So in my last post, I was a little harsh on the product managers. While I still think those calls were fair, I think there is an inherent problem with financial services that is causing a lot of problems. There is a void in the strategy of many financial institutions, and that void is being filled in a number of ways, most of which are not geared towards success in modern banking.
What is a business strategy?
Even though most understand what a business strategy is, let’s define it anyway:
A business strategy outlines the steps necessary to achieve the results an organization wants to see and guides the decision-making processes to improve the financial stability, competitiveness, and long-term sustainability of the business.
Obviously, this is important for any business. In financial services, the strategy has remained largely the same for the past 20 to 30 years or more. Over the past 5-7 years, financial services have seen a major push with the introduction of fintech and emerging technologies. This has forced a necessary assessment of the detailed strategy used by financial institutions (FIs), which now requires significant overhaul.
Same results, different steps
While the detailed FI strategy may have changed, the end results have not. Typically, financial services have the same revenue streams that have kept banks in business since their inception:
- Interest income (loans, credit cards, etc.)
- Fee income (credit card fees, checking and savings account fees, etc.)
- Capital markets (sales and trading, underwriting, etc.)
Emerging technologies, the rise of digital banking, and competition from fintech have prompted banks to reassess the How? ‘Or’ What in how this strategy is implemented. Customer experience, innovative, real-time products or enhancements, and easier access to robust financial tools create a competitive environment that forces FIs to abandon much of what they were doing in the past and seek elsewhere to orient themselves.
Enough accumulation, where is the void?
Since most innovation and experience comes from technology, FIs typically look to technology for answers — but… there is a problem. They haven’t needed a strong technological presence so far and all the current infrastructure is built from extremely old approaches. So the business asks the technology which strategy to use and the technology asks the business which strategy to support.
On the business side of the bank, there is a mix of ideas about exactly where the strategy came from. Is it a product? Executive leadership? Collaborative effort? Everyone seems to be waiting for someone else to step in.
This scenario creates a vacuum where the first to deliver a viable strategy that is easily communicated and justified to senior management wins. The void will always be filled…
Queue the technology manager. They formulate a strategy based on:
- Wide application of platforms and frameworks across the enterprise
- Improving processes with software automation or going all digital (no more paper)
- High level technology updates without disrupting essential or critical functions to give small gains to the greatest number of teams
Generally, these strategies do not take into account the very approaches that make fintechs successful. They rarely have a significant impact on the customer experience across the enterprise and create new gaps in payments and digital for the FI. Business drivers are not taken into account and are not impacted.
Technology is a great tool, but a bad strategy
Technology must support the strategy. FIs need to start by developing strong strategies and then work with technology teams to make those strategies work effectively and competitively in the market. Technology should absolutely be part of strategy conversations, but in support of what is possible to achieve strategy, not drive it.
FIs can do a lot to move strategic discussions forward, but commitment will be needed to reap the full benefits. Start with:
- Decide where strategy should come from — whether it is a product or a collaboration of product, innovation and/or management teams, the company must seek information to develop a solid strategy. This information must in particular concern customer data (surveys, internal data, etc.) and market data (characteristics of competitors, fintech functionalities, market expectations, etc.).
- Create portfolio-based goals — This applies especially to FIs outside of the top 5-10: you can’t be everything to everyone. Where are the sweet spots for you? Are you primarily a commercial bank? Detail? Where does the vast majority of your current income reside? Once you’ve established that, you can move on to markets you might want to expand into in the future.
- Include technology teams in the solution — whether you have internal resources or outsource consultants, these groups will be able to best support the business if they have a final set of results that you have in mind that are as specific as possible. They can tell you about partnership options on the market, as well as debate the merits of buying versus building.
- Allow strategy to ripple through every team — Each product manager’s roadmap must align with the overall strategy, and each technology team’s roadmap and priorities must align to support those roadmaps. Meetings should also be held with each vendor to discuss their current support and overall roadmap for the products or services the FI uses. Are they aligned with the strategy? Are there areas where you will need to complete? Can you influence the supplier’s roadmap or schedule?
From the latest regulatory rumors to the next fintech launch, FIs operate in an environment that changes every day. It is imperative that every FI has a strategy that will lead it to be competitive and meet the needs of the business, but those needs must first be defined. Technology cannot and should not define business needs, it must meet them.