Don’t convert your bank to digital, start a new one!

• The pandemic is testing our infrastructure to its limits. Burdened with high costs and inflexible structure, traditional IT cannot respond to new circumstances or develop new products quickly enough.

• Above all, it has shown that the defining capability for success is responsiveness to change.  

• A viable alternative is to start one’s own challenger and gradually move the products and customers over.

From the outside, many financial institutions look like the US automotive industry just before it crashed in the 1970s. They built overpriced cars that substituted size and trim for quality. Then the oil crisis hit, followed by “challenger” Japanese manufacturers - and the incumbents could not respond. Today, traditional banking is facing a world with negative interest rates and a fleet of efficient digital challengers.

Banking is now in the middle of a transition to digital that’s as radical as Lean Manufacturing was for automotive. Like Lean Manufacturing, the change is as much cultural as technological. And the Cloud that underpins this change is not just “someone else’s datacentre”, but a structurally different approach to the operating model of how a business services its customers.

This transition cannot be ignored - but your current organisation cannot get you there either, so you need to find a way through. And the way forward is to set up a new “sidecar” bank.

Disruption from digital challengers

In other words, the least-worst path to turning an established bank into a digital leader is to start a new one. Normally we recommend incremental organisational transitions, but that takes time and sustained effort over many years. Many banks have now missed that window and find that their core businesses are facing disruption from digital challengers that are using the Cloud to achieve transformational efficiencies.

Our clients and advisers are seeing that the most effective response to the Digital opportunity is to build the right kind of organisation separately, and then to transition business lines across - in effect, to start their own challenger. It’s not easy, but the alternatives are worse. And one of the hardest parts is ensuring that the new entity is truly free from the constraints of the existing business.