,” he says. “At that point, you start filling the organisation with individuals that see the world from that perspective. They’ve come in to protect that and start presenting risks to organisations such as ‘how can this damage our brand if something goes wrong?’ So organisations become very risk-averse and that is not a fertile breeding ground for innovation.”
That means banks need to find a balance between this risk-averse mindset and having a more innovative culture.
“The culture of the organisation needs a level of risk aversion because if it was just a bunch of cowboys or mavericks running all over the place, chances are that would do some damage,” says von Helden. “Banks shouldn’t be switching from a risk-averse culture to a risk-on culture—there needs to be a happy medium.”
Some incumbents are attempting to solve this problem by creating standalone fintech businesses that operate independently from their wider organisation.
“The banks that we’re seeing be most successful at doing this are actually siloing off business units or creating brand new business units that look a lot more like a startup organisation,” says Nurcombe. “What that does is it allows them to cut away all of the politics that you typically see in a huge organisation where you’ve got conflicting organisational or departmental priorities.”
It can also enable organisations to hire people who have a growth mindset, for instance those that have worked in a fintech or startup environment rather than someone who has been at a traditional bank for a long time, Nurcombe says.
“Most importantly, it means that they can step away from that environment where they need to protect what they already have into saying ‘we’re a brand new organisation, we need to grow and create something that drives value and that people want’, and as soon as you switch to that mindset, that’s when you can really build new things,” he says.
That approach is something that Standard Bank has adopted through the launch of Shyft.
“The reason why we created a fintech within an organisation is because the organisation itself struggled to actually solve problems that required innovative and entrepreneurial thinking,” says von Helden. “The organisation was putting in place strategies and technical capabilities in the hope that they would solve those things, but they weren’t actually solving them in the way that they needed to be solved.”
By operating as a fintech startup, employees can be more creative and adopt a more entrepreneurial mindset because they will have a vision about what they want to achieve and how they want to grow the business, and that gives them a greater sense of ownership, says von Helden.
“Banks need to create vehicles and opportunities to explore new endeavours,” he says. “Large organisations don’t need to all of a sudden reinvent their culture, but they must create environments where ideas have a forum and there are people that can nurture and grow those opportunities when required.”
There is a lot of desire to innovate and change and that’s very different from a few years ago
The advantage of this approach is that it can enable banks to test new ideas and fail without it adversely impacting the wider business.
“You don’t need to build the final solution from day one, just innovate for a very tiny section of your customer base or maybe it’s customers that you don’t even have yet and build an MVP (minimum viable product) that solves a really specific customer problem,” says Nurcombe. “There’s no reason to expose your existing bank to this innovation, you can do it on the side and remove all the risk.”
Banks can then develop new products at their own pace and slowly move customers over when they are ready rather than rushing to migrate all customers in one hit and then risk destabilising existing business lines.
“One thing that the fintech community sometimes overlooks is that banks make huge amounts of revenue already today and they’ve got brilliant business models that work,” says Nurcombe. “Sometimes, it doesn’t actually make sense to innovate and cannibalise a brilliant revenue stream.”
The traditional banks that are doing the best job at this are innovating in small steps. Nurcombe says this approach mirrors what Kendall Roy in the HBO show Succession calls the ‘Strategy of a Thousand Lifeboats’, where an organisation builds lots of little life rafts that are moving away from the big sinking ship and one by one, they innovate.
“That’s what the successful banks are doing at the moment,” says Nurcombe. Incumbents can also learn from challenger banks around how they approach innovation, he says.
“A lot of the neobanks have been created with an innovation mindset—it’s been about growth, it’s tech-first—so there’s a different culture built in,” says Nurcombe. “But the main thing that digital banks have done well is that, through necessity, they haven’t tried to build everything themselves, they’ve been very receptive to partnering with third parties and pulling together different solutions. Traditional banks could still learn a lot from that.”
There are three main reasons why banks should consider partnering with third-party providers rather than trying to develop their own technology in-house. The first is speed to market.
“If you’re a bank with a huge customer base, it’s really important that you focus on taking something to market and adjusting it to your customers,” says Nurcombe. “What you don’t want to be doing is trying to build everything from the ground up—by the time you’ve done that the market has moved on or the opportunity has been lost or someone else has built it already. That speed to market is something where the really successful neobanks have been so fantastic.”
The second benefit is that banks need fewer resources to maintain third-party software, helping to reduce running costs.
“The old school way of thinking was that every organisation must own and control every aspect of what they do,” says von Helden. “Now that we’re in an age where technological advancement is happening at such a rapid pace, it becomes almost impossible for one organisation to have all of these different systems and be at the forefront of the development of all of these systems.”
A third reason is that third-party providers like Currencycloud continually innovate and develop their products in line with current regulations, helping to ease the compliance burden for banks.
Financial institutions should therefore focus on their core offering—providing banking services to customers— and partner on everything else.
“Let’s go to a third party that is 100% focused on, say, international cross-border payments, who can provide best-in-class technology and who will take ownership and responsibility of the development of that without us having to invest in the technology ourselves,” says von Helden.
All of this requires a new way of thinking that embraces a more collaborative operating culture.
“The initial feeling among incumbents was to protect yourself from this,” says von Helden. “Now the realisation has set in that it’s no longer about protection, it’s about partnership. And it’s about leveraging those partnerships and being relevant. That’s a completely different way of thinking. It is an open, integrated, platform mindset, versus a siloed barricaded mindset of protection.”
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Partnership in action
Challenger banks have been able to disrupt the banking industry because of their innovative mindsets and their willingness to adopt new ideas. But it was their need to outsource their tech requirements to third-party providers that allowed them to move quickly and challenge the incumbents. Using third parties is something that traditional banks had historically been reluctant to do, partly down to risk aversion, but also partly because they have vast internal resources at their disposal.
“When a lot of the neobanks first started out, they had limited funding and they had to really pick their battles, and they needed to get to market quickly,” says Lewis Nurcombe, global vice-president of sales at Currencycloud.
Partnering with Currencycloud gave these neobanks, including Revolut and Starling Bank, an edge by allowing them to offer cross-border capabilities to their customers without having to develop that capability themselves—they could just connect with Currencycloud’s API and have an off-the-shelf cross-border offering ready to go. That enabled them to focus purely on enhancing the customer experience and growing their business.
“That was a real driver for a lot of the success of challenger banks—cross-border was one of the most opaque areas of banking that was ripe for disruption, so a lot of them led with that, whether it was for holiday spending money or migrants sending cash home,” says Nurcombe.
Neobanks replicated this partnership approach across their organisations with other providers, ensuring they always had the most up-to-date technology in the market for their different product lines.
“As everyone continued innovating, before you knew it you had a platform that just kept improving every single year,” says Nurcombe.
Given the success of Currencycloud’s technology, the company was recently acquired by Visa. That comes as traditional banks increasingly turn to third parties to power their digital transformation efforts. Standard Bank’s FX app Shyft, for instance, is underpinned by Currencycloud’s tech. The bank needed to build the app quickly to get to market before any of their fintech competitors and partnering with Currencycloud enabled them to move faster than developing the tech in-house.
“The partnership with Currencycloud has been vital to the success of Shyft,” says Arno von Helden, head of Shyft. “Currencycloud really understood the challenges Standard Bank was facing and delivered a solution that improved our speed to market, while reducing costs and delivering operational efficiency.”
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