The challenges for traditional banks

Traditional banks have so many challenges with their conversion to the digital world. Same thing is happening with the newspapers and other industries.

With the banks the bottom-line is that they come from a very regulated market with big barriers for the penetration of new competitors. They have an ecosystem who has been changing so much during the last 30 years, and they have been the first ones to take the advantage of the IT, so the challenges they are facing today is not a new situation for them (for instance, the newspaper companies are not used to have these type of dynamics where the market completely changes).

The new ingredient to the banking market is that some IT companies wants to become banks. Paypal, Google, Facebook…. they have started to manage so many volume of payments. Payments who are not managed by traditional banks anymore.

The next step can be that with a good volume of treasury, these IT companies, can request to the central bank of a country to be able to extend credits, loans… as the major supermarkets are already doing.

So this is the situation, there are so many different reactions the banks have had and they are managing it in different ways. I can only write about 2 cases that I know.

Case one, the bank identified these threads so much time ago (2000) and they took the determination that the IT was not an auxiliary department of the bank, it has to be considered as a core capability that the organization has to define, nurture and mature. In this situation they started to acquire niche small companies, they started to in-source capabilities that in the new map of capabilities were considered as core capabilities, and they started to define a strategy where the end consumer is demanding “more” in terms of accessibility, products…

Case two, the bank has continued their expansion buying other banks, acquiring with them new IT departments, people with knowledge in their own areas and making the complexity of the IT organization to be so much complex. They have integration plans that are not always completed properly, so they are not able to take the competitive advantage that they where assuming during the acquisition analysis. They also have a strong dependency on third parties who has the knowledge of the processes and these vendors are only interested on the T&M contracts, that’s it. They were too much far away in terms of percentage of outsourced consulting services.

In this situation, the second bank has an organization with low costs of operations, but their time response to evolve their solutions is slow, their ability to change and adapt the organization and the operations are very poor. They know they can compete in the next quarters and be operationally efficient, but the 5 years road map they draw in 2007 is obsolete and they as organization have not been able to react to the changes that were coming.

This is my personal view, if you type “traditional banks challenges” in a search engine, you will read more! For instance this one.