Last week we were privileged to take a deep dive into Industry 4.0 a.k.a. the Internet of Things and were struck by the parallels it has with Banking.
For those not familiar with the concept, Industry 4.0 is the digitisation of industrial value chains and networks and is regarded as the next 'industrial' revolution.
Common standards drive inter-connectability between all participants and produced parts, with each resource becoming an information carrier able to communicate with other resources. This creates compatibility, high visibility and real time decision-making across the value chain.
The impact is profound. Customers can seek highly personalised offers in small batches. Producers can become flexible to reconfiguring for changing demands. The ecosystem of suppliers, logistics and finance has to integrate seamlessly into the end-to-end process.
If you extrapolate further the business model changes. Rather than protecting IP and tying clients into long service contracts, Industry 4.0 will facilitate ‘plug & use’. Ecosystems become more open, market participants can collaborate for mutual benefit and client satisfaction is driven by service excellence.
Parallels for Banking?
As we listened we pondered that many parallels exist with Banking, an industry also facing significant change.
For example, many Banks continue to lock-in clients by bundling ancillary services with lending, restricting client choice and switching barriers. Worse still, many banks have used their position to miss-sell and manipulate markets (Interest rate markets admitted, FX fudged, Commodities and Credit ignored thus far).
The advent of Open Banking should help to change this. Clients will be able to consent to their private and transaction data being shared with third parties. Third parties and FinTechs will be able to offer financial services based on this data or have their solution integrated with the Bank’s offering in a more platform based approach.
As with Industry 4.0, clients should receive improved choice and service. Banks will be able to leverage the strengths of others and offer microservices. Service and solutions must become more client centric and responsive.
Digital Transformation Required
The prospect of new revenue streams or entirely new business models is alluring, especially in these times of strained financials and client satisfaction, however change will not be easy given significant technological change is required.
Systems must become more agile and open to APIs through which new products and partners can be added easily. This will be particularly challenging for digital core banking bsystems, many of which operate on legacy principles and programming languages. Increased third party access increases the risk of systems failures and cyber attacks.
Processes need to re-engineered and digitised across the value chain to create compatibility and reduce paper, phone communication and manual tasks.
Significant shifts in mindset and of course investment, with payback measured in years, are also required to make this a reality. Most understand the benefits, many lack the skills to change, the laggards remain sceptical despite FinTech providing proof of concept – providers connected by API’s, seamless delivery, intelligence analytics and suggestions.
To succeed it is essential to be digitally enabled, that is to see IT as a long-term source of competitive advantage rather than a cost/fad. All aspects of the business should in scope - people, processes, products, value propositions - and a digital transformation program implemented:
1. Innovative mindset, including seeking global best practise, partnering with external experts, etc
2. Examine on a subsidiary and full Enterprise basis, removing silos improves decision making, standardisation improves efficiency and compatibility.
3. Adopt a client centric approach, they are what matters and it is easier to analyse data, relationships and profitability.
4. Modular solutions are easier to implement and pay only for what you need.
5. Agility is essential. Customise to your need, scale quickly and be able to adapt easily and economically.
6. Open architecture to interface easily and securely with others.
7. Automate processes as far as possible to provide efficiency gains and create better data for decision making.
8. Make sure you support multiple transactions and applications in real-time 24/7/365.
9. Plan and communicate so clients, staff and stakeholders understand the journey and engage.
10. Ensure quick wins, proven benefits produce a positive loop of adoption, revenue and budget.
11. Firm commitment of budget to the IT, business and skills changes required.
Neil Mathieson, 01.06.2015