Deus ex machina - Digital Transformation

The banking industry is facing a very challenging period ahead. The upcoming and, unfortunately, inevitable economic crisis is becoming increasingly visible. It started with the Covid-19 virus, which, although still present, is no longer headline news. It continued with the war in Ukraine, rising inflation, an energy crisis, and the frequent announcements of food price hikes to historic highs. Things are even more challenging in the eurozone, as the euro has plummeted to its lowest level since its inception. Central banks have been consistently raising interest rates, and unfortunately, given the strength of the inflation wave, this trend is likely to continue. The certainty of interest rate hikes will reduce lending activity but increase revenues. The increase in tariff prices will further boost banking revenues. However, with higher funding costs, higher fees for potential losses on bad loans, and reduced lending activity, things may look better than they may look. As the saying goes, "Once bitten, twice shy," and it can be expected that banks will become very cautious regarding risk appetite again, similar to the post-2008 crisis period. Profitability will be impacted, and one measure of profitability that every bank uses is the "cost-to-income ratio," which essentially shows how efficient a bank is. Herein lies the real problem. Bankers, especially those in the management of large banks, are traditionalists and particularly sensitive to reducing their annual bonuses. Therefore, if profitability declines, many banks may opt for cost-cutting projects, which are always popular in times of crisis.

Looking at the structure of banking costs, in addition to those related to financing and bad loans, the most significant costs come from operational activities: the number of branches, the number of employees and their salaries, general expenses, and, of course, IT, which unfortunately is still often seen as a cost in banks, despite being well into the 21st century. In times of crisis and guided by a simple cost-cutting model, bank management often tends to target costs related to employees, the number of branches, and IT. While it is perfectly normal for companies to reduce costs when profitability is at risk, it is also essential that prices are not cut in areas where that expense is intended for future growth and cost reduction. The sword used for cutting costs for IT, especially IT that serves digital transformation, is double-edged.

Banks typically spend between 4.5% and 10% of their operational income on IT. This percentage has increased for years and is among the highest in other industries. However, it appears modest if this percentage is compared to big tech companies like Google and Amazon or enterprises on the rise like FinTech. In some of my previous articles, I have written that the main competition for banks in the future comes from big tech and FinTech companies, and traditional bankers must sound the alarm if they want to retain their positions in the financial industry in the long run. Over the past decade, we have witnessed a similar "attack" on tradition in another sector—telecommunications, where OTT and streaming platforms like Netflix and others have created a real shake-up in the market and severely disrupted traditional telecommunications giants. These companies, just like big tech and FinTech, use technology's advantages, flexibility, and, most importantly, good user experience and ease of using services as their main advantage over traditional players.

Although all banks today have digital banking and digital transformation as part of their strategies, the practice shows that, in recent years, the most significant benefits of digital transformation have been brought about by COVID-19. Not strategies, development plans, or a digital agenda, but a health crisis that limited people's movements and thus brought digitalization in banks to the forefront. There was no longer a prioritization of IT development projects in digital compared to operations; there were no more extended calculations. Banks had to make an intensive effort to operate online. Whether they liked it or not, clients had to turn to using what the bank offers online and forget about branches for a while. However, this is just the beginning. Banks need to achieve the level of digitalization required and must complete it. As generations not accustomed to online operations slowly move into the senior segments, banks will also need to find a way to meet the needs of new, younger clients who do not want to appear in a branch. All that they have on Google, Instagram, Discord, and in their virtual world where they mostly live, they will demand from their bank. I won't mention the Metaverse and a virtual world where the aforementioned big tech conglomerates have ventured.

So, how can most traditional bankers successfully implement digital transformation? Looking from their perspective, this sales channel, as it is usually viewed in banks, called digital, is something that it will handle, or if there is a Chief Digital Officer (CDO), the function that has become common in banks that are aware enough to give importance to digital transformation. Wrong. Digital transformation is not just the introduction of digital channels, applications, and investments in software and hardware. Digital transformation must change the mindset of bankers that their industry is now more technological than financial and that their main competitor is Amazon, not another bank. Tomorrow's bank does not have a CEO, CFO, CRO, COO, CBO, or possibly a CDO function. Instead, everyone in those roles must have a digital mindset. And deliberately, in this text, I did not mention the technological component, such as outdated legacy IT core systems and the introduction of new digital applications that bridge to old systems because that is already clear to everyone, and it is usually used as an excuse for why digitalization is not progressing faster.

As it is a characteristic of consultants to think in bullet points, I will try to give you a few key topics that bank management must consider if they want to make digital transformation their top priority:

• Change the board's mindset about digital transformation—it's not a project, not someone's responsibility, not a part of the organization, not IT's job or digital channels; it's your job, the way the bank must operate in all your functional areas.
• Bankers are no longer just economists; bankers are now more technology professionals who understand economics. Align your hiring and talent acquisition plans to enable the implementation of digital transformation. Invest in the technological knowledge of your existing staff; with it, it will be possible. It would help if you had data, AI, and IoT experts. IT and digital are no longer just professions; these are the most essential knowledge and skills components your employees need.
• Find a way to hire talent who can implement fundamental digital transformation. Banks could be more attractive to the best IT and digital professionals. You will easily teach them banking if you bring them into the bank.
• IT is not a cost; IT is an investment in the future. Rethink your budgets and monitor what big tech companies are doing. Forget about benchmarks with other banks regarding IT costs; that data is irrelevant.
• Don't think about buying only other banks; think, or even better, purchase creative FinTech, e-commerce, and technology companies as soon as possible. They will bring you more excellent value in the long run.
• Take off the suit and tie and the expensive suits; dress more casually with jeans and a black.

This last part isn't the critical topic; it's more about my trauma of wearing suits, white shirts, and ties daily, LOL. And yes, learn expressions like LOL; you'll need them.

Although I don't believe that many members of bank boards will read this text because it's not precisely banking-related but rather about digital transformation, as someone who is a consultant and works with banks, I felt the need to provide a different perspective on what, joking aside, is the central theme in banks today. When they hire us for digitalization projects, especially for IT, they usually expect us to solve problems beyond IT segments or digital channels. I like to seize every opportunity, even through these projects, to at least partially change the mindset in line with the key topics mentioned in the text. However, we're only there for a short time while the project lasts, and they have to live with digital transformation if they want it to be successful.