Digitalization Transformers

Talk about out of the frying pan and into the fire.

Having survived the shocks of the financial crisis, the ensuing regulatory tsunami, volatile markets and uncertainty among clients, banks now face a new threat – one that some see as potentially life-threatening.

The talk is of digitalization, by which is meant the fundamental transformation of the industry through technology. This has happened elsewhere: Remember the local bookstore? Remember the travel agent? Although neither has disappeared, they have largely been co-opted by digital substitutes. Many think banks are up next, and not without some cause. The amount of investment in startups looking to disrupt the financial services industry – the notorious Fintechs – has mushroomed, from four billion US dollars in 2013 to almost 20 billion dollars in 2015.

The result has been an onslaught on a wide variety of fronts. There’s peer-to-peer lending threatening to circumvent banks in their role of matching savings with investment. There’s crowdfunding to replace corporate (or even private) financing. There are direct FX platforms to provide low cost currency exchange. In the future, instead of sitting down with your financial advisor, you may be interacting with your robo-advisor. And instead of paying cash, which you have withdrawn from a bank’s ATM, you will pay for everything with a phone or watch provided by a (non-bank) technology company.

Disrupt me, please

There is no doubt that Silicon Valley’s t-shirt and hoodie crowd has set its eyes on the industry. But while the picture of bright young kids taking on bloated, sclerotic banks makes for a good media story, in reality reports of the demise of banks at the hand of Fintech are premature.

For one, Fintech is only part of the equation. Digitalization goes far beyond the fabled startup in the garage, and includes new processes and technologies being developed or adopted by incumbents as well. Banking, people tend to forget, has been an IT business for a long time. It is hardly an industry populated by tech-fearing luddites.

Fintech companies are also by no means only adversaries. A great many of them are not looking to compete, but to cooperate. If Fintech drives innovation and positive transformation within banks, that will be good for the industry and its clients. The fear among banks is not so much being made obsolete as being, through inaction, left behind. Today’s catchphrase is “embrace change.”

Case in point: UBS is part of the World Economic Forum’s (WEF) Disruptive Innovation in Financial Services project. This is a collaborative effort by major firms in banking, insurance, exchanges, financial infrastructure and others to identify transformative innovation in the financial system. It is a model of forward thinking. In an influential report, released in June of this year, the group delivered a host of pertinent insights. Among them: areas of disruption are predictable, meaning banks can prepare; disruption will be ongoing, meaning that it behooves them to do so.

All together now

According to the WEF report, incumbents will also increasingly be employing parallel strategies, both competing and cooperating with startups. This is paving the way for new paradigms.

Perhaps one of the most transformative changes wrought by digitalization is the way it is promoting collaboration within the industry. As the Internet has done in other areas of society, digitalization is encouraging sharing in the financial services industry, and that is driving innovation. To foster this innovation banks are reaching outside their walls, working with startups, joining innovation platforms and collaborating on new ideas in ways that would have been unfathomable a decade ago.

They are doing the same internally by adopting yet another aspect of the new economy: the permission-to-fail culture. Where in the past no new idea got anywhere in a bank without a clear business case, today’s banks are much more open to experimentation. They are creating spaces to generate ideas, try them out, adopt what works and discard the rest, without attaching any stigma to failure. This is a major cultural transformation.

Farther down the line, approaches based on collaboration and openness may be bringing dramatic and transformative change to the financial system as a whole. As Bussmann says, there is a move away from the monolithic, centralized banking system of old to more networked, transparent and decentralized approaches.

Take the blockchain, perhaps the most talked-about potential disruptor of banking at the moment. The blockchain creates an open and transparent ledger that is completely decentralized and, if done right, immutable. It can be used to record transactions of any kind quickly, safely, permanently and basically for free. This could radically streamline the whole plumbing of banking, which is why so many banks – UBS included – are working hard to understand its possibilities.
 

Indeed, there is seemingly no end to the ways in which technology is set to change the face of the industry. Mobile channels will be giving clients more and more ways to interact with their banks, going way beyond e-banking to things such as on-the-fly portfolio and risk management. Increased frequency of client contact, even if it is virtual, will give banks more opportunity to prove their worth. Big data will make banking services far more personal. It will also make banks smarter, better able to turn reams of data into usable insights. Digitalization will continue to transform back offices as well, driving efficiencies and cutting costs.

What digitalization won’t do is make banks go away. The real challenge, as Jürg Zeltner, President Wealth Management at UBS has said, is for banks to combine the new “digital” with the old “personal.” There are things that machines do well, and things that humans do. The task is to manage that divide in a holistic way.

Let the transformations begin.