In this episode of The Purposeful Banker, Dallas Wells and Jim Young take a deeper look at Accenture's recent report on 2020 commercial banking trends - from empowered bankers, to moving way from legacy systems, and more.
Which trends are the most important and how should your bank respond?
Helpful Links
2020 Commercial Banking: Key Digital Trends (Accenture)
Jared Rorrer, Accenture Managing Director, Global Commercial/Wholesale Banking (LinkedIn)
Time to Do Digital: Interview with Sam Maule of 11:FS
Empower Your Relationship Managers with Targets Instead of Hurdles
Pricing Technology Survey Results
Transcript:
Maria Abbe:
Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm Maria Abbe, Senior Communications Manager here at PrecisionLender. Today's show features Dallas Wells, he's our EVP of Strategic Initiatives, and Jim young, our Director of Content. They're going to discuss a recent report put out by Accenture and what it means for your bank. The report is titled 2020 Commercial Banking: Key Digital Trends. We'll have links in the episode notes to relevant articles and information. We humbly ask you, if you enjoy the Purposeful Banker Podcast or if you have any feedback at all, please leave a rating or review. Your ratings and reviews help more people find this content and help us cover topics that matter to you. Now onto the show. Enjoy.
Jim Young:
Dallas, I'm sure you know this because you are a dedicated listener to this podcast.
Dallas Wells:
Of course.
Jim Young:
But yeah, of course. But just in case you somehow missed it, two weeks ago we had Sam Maule of 11:FS on as a guest, and 11:FS which is a fintech digital consultancy. They've got the tagline on their website that says, "Digital banking is only 1% finished." Meanwhile, in this Accenture report, they declare that digital transformation is just beginning, and I think I asked Sam something along the lines of, "Wait, we're just started. I feel we've been talking about this forever?" So what's your view on this, are we really at just the beginning of the digital banking era?
Dallas Wells:
Yeah. I think just to add one more analogy in there, we're probably in the second or third inning, it's really early. So for one thing, you're right, we have been talking about it forever, but there's still a lot of banks that have done very little action behind the talking. I think a lot of the talking frankly kind of happens in this, what I think of as the fintech echo chamber. You got a lot of tintech journalists and vendors who love to talk about digital transformation, and I think the industry is almost, has spent a lot of this time kind of set aside from that, and maybe listening to the conversation, but not being directly involved in a lot of it. I think that's starting to change. But a lot of what we've seen so far is really just surface level digital transformation. It's putting nice digital user interfaces on top of some old legacy clunky systems.
So I think the full digital banking transformation that Sam was talking about, that Accenture is talking about here, is really for that digital transformation to go kind of all the way through the plumbing. All the infrastructure really needs to be digitized, because it's shocking how much banks still print something from one system to scan it into another one later. We get these requests from some of our users where they're like, "Can you make a way to print this?" And we die a little bit inside every time that happens. I get it, I still like to read paper books and occasionally I have to print my kid's homework to be able to help him with it and things like that.
But when you push print on these things, it's sort of like giving a modern digital API based, cloud-based system, like PrecisionLender sort of like giving it a frontal lobotomy. You just sort of disconnect everything, and it just becomes a dead static piece of information instead of this living breathing thing. So that's I think the difference, since banks have to make this digital flow of information truly go through all the systems instead of there being all these manual plugins in between.
Yeah. I also should point out too that the title of this is, "2020 Commercial Banking: Key Digital Trends." So a lot of that digital talk we have been hearing for a long time and in the fintech space is a lot of times retail-banking oriented, and what we're talking about here is commercial banking, right?
Dallas Wells:
Very true.
Jim Young:
Dallas, this Accenture report, they use an example of a Thai bank that has really gone all in on digital transformation for their commercial bank, and they include this line, "The commercial banking transformation will go far beyond incremental change in cost-cutting and include deep process transformation, that involves digital customer interfaces, an entirely different business model."
I probably shouldn't have read the whole thing because frankly what I'm struck by is just the first part of that sentence, which is the, "Going beyond incremental change in cost-cutting." What I'm wondering is how often do you see banks that think of digital banking as simply sort of an incremental step, with cost-cutting as the goal? Or how often maybe then if you don't want to be Mr. Negative like me, how often do you see banks that have the vision to look beyond that when it comes to digital?
Dallas Wells:
Well, here's the interesting part. Early in the conversation with banks, I think you get a lot of genuine, real authentic discussion about it being a deep transformation. So bankers want this to be the kind of full end-to-end change the business model, change the way they interact with customers. But when it actually comes time to go get budget, it always comes back to efficiency.
So that's one of the hard lessons we've learned in just trying to get this done with banks, they love the story, they love the idea of being able to make a truly transformational change. But you better have some stats that show that, yeah, all that's great, but at the end of the day we're going to cut costs by 30%, so that this thing has a positive ROI. That's where you actually kind of go above the cut-line on budget where real decision makers will put this stuff in place versus the digital transformation teams or even the lines of business thinking it's interesting and cool and they'd love to do it. So I think the reality is still that you got to get some efficiency out of it for it to really get done in most banks.
Jim Young:
Not to go off in too much of a tangent here, but that feels like there's a sort of fundamental lack of faith that they can actually grow revenue in this situation, that the only possible positive outcome for any of this stuff is cost-cutting because the other one is not a possibility. Or am I reading too much into it?
Dallas Wells:
No. I think you're right. But they've got 20 years of history of seeing declining revenue in the banking world, not top-line revenue, but revenue per customer, revenue per dollar of assets. It's just getting harder to squeeze revenue out of the business you have and has been for a very long time. So you've seen bankers that for 20 years have seen nothing but that trend, and it's really hard for them to, in some cases with the size of some of these projects bet their career on the fact that this project is the one that's different. Now there are cases where it works and it does happen. I think that's the, key is you just have to have evidence that it really works and you have to have believable evidence, and it doesn't help to be able to say ... Oh, and also you'll get your efficiency, that's what you can stake your career on, is that there will be efficiency and then the revenue upside, the change in customer interaction, that's all kind of icing on the cake at this point.
Jim Young:
Got you. All right, well, taking a more positive bent here on this next one. The second trend they identify because it's titled, "A new breed: The empowered banker." Now tell me the truth, did you get a little choked up reading someone from Accenture saying basically exactly what we've been saying for a while? Did you feel at least a little validated?
Dallas Wells:
Yes. Like I'm not crying, you're crying. I think this is, this idea is becoming more and more common, that people are important in this business and not just in this business, but then that's how technology is going to work in knowledge work. It's not that you can automate away the humans, it's that you need to augment the humans. You need to give them digital tools at their side that can kind of ride shotgun with them and make them better, not just replace them. We're a very long way from that in most businesses.
Jim Young:
Yeah. Sort of really to confirm that they showed some of that research from a survey they had done before, and it said, the quote here is that "The vast majority of SME customers would not give up their RM for a digital-only offering, even if it was offered at a cheaper price." Now that seems obvious to me, what's Dallas, I guess, your view on why a customer would or should feel that way?
Dallas Wells:
Well, these are still complex transactions. Even for plain vanilla cookie-cutter deals, there's just a lot of moving parts and they have big implications, especially when you're talking about the SME world. It's sort of taking on commercial debt as of the mortgage of their life. It's a big deal and they are in many cases betting the future of their business on it being right. They want that expertise, they want somebody to help walk them through the transaction to be able to answer questions. The digital aspect of it is nice, I think you can add those things for convenience and for transparency and for efficiency and simplifying. All those things are good, but you still want a human who's sort of on your side, to help walk you through those things and just make sure that all the complexity is properly handled.
Jim Young:
Yeah, exactly. It's that whole thing of the power of judgment becomes more and more important as you can automate more of the things around it-
Dallas Wells:
Yeah, exactly.
Jim Young:
That human being and the judgment they bring to it. Speaking of automation, one of the things they mentioned was that, basically in commercial banking you don't often see kind of new competitors come on the scene. Because it's, the quote here was, "Complex operating models, products and processes, all of that makes entry and scalability difficult." The trend toward increased automation, again putting aside what we just talked about with, you still need an RM. There's a lot of other parts of the process that can be automated and are being automated. Does doing that actually open the door for non-traditional financial institutions to come into the commercial space?
Dallas Wells:
I think we're seeing that happen. The evidence says that that's absolutely true. You've got new entrance, they can come in, kind of without the baggage of the legacy systems. And maybe just as important as the systems kind of the legacy processes and mindset. Change is hard versus coming in with a clean slate and being able to just plug in the new modern tools and approach to everything. So it is absolutely an advantage for some of those new players to come in and start fresh. They've started in the small business world, but they're moving their way up the scale.
I think it's just a reality that banks have to be aware of and just have to believe is true, that that will continue and middle-market is next, and someday large corporate deals are probably going to be, you're going to be competing not just with the other banks or, and larger deals with capital markets. But probably some fintechs without a banking license, that are able to jump in and do things in a digital-only or digital first way, that will cause you to have to compete in a different way.
Jim Young:
I'm wondering though, and maybe this is just kind of the tech speak part of it, but between the automation trend that this report talks about, and then the next trend that they get into which is about expanding opportunities for AI and machine learning. I did sort of find myself wondering, is this a report for enterprise banks only? Should smaller banks be scared off by all the really futuristic tech discussions we're going through now in commercial banking?
Dallas Wells:
We had a team at Acquired or Be Acquired Conference down in Arizona a few weeks ago. One of the interesting trends and the hallway conversations there was just this, "How do small banks compete with this stuff and do they need to?" I think they're starting to come to an answer for that question, which is, "Yes, we need to."
So AI and machine learning, I think those are, when they were fuzzy concepts, especially for small banks, it wasn't like they had these big global footprints and millions of customers, and 15 different business lines to try to make sense of. They had this maybe four-branch bank that's kind of easy to run it in your head, right? You kind of keep your arms around it, add some Excel spreadsheets and you're good to go.
But I think with everything moving to the cloud, what you're finding is that banks can get really smart, and can most importantly serve their customers better with some AI and machine learning. So now that those are going from these fuzzy technical concepts to real actual use cases where you can see how it's applied to a customer, which is things like next best offer, combating fraud, better, fraud costs are huge even for community banks. Real-life use cases like that where they're saying, "Yeah, we've got to figure out how to do this, and I'm not sure how we do." So they're very reliant on some vendors to make it happen for them, and I think they've struggled actually getting it done. So that'll be interesting to watch over the next few years, and I think that's why the big discussion point in the industry right now is consolidation. Everybody's wondering, how long do we stick it out independently? When do we pair up with somebody? Should we buy? Should we sell? That seems to be top of mind for a whole lot of these small banks.
Jim Young:
You mentioned the relying on some vendors to get this done for you, and you touched a bit earlier on about some of the legacy systems and that sort of thing. I did want to mention this, a little nugget in here in which they said that, "92 of the top 100 banks globally still rely on legacy mainframe systems." I guess I'm just wondering kind of what you just discussed with some of those new players coming into it, and I totally get that thinking, which is, and again, because I'll get to a sports analogy because that's what I do.
But sometimes coaches will say, "You know what, I'd rather come in and coach an inexperienced guy than come in and coach a veteran, because the veteran, I've got to unteach all this stuff and teach them this, and with the new guy I can kind of mold him from that." I guess what I'm wondering is the legacy, and again they call it unloading legacy baggage, sort of the negative connotations with it. We're talking 92 of the top 100 still have all of this stuff, and then we're also talking about how it might be quicker to be able to just kind of move without that. So how big of a concern is this and why is it that 92% of them still have this?
Dallas Wells:
Well, taking those out is kind of a heart transplant while you're still running down the track. You've got to try to do it on the fly, there's a few big banks in Europe in particular that have tried to do it and it's been a miserable failure. They have systems down for multiple business days in a row and class-action lawsuits and just ugliness. So it is a real risk to try to just rip it out. The interesting trend here, what you're seeing is, you're starting to see more and more ... It shows up a lot of times in the digital-only banks that are living under the umbrella of these big banks. But they're basically like, "Hey, to compete with this, let's actually do our own version of it, let's start a fresh." So they stand up a digital-only offering that includes a totally separate core system, that is cloud-based and API friendly and all those things.
So what they're trying to do I think, is the technology now allows them instead of having to do this transplant, they can slowly transition things from that mainframe to some of these new systems, and you can stand up four or five, 100 of those if you need to share things in a central data lake or data warehouse. You can kind of get back to that one system at the end without having to rip out one and put it in a new one all at the same time.
So I think they'll figure out how to make a slow transition. But in the meantime, it is painfully expensive, these projects, they suck up a lot of time and energy and resources, and they're frustrating. For the bankers you have to pour the foundation first before you can start building anything interesting, and it's like a multi-year process to make that happen. So I think they're trying to be more agile about it. They're spinning up some real things that they can get out in the while and actually do business with it, which I think is smart. So that's another thing that will be interesting to see, how much that trend really picks up steam in the coming years?
Jim Young:
Yeah. You go to what we discussed earlier about how difficult it is to get projects through without having sort of cost-cutting in there, and now to try this one, which is, "Hey, this could be really painful, but trust us, in the long term it's going to be better." That is not an easy argument to make in a board room. Finally here, again, because, and you know this, and I think our listeners know this, I'm an inherently glass-half-empty person. I'm going to bring this one up, at the start of the report, the author Jared Rorrer and Jared, if I botched that last name, I apologize. But he writes-
Dallas Wells:
I think you got it right.
Jim Young:
Okay, good. "Here's to the roaring twenties in commercial banking." Now obviously he's connecting that we are entering the decade of the 2020s, and he's connecting that with the 1920s, a time of great optimism and growth in the United States. But the historian in me can't help but note that the roaring twenties gave way to the great depression. Is there any concern that all of this going all in on digital bet now, can somehow lead to a lot of regrets later?
Dallas Wells:
Well, I think there will absolutely be some come upends in the marketplace, and I think a lot of the bankers are saying, "Maybe that happens in the FinTech world." There's just been an awful lot of venture capital and private equity dollars poured into this market at just insane multiples. There absolutely is the feel of a bubble to it in many ways, and I think that any of this kind of boom and bust thing, you saw it with railroad infrastructure being built out, and you saw it with the tech boom and bust of the late '90s early 2000s. Where it's a whole bunch of money gets poured into this new thing, this new infrastructure, and it eventually ends up being the right answer, and there's some winners that come out of it, but there's a lot of losers along the way.
So I think that's why you see banks being cautious as they don't want to get out over their skis, pouring too much into this, and they want some validation that they're on the right track. So that's why you're seeing them tip-toe into these things, and make sure it's efficiency first, and then all the rainbows and unicorns is later. The fintechs are just the opposite, they're all in, and they're burning through capital in some frightening ways to try to win this market. So some of those will explode in a nasty way. But I think the industry as a whole ends up in a better place and ends up at the right answer, but you'll see the banks be cautious and that'll probably serve them well.
Jim Young:
All right. Again, just want to remind folks that that report, and we'll have a link to it in our show notes, is from Accenture and it's called, "2020 Commercial Banking: Key Digital Trends." Dallas, thanks for coming on.
Dallas Wells:
You bet, thanks.
Maria Abbe:
And that'll do it for this week's show. Thank you so much for listening and now for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit our resource page at explore.precisionlender.com or you can just head over to our homepage to learn more about the company behind this content. Finally, if you like what you've been hearing, make sure to subscribe to the feed on iTunes, Google Play or Stitcher. As I mentioned before, we would love to get ratings and feedback on any of those platforms. Until next time, this is Maria Abbe for Jim young and Dallas Wells, and you've been listening to the Purposeful Banker.
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