Book Reviews | May 02 2022
By the authors of Disruption: The Future Of Banking And Financial Services.
Only Ambidextrous Banks Will Survive The Age Of Disruption
By Philippe De Backer & Juan Gonzalez, Arthur D. Little
The traditional banking sector is experiencing profound turbulence. For too long, many institutions have built their business on customer inertia rather than reacting to the needs of the modern consumer. Now, in an age of disruption where the digital online economy is kicking over the traces of the old world, conventional banks are being punished for their complacency.
This is most starkly illustrated by the digital natives of Generation Z, with only just over half saying that they trust banks with their money. Instead, they prefer the agility and low-cost structures of new digital players. Simply put, customers are falling out of love with traditional banks, opening the door for disruptors to enter.
Has the sacred contract between the traditional bank and its customers broken down irrevocably? I would argue, “not yet”. But urgent action is needed to transform their business from a monolithic enterprise to one that is more suited to the multiple demands of the 21st century.
It is time for radical change. Those banks that make the right strategic choices have a future, but it will be very different to what has gone before. Crucially, banks have to move on from just exploiting their pre-existing markets, because that particular well is running dry. To survive, and to potentially thrive, they must instead embrace innovation and develop an ‘ambidextrous’ mindset and culture.
Banks face an immense challenge
The magnitude of the challenge facing traditional banks is immense. To get a sense of it, we need look no further than Ant, the financial arm of Chinese digital marketplace giant Alibaba. Ant’s technology can handle 120,000 orders every second and reach a decision to grant a loan or not in just three minutes. This is perhaps the world’s purest example of digital finance’s tremendous potential, but the vivid signs of a banking revolution are everywhere – for instance, Europe’s three largest ‘neobanks’ – Revolut, N26 and Monzo – have 23 million registered users between them and that number continues to grow.
The scalable business models of the neobanks give them an easy advantage. Their lower cost structure, lower capital requirement and greater flexibility in introducing products make them nimbler and more adaptable to changing consumer demands. And they’ve benefitted from sitting outside the stringent regulatory environment of legacy banks, saving them millions of dollars in compliance. They’re also free from the high labour and capital costs that traditional banks incur by maintaining obsolete technology that requires endless unpicking whenever any change is required.
There are also incursions into the market from those with business profiles very different from traditional financial institutions. For example, Amazon Cash enables customers to load money from their Amazon account on to a card and use it to buy products at physical retailers. Google has launched a physical debit card linked to a Google Wallet account. And the Apple Pay app further removes consumers’ mental association between day-to-day financial transactions and traditional banks. Meanwhile, supermarkets and high street brands have become post offices, banks, and bureaux de change.
It is here, where industry lines begin to blur, that customer loyalty to conventional banks starts to erode and the convenience offered by digital newcomers proves too tempting to resist.
Even corporate lending is under threat. Large banks are losing their grip on market share as alternative providers lure away their traditional customers with cheaper, faster, more transparent, e-commerce integrated payment services, and superior deposit and lending platforms. Innovative solutions such as Kickstarter’s crowdfunding model are also proving popular.
Balancing ‘exploit’ versus ‘explore’
Against this challenging backdrop, traditional banks need to adopt an ‘ambidextrous’ approach if they are to survive, let alone thrive. That means balancing short- and long-term priorities and exploiting existing markets while experimenting with new ones – capitalizing on historical strengths while also embracing radical change.
The problem is that banks have remained in ‘exploit’ mode for too long, the consequences of which are now catching up with them. Now, they have to learn from ‘explore-oriented’ businesses if they are to continue to remain viable.
Yet such organizations are rare. In a study by Arthur D Little, only 8% of organizations were explorers. These explore-orientated firms were typically smaller and less complex than those in the exploit-orientated cohort. They focused on experimentation, risk-taking, discovery and innovation. They were more flexible and comfortable in the presence of uncertainty than their exploiter counterparts, creating an environment from where interesting innovations can emerge.
Neither exploration nor exploitation is inherently good or bad. The key is to achieve a working equilibrium between the two. The ambidextrous bank must balance short-term value drivers with the need for innovation to drive growth and transformation.
The ambidextrous bank
For a bank to become ambidextrous, the first step is to perform an honest stock take of its current position. An initial ‘pulse check’ can give banks an idea of their current capabilities. They can then follow this up with a benchmark survey to see how those capabilities stack up against other banks. After this ‘ambidexterity audit’, banks will have a much better idea of how to achieve a better balance between explore and exploit.
For traditional banks, this won’t be a simple matter of cost reduction or adding more features to standard products and services. It will necessitate a total rethink of its business model to enable the bank to differentiate itself in a marketplace that, on the one hand, is becoming increasingly commoditized, and on the other, is transforming beyond recognition.
Against this challenging backdrop, the most important thing that banks can do is find the right person to lead them to the ambidextrous future. This appointment needs to be an inspirational and entrepreneurial leader who understands the need for transformation and is willing to take risks and think differently – rather than merely maintain the status quo.
Boards must play their part by choosing a CEO with the capabilities needed to lead a bank of the future. This might force them to set aside old expectations of what leaders look like, because the person they’re looking for is a rare breed. He or she must be a mix of innovator and optimizer: someone who can resolve the exploration-exploitation dilemma by replicating the drive and technology innovation of a digital start-up, through risk-taking and experimentation – while simultaneously squeezing the most from the organization in the short-term.
It's also vital that new blood is brought in at the executive level to nurture and stimulate the ambidextrous mindset. There should be an increasingly diverse mix of expert directors, because research shows that diverse teams perform better. There should be a widespread mix not just of age and gender, but of technology skillsets and digital acumen too, all of which are critically important in challenging a board’s traditional assumptions that hold it back from change.
Timid board members who hide behind the excuse that transformation initiatives will disturb business-as-usual miss the point. In a brave new world of neobanks and digital fintech, disrupting business as usual is precisely what needs to be done. And if they feel they cannot, or prefer not to, participate in this, then they should make room for someone who’s willing to do what’s necessary.
Ambidexterity in action – DBS Singapore
In the wider economy, it’s easy to spot ambidextrous businesses: Amazon and Alphabet are clearly two companies that have blended left- and right-brain capabilities to spectacular effect. Yet there are also companies in the financial services sector that have also combined the efficient exploitation of traditional markets with digital risk-taking and service innovation.
A great example of this is DBS, Singapore’s largest bank. As outlined above, the radical change needed to create an ambidextrous business has to come from the top, driven by a CEO with an explorer mindset – Piyush Gupta, CEO of DBS, exemplifies this persona. His mantra of “live more, bank less” has underpinned what is regarded as the most extensive transformation program of any bank. Today’s reimagined DBS is characterized by simple, effortless service delivery. As Gupta explains, “I found that once you give people permission and some training, you unleash this tremendous energy to do things.”
DBS has taken a leap into the digital future, drastically changing its business model through innovation. By adopting the cultural vision of a ‘27,000-person start-up,’ DBS has successfully repositioned itself, developing new products and services and delivering the type of growth and financial performance that has seen it go from a traditional regional player to being recognized as one of the world’s most forwarding-thinking and innovative banks.
Creating a new ‘digital culture’ was central to DBS’s transformation. It was certainly the first bank in the world to develop a methodology for measuring digital value creation, which has led to the creation of a very successful digital banking model. For example, in India, DBS switched to a digital-only model with absolutely no physical presence. Its digital retail customers now generate twice
the income, at a 20% lower cost-to-income ratio. This segment also generates a 9% greater ROE than DBS’s traditional banking segment. Digital customers now make up more than 40% of the bank’s customer base and generate about 70% of its profit.
There’s no question that in order to remain competitive in this new world of digital finance, the traditional banking model has to change. But banks will only achieve this if they see this transformation for what it is — a fundamental reconfiguration. It is not a gradual, incremental set
of improvements, or fiddling around at the edges, or battening down of the hatches and waiting to see what happens. Instead, it’s a total shift in both mindset and operations.
As such, creating an appropriate culture must be a top priority for the CEO of any truly ambidextrous organization. He or she must also ensure that innovation permeates every cell of the business as part of the transformation process. In fact, banks must now start thinking of themselves as tech companies as much as financial institutions because online and digital dominates the world that their customers now live in.
Yes, there is still money to be made in traditional financial services, but very soon it won’t be sufficient to support the sprawling corporations that conventional banks have become. These behemoths have to innovate and diversify now, or face a slow and painful extinction.
Philippe De Backer is managing partner and global practice leader of financial services at Arthur D. Little. Juan Gonzalez is a Partner at Arthur D. Little. They are co-authors of Disruption: The Future Of Banking And Financial Services.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On