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Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Most challenges are internal as banks try to go digital

Many banks find their digital initiatives struggle to deliver results. Either they stay small and marginalized, and do not scale up to the whole bank

Digital transformation is on top of the agenda for most banks across the world. While it sounds all high-tech, the real stumbling blocks in this process are human resources and organizational design matters, and not the technology per se.

Why is digital on top of the agenda? It promises to address so many external threats and pressures that have together come home to roost for banks. New, onerous regulations are increasing costs every day. Financial technology industry threatens to attack hitherto protected revenue pools. And customers are demanding more engaging service designs that can match Internet companies in coolness and convenience. Indian banks have felt especially threatened, given that many of the new bank licensees promise to be digitally savvy competitors.

Digital can, indeed, help address all these issues. Digitization of processes can eliminate paper and, thus, cut costs dramatically. Digital channels like mobile and Internet can dramatically reduce transaction costs in branches and ATMs by eradicating cash. Most of the routine banking can be oriented towards self-service. Mobile apps can be as engaging as the most successful Internet companies. And with so much pre-existing customer data and trust, banks can on any day outdo most of the new start-ups in product innovation.

Banks typically take two independent—sometimes simultaneous—approaches for digital transformation. The first is, digitization that involves a relook of all the processes and re-imagining them with digital technology. This quite often leads to radical process changes, viz. doing away with paper-based forms altogether, or anticipating customer needs and sending them a cheque book in advance. Done well, this leads to reduction in costs, improvement in service levels, higher productivity of employees and higher engagement of customers.

The second is to incubate a new all-digital bank outside the traditional bank with the goal to self-cannibalize the business before new digital attackers start to nibble at it. This approach is akin to a cinema hall operator setting up a video streaming business in anticipation of competition from such new attackers.

Irrespective of the approach, technology per se is definitely not a challenge. Digital technology is widely available. It is relatively cheap—especially in India where software talent is quite abundant. It can be installed quite fast. Applications take only weeks from start to finish and not years as it used to in the past. The only technical point that merits attention is cybersecurity. Banks need to induct or inculcate this new skill in their teams.

Many banks find their digital initiatives struggle to deliver results. Either they stay small and marginalized, and do not scale up to the whole bank. Or transformation programmes get mired in debate and move so slowly that the organization runs out of patience. We find that organizational challenges that are unique to digital, are coming in the way.

Digitization of a traditional bank is like redesigning an aircraft while flying. The organization’s leaders need to have a high degree of belief in the digital future and determination to see it through to endure such surgical changes while continuing to deliver quarterly performance. A project team working on the side to redesign processes like they might have done for a conventional BPR (business process re-engineering) exercise will fail to do the trick here.

The whole organization needs to be involved. Line managers need to champion the redesign and its implementation in spirit. Most importantly, digital technology throws up opportunities for radical new ways to run a process. This challenges prevailing paradigms about what is permissible under regulations. The new processes could pose new risks that are not envisaged earlier.

So, the only way to go about digitization is to create multidisciplinary teams that are collectively responsible end to end, i.e. from design to full-scale roll-out. Since an entirely new set of metrics can now be measured, employee key result areas (KRAs) needs to be adjusted. People at the back end can also have customer-centric KRAs.

The performance management system needs to be tweaked. People who have gone through a successful digitization reckon that the environment during the project is akin to a post-merger integration in terms of intensity of effort and engagement of staff at all levels. Many banks fail to drum up this level of energy and conviction.

Creation of a digital attacker bank at arm’s length from the traditional bank has its own organizational challenges. Banks fail to create a sufficiently arm’s length team with an entrepreneurial environment to build a new business at scale. If the leaders leading disruptive innovation also have responsibility to manage current digital assets, they are never able to give the required attention to the new business. The urgency always takes precedence over what is important.

Banks often baulk at the idea of duplicating digital assets. The arm’s length team also needs a funding and investment horizon that is deep and long enough to allow experimentation, failures, and iterations. Many banks fail to drum- up the patient investment needed.

In either of the approaches, organization and people issues are the real stumbling blocks. Even in the digital world, it is the human angle that makes all the difference.

Saurabh Tripathi leads the digital banking practice of BCG in Asia-Pacific. The views expressed here are personal. This is the first in a two-part series on digital transformation of banks.

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