Part 3 - Perspectives on Banking - More Basic Tenets

Continuing with some further thoughts and tenets that may be useful in considering Banking activities.

Mean reversion and “spaghetti junction”

Notwithstanding the exciting world described in my last post, and just to bring things down to earth again for a while, lest we lose the run of ourselves and actually start to think that Banking is “cool”, I find that most “innovation” in banking is in fact just incremental technological deployment, what the “red bank” deploys as a customer centric in-app enabling digital real time feature/utility today, “the blue bank” or the “green bank” or whatever, has deployed within 6 months, or actually deployed it 6 months ago with a slightly different twist. Yes, each bank is making progress in developing its fully loaded digital products and services in its digital channel, so “a rising tide is lifting all boats”, but it’s not “real disruption or even differentiation”. Disruption might be through Web 3.0 (for discussion, sorry, I mean monologue later), and differentiation through a great ecosystem/marketplace approach. The utilitarian and heavily regulated nature of banking makes differentiation very difficult. As I mentioned in the last post, it is easier for the new digital banks, some of them are doing a great job, but it is easier to white board, and deploy? a shiny new bank and technology, with shiny new people, and shiny new products and propositions, than to basically deeply restructure decades of interconnected legacy,…I call it the “spaghetti junction” that legacy banks inherit. But, well done the new banks, they are making very good progress, but some will still have to answer challenges (to mention just a few) of scaling, customer acquisition costs (CAC) and the critical transformation of tertiary and secondary customer accounts to primary revenue generating.

Planning fallacy

So, it’s all very complicated, and as an old boss of mine from the old male dominated “clubby” world of banking used to say, “if I explained, you wouldn’t understand anyway!”. That’s why we plan and strategize ourselves “into the ground”. Banks are dealing with very complex agendas, lots of money to invest in “agile technology deployment”, lots of staff to manage in an environment where technology is replacing human beings in many roles, where unfortunately staff redundancies have been the “order of the day” as technology (through new products or platforms or channels or functionality) replace people, so that the “cost to serve” comes down, and the “time to market” accelerates. The speed of change requires strategic plans to be challenged and updated in near real time, agility is absolutely key, it’s almost certain that new priorities will get in the way of the plan, and the ability to work in and through a highly ambiguous set of permutations and combinations (as it’s the “knock-on effect from one project to another that usually causes the biggest challenges) is paramount. And just to confuse you further, at the same time it’s so important to “stick to the plan”, don’t get distracted by the latest shiny thing. So, the real skill for Board and Management is knowing when something really fundamental has entered the environment, must be prioritised and enabled, (this includes stopping something (very difficult to do, very hard to “swallow”), as well as starting/mobilising something, both reflecting the “new realities and variances”. In general though, plans tend to be a bit too ambitious, it’s a hard lesson, but there is a-only so much a Team can do with X amount of resources, Y amount of people and partners in Z amount of time !!,..unfortunately we break the time up into things called 12 months, one year, and that’s not a lot of time, and doesn’t give much wriggle room. I guess the pressures of quarterly earnings updates push things this way, but I think the best Management Teams keep this “planning fallacy” to a minimum. But planning fallacy is a feature that Teams should be brave enough to confront and at times push back on/resist. Again, this is a “first cousin” of the point that banking is a long-term business not a short-term one, given the utilitarian/commoditised nature, the cognitive versus experiential gap, the deep legacy tech stacks and the general sensitivity with all “things money”, Banking is more about “perspiration than inspiration”. “Grinding it out” is more likely to be the order of the day than “killing it” or “knocking it out of the ballpark”!

Back to Front banking approach

Given the pressure on Banks to digitise, modernise, reduce costs and be relevant, there is often a tendency to fix the front end first, have a customer facing “app” that gives a sense of modernity and digital prowess, only to find behind the app that “all hell is breaking out”, with manual fixes, and almost the “faulty towers like scene” of human beings feeding the ATM from behind the screen,...of course, I am exaggerating and being unfair, but it’s so important to first (ideally !) fix/rebuild/renew/replace the back end core platforms or at least do it in parallel, otherwise your data and analytics are likely to be “all over the place”, a SCV will be near impossible, duplicative processes and costs will abound and credit, capital and liquidity risk management could be made more difficult or even compromised, and CX/customer service will be compromised,…cool app or no cool app.

Partnerships/Fintech

Therefore, even for the largest of Banks, it is difficult or impossible to be “best at everything”. Can a Bank seriously say that it can attract the best talent in every area from financial crime to technology/computer science, from fraud expertise to digital marketing, etc,….so a culture where the Bank is recognising that and is open to Partnerships with likeminded Fintechs and the like, is crucial. Companies that bring specialist skills and capabilities, that can be bolted onto the Banks product and customer journeys are crucial and value added. The Bank of today, in the interconnected digital complex world that we live in, with customers who expect real time service, fulfilment and satisfaction need this help. Banks need to bring some humility to the table in dealing with Fintechs, do not bring the Bank’s biases and potentially arrogance (at least it can be seen as such by external parties) to the table, Banks can learn a lot from these companies and the interactions and potential partnerships they offer. Fintech Partners are for example crucial principals (e.g., product providers) and technology providers in customer journey pain points and much more.

Despite it all Banks post GFC have shown themselves to be resilient

I guess that was the basic idea of having to go to the well and recapitalise them! That was/is the idea behind Basel III. Thank you! Now Bank’s must repay, they must be good corporate and social citizens, they must enable societal and economic progress, they must continue to build modern relevant inclusive diverse cultures. The massive increases in Base rates/official rates around the world (10 in Euro zone, 14 in UK), heaped massive pressure on Bank’s Asset and Liability Management capabilities. Crypto evangelists and others forecasted the end of Banking as we know it, we are still told that Central bank Monetary Policy is dead in the water, has led us to this state of ever depreciating currencies with dollars and Euros and Sterling etc being pumped into the operating room to keep the patient (economy!) alive. Yes, Silicon Valley and Signature Bank were closed down/portfolio sales etc, but the many thousands of Banks around the (in particular) developed world were able to withstand the rate shock and remain solvent and reasonably well managed. Silicon Valley and Signature were basically the exceptions that proved the rule, there are about 4,500 banks in the US, two went down. There are about 10,000 banks in the world, there were a tiny number of Banks hitting the rocks through this period. So, post GFC Banks have been remodelled and built to be sustainable, (capital ratios, MREL, liquidity ratios, stress tests, recovery and resolution planning, credit, capital and liquidity modelling, (ICAAP’s and ILAAP’s and other interesting acronyms that I am not going to go into!). This resilience is of course a prerequisite to economic growth, stability and Bank’s being there to support economic development. Yet, Bank’s typically trade at significant discounts to book, with some of the lowest P/E’s. The markets see another decade of cost cutting, restructuring, transformation, job losses, platform migrations, new costs coming in in terms of digital platforms and regulatory demands. Banks struggle to come up with the “investment cash” to invest in their transformation, yet, many of them are paying dividends and doing share buy backs ?,…so the Banks’ are getting pulled between the urgent and the important, the short term and the long term, investor requirement for “returns” versus the actual accomplishment of the fully mature digital streamlined bank,….so the Mutual model comes to mind, I was lucky enough to have been CEO of Ireland’s last mutual society EBS, we see the Nationwide in the UK going from strength to strength, the mutual model significantly enables the alignment of the time lines, the priorities, and the development of long term sustainability, remember, Banking is a long term business.

So, what are the skill sets in Banking?

Banks like other businesses, have departments full of well qualified people across multiple disciplines, marketing and sales, technology, risk management etc. But the fundamental operation of a Bank is about credit risk assessment and management, and capital and liquidity management (Asset and Liability Management or ALM). These are the subjects that enable the lending and depositing of money, i.e., the creation of money, all supervised by the respective National or Supranational Regulatory bodies. The creation of money is such an important and sensitive concept that I believe Bankers at certain level in a Bank must have a specific qualification that reflects a deep understanding of “the Business of Banking”, this should be a post graduate degree in Balance Sheet and Credit Risk management. The employee does not get the promotion to a certain level, is not qualified to do the job unless they have this qualification. Yes, there are various Banking exams available and expected to be completed for various roles, but I think a senior professional qualification that is a “must” rather than “good to have” or “nice to have” should be actioned. For example, if a person wants to serve on the Leadership Team of a Bank in any functional role from HR to Risk, commercial to financial etc, they must have this qualification. This may seem a bit heavy”, but we expect a solicitor to be qualified, a pharmacist, a doctor etc etc, money is a very important, sensitive area that can have incredibly positive or negative effects on people’s lives. I see too many senior bankers who don’t know how a bank works, i.e., the fundamental activities in Banking and the “creation of money”.