Current State of Digital Banking Transformation

Jim Marous: Welcome to the show. Alan, glad to have you on the show.

Alan Trefler: Oh, thank you, Jim. Pleasure to be here.

Jim Marous: First of all, I want to take this opportunity to thank you and Pega for being the sponsor of the Digital Banker Report entitled The State of Digital Banking Transformation. It not only provides a vast amount of insight as to where the industry is today, but also some of the challenges we face in the future. I think one of the big takeaways from the research is that there's still a long way to go as a banking industry tries to compete with nontraditional players and meet the needs of the changing consumer. Does this coincide with what you've seen in the industry recently?

Alan Trefler: Well, what we see going on is really quite interesting that organizations are increasingly understanding that they need to transform their businesses. But as they tried to do it, as I suspect the research will demonstrate, there are lots of gaps.

Jim Marous: Yeah, it's interesting because as I look at where we are and where we're going, in 2018 at PegaWorld, you delivered a keynote presentation entitled From Digital Chaos to Digital Transformation. I'm wondering if the banking industry as we see it is still in somewhat a state of chaos as they try to become digital, so to speak.

Alan Trefler: Well, I think there is progress in the banking industry, but I would tell you that I believe the chaos reigns quite broadly. You have banks who have, I think, learned that they're not going to be overrun by fintech because they're frankly, many of them have the reputations, have the relationships that enabled them to create a bit of a mode, but they know that there are huge risks out there. Frankly, I think they're struggling routinely in trying to figure out what their mission should be. Should their mission be to emulate the fintech? Should their mission be to trying to create more platform oriented solutions that will enable them to engage more broadly with their customers? How do threats and opportunities like open banking apply to the banks? I think that there's a lot of wrestling in financial services, both banking and insurance actually that the tie to all of these points.

Jim Marous: Well, yeah. I think we also see in the research board out that the challenges and where every organization is there... It's interesting that I think we see the most a level of transformation probably happening the biggest and at the smallest end of the asset scale, but there's a really wide gap in that middle ground of assets, both, well, call the large community and the smaller even regional banks that I think they're more stuck in the past than the biggest or smallest organizations. You see that same thing out there?

Alan Trefler: Well, I actually think the problem rises all the way to the largest organizations very, very clearly. They may be doing a variety of things, but a lot of them are struggling to actually get the outcomes that they desire. And in the process of doing that I think that, as you mentioned, my PegaWorld keynote, one of the things that we've observed is that banks, and this is even more true for very large banks, are making several really well intentioned but disastrous mistakes. [crosstalk 00:03:32]

Jim Marous: So such as what?

Alan Trefler: Well, I think there are three that we see routinely. First, all the banks talk about clients or customers. We want to be one with our customers, we're going to defend ourselves from fintech or attack by having broad customer relationships. And they do that. But then, especially if the larger banks, what they immediately do is accidentally ignore that by organizing around channels.

Alan Trefler: So they've got the group that's doing the web channel and they got the mobile group and then they got the group worrying about the contact center and the person trying to put up messages on the ATM. All of a sudden, you've got business logic and processes being defined in these channels and that might feel really good, you can get something up fast. But boy, when you then want to evolve things, so you want to be able to offer a customer an experience that can begin in one channel, pause and then move to another channel. You are just out of luck.

Alan Trefler: This logic in the channel mistake, which I would tell you when you talk to CxOs at their organizations, but business and technology, CxOs, they sometimes pause and say, "Yeah, we're doing that." But by doing that they're falling into, I say, one of the three traps that we'd like to talk about.

Jim Marous: Well, I had a speech I did I guess it's two years ago now that somebody in the audience said, and he put it very well, he says, "The problem is that bankers just can't get out of their own way." That's in a nutshell what's going on is that we think the right things. We talk about digital transformation and then we somehow put it in the context of legacy banking organizations, both with the silos, with the organizational structure. We have goals set that way.

Jim Marous: As you mentioned between the channel changing from, let's say a digital channel, and then we in many cases forced the consumer to go to a different channel and our measurement functions make it so that the beginning of that journey completely dissipates. You don't even know what happened because they'll start from scratch.

Alan Trefler: It's so easy these days for customers to switch or for customers to find an alternative. It's especially dangerous. So that's first of the problems. You used a word silos, which I described as the third of the problems to tell you the truth where people aren't thinking end to end. What they're thinking of is just department to department or function to function. That sort of siloed mentality is extremely dangerous for businesses.

Alan Trefler: I jumped over the second problem I like to talk about, which is everyone says that they want to achieve automation, they want to be able to digitize to be able to drive the costs and increase speed. But so much of what's going on these days is just task automation. It's not organized around outcomes at all.

Alan Trefler: So those are the three elements, putting logic in the channels when you think you want to serve your client, being able to think about outcomes as opposed to just automating tasks and understanding that the silos will kill you. Those I think are the traps that are undermining and creating chaos in organizations.

Alan Trefler: It's funny because when you're in say "the digital" or people sometimes are confused as digital web, is digital mobile, is all of the above, none of the above. When you're in one of those channels, it might look like you're doing all the right things, but if you peel yourself out and look from the external end you say, "Boy, we're just not treating our customers in a coherent fashion." Which is why there needs to be a completely different way of looking at this.

Jim Marous: Well, yeah. And now you have a consumer that really knows better. I mean we've benefited for the last several decades certainly as long as I've been in banking that we kind of drove what the consumer's going to get. Well, now the consumer has enough comparisons out there in the marketplace that are not in the banking space and in some cases are in the banking space that they know things can be better.

Jim Marous: I think what's interesting is that the self-evaluation, our first question in the survey was what do you consider yourself with regard to how well you're doing along the path of digital transformation or digital maturity. What was interesting is that, it's somewhat concerning that we had less than 20% of the organizations say that they consider themselves a pioneer or advanced with the majority considering themselves either fast followers or mainstream players. You've been in the industry long enough to know that that fast follower was a comfort zone where a mainstream player was a comfort zone for the past. But that's certainly isn't a really good comfort zone going forward.

Alan Trefler: Well, particularly if they're not following very fast.

Jim Marous: Yeah, exactly.

Alan Trefler: One of the advantages of not being the way out there pioneer is you get to learn from what you see other people doing. But we see lots of organizations that have almost a fostered an intentional blindness to not really think holistically about what other organizations are doing. But just trying to glom on to quick and dirty solutions. I mean, otherwise how can you expect... You look at all these companies, banks at the forefront that are doing this robotic process automation, which honestly if you go look at it in many of these organizations, maybe it does something in a department or two, but putting a little robots in your back office is no way to do a better job for your clients. If anything, it just ossifies and makes a lot of that stuff work.

Alan Trefler: By the way, we sell robots, it's part of what we do. We just don't think they should be the point of the spear. A lot of times in organizations look at other organizations to say, "Hey, I'm a fast follower. What are the leaders doing?" Then on actually validating that those early adopters are getting the benefits. And as a result, they're not really learning from those organizations. Many of them are repeating the same mistakes.

Jim Marous: Well, also you get into a situation in that it's not, especially in the digital world, necessarily good to even follow the fast transforming companies because for instance, if I'm a mid sized regional, I'm not too sure if I should be following the Chase brand strategy. There's one of these things that say, "Okay, are you following the right organization and do you really know how that other organization is using the things that seem to be fairly apparent in the marketplace?"

Alan Trefler: Well, I think that's very true Jim. Being able to have a strategy in a context of your own is one of those things that particularly mid-sized organizations should be able to be really good at because frankly their problems are often simpler. But if you think of a mid-size organization thinking that it wants to create a little innovation hub at Silicon Valley and doesn't look at the fact that nearly all of those haven't paid off for the big players who have done it. Well, boy that's a mistake.

Alan Trefler: If they want to follow one of the players who for example just operates on mobile, but their value proposition is that they actually have real people, not everything's going through a mobile device or a website, then they throw away their advantages. You need to put what you're choosing to do as a follower into a context that makes sense for you, not just one of the brand names.

Jim Marous: Well, it's almost like looking at the difference between what Sears did in their transformation, which was buying Kmart and what Walmart's done and their transformation moving from a store to also being a digital player. They use the branches as an advantage in Walmart, but also build a digital entity while Sears almost doubled down on a bad strategy.

Alan Trefler: Perfect, perfect example. You can see the trajectory of Sears versus a Walmart very, very clearly written.

Jim Marous: So while it's encouraging that organizations mentioned improving the customer experience as a primary driver for digital transformation efforts in our research, do you see that organizations still kind of focus on cost containment as a goal and sometimes call that customer experience?

Alan Trefler: Well, I think that cost containment are both achievable and reasonable goal to go after while you're doing digital transformation. If you do it right, then the cost containment and the idea of a coherent client experience do march along together. But if you just go after cost containment, you can make some of those mistakes of, frankly, locking yourselves into more silos. And that's where I think some people lose their way. So it goes back to being able to have a strategy, have a picture in your mind of how your organization wants to evolve over time.

Jim Marous: Well, when you're talking about cost containment, we sometimes avoid what I'll call the elephant in the room, which is the branch situation. The biggest cost that most organizations have is in their distribution network. Even though those are being used less and less, that's one of those untouchables that create the biggest amount of difference between a traditional bank and a digital player. How do you see organizations have addressing that in the marketplace as you're reaching out to your customers?

Alan Trefler: Well, it's interesting you mentioned Chase, which is we're privileged to have as a client for a lot of years. They actually are adopting an active branch strategy because they recognize that you can contain the costs typically with a lot of automation and perhaps with branches designed differently. You can contain costs compared to what you used to do years ago. But boy, there were times in somebody's life where being able to actually go in and talk to a person makes all the difference.

Alan Trefler: Take a look at Amazon opening stores. The idea that you want to be a purely digital organization can make sense for a brand new startup. But if you're an organization that is looking to retain a reputation, retain a customer segment, then I believe you need a mix of channels to be able to engage the customers in the way they want to be engaged or you'll just be driven out of business by the people who will probably do the tech stuff more effectively than you.

Jim Marous: Well, it's interesting because you brought it up earlier is that, and then more than just providing more channels. These channels have to talk to each other. So the fact that you can-

Alan Trefler: I would actually say it's even more important than talking to each other that they're designed so that the logic and the processes, whichever at the heart of everything that happens in banking because that logic, that processes don't get buried in any of the individual channels because otherwise the world gets ossified and too complex. We talk about thinking from the middle out, from being able to have an engine, a customer engagement engine, which is, for example, what the Commonwealth Bank of Australia calls the way that they use us in the way I'm describing. Being able to do an engagement engine that's going to drive consistent, coherent personal engagement across all the channels tied to a workflow engine that knows how to deal with the different backends that exist, which in the future the bank may not even own.

Alan Trefler: In the world of open banking that backend is somebody else's loyalty product, somebody else's credit instrument. You're just bringing it together and presenting it as a bundle. Thinking from the middle, from the heart of your business out gives you a completely different perspective than trying to think from the channel in. We're trying to do that sort of be as cost containment in little point solutions in the back office. We've seen the organizations that are really starting to have meaningful impact by my understanding it's the way they draw the picture, that makes a difference.

Jim Marous: Well, it's interesting because we take Amazon as an example again. They realized that one of the pain points for consumers was returning things. Now mind you, there's no place better than Amazon to return things because they continued to deliver whatever you need returned back to you in whatever form you needed if it's different size, different color, whatever. They'll deliver it to you before you've even returned whatever it was that you needed to return. But now they've worked with a different company in many cases, Kohl's being one of them where you can not return items purchased at Amazon to Kohl's and it'll be better than building a bunch of stores just do returns. But they're using an outside retailer to provide a return vehicle. How great is that when you consider the fact that they don't have to build a bunch of stores to do that. They're building buying stores as well returning network.

Alan Trefler: Well, I think that is terrific and you see evidence in other industries. For example, a tremendous amount of telephones are sold through third party channels that aren't the brick and mortar stores that are Verizon or AT&T might create. It might be in a Best Buy or some other channel. Even in the banking industry. We've seen banks pair up with supermarkets and other places to create much lighter touch personal interactions.

Alan Trefler: But what we think is critical is that across all those channels there is a coherent client engagement that the way the client is engaged, your knowledge about the customer, what you tell the customer you think they should be doing needs to be just aligned. It needs to be sensible and needs to be real time. That's what we see as the difference, frankly, regardless of industry.

Jim Marous: The research we did on behalf of Pega on digital transformation, we found that not surprising because we've seen in other research we'd done for the Digital Bank Report that there's less than a robust use of AI and advanced analytics and pretty much a lot of it is still in the area of risk and security as opposed to personalization and more outward facing utilizations. Is this going to be an issue for the industry going forward?

Alan Trefler: Well, I think there's a lot of confusion about what AI is and when and how it should be used. We have an AI customer engagement platform that's used by one of the top three banks in the US is using this literally millions of times a day to make that personalization happen for its clients. To do that, you're not just thinking about AI in a theoretical sense like how do I find patterns in the data? You're thinking about how do I deliver that AI to the desktop, to the call center, to the ATM. How do I deliver that AI in an omnichannel way that is coherent and means that if a customer has an experience in one channel, well, the bank knows about it and can influence what happens in the next channel about it. That sort of thing to my mind is true AI in practice. So much of what we see going on is kind of AI and BS.

Jim Marous: Yeah, exactly.

Alan Trefler: A lot of it is really, really just, I think, miscategorizing. In some cases involving risk to particularly a bank around some of the sensitive issues we're hearing about around AI.

Jim Marous: Well, it's interesting because sometimes when I speak to groups I say, "We've got to stop doing analytics for just better reports internally. We needed to do it for better experiences." And the challenge I have is, I use two top six banks, one for business, one for consumer side. And I go, the fact that the banks really, really, really know me is not enough. They got to show me they know me, which isn't done very well.

Jim Marous: If I went to let's say Wells Fargo and said, "Tell me everything you know about me." I'd probably be scared by all they knew. The problem is, on a daily basis, I don't get the sense that they really know me. So they don't deploy it as you mentioned through the channels the way you'd hope that they would do.

Alan Trefler: Well, there's a big difference between being able to theorize and being able to operationalize. I think that's a gap that AI has fallen into and we're seeing some customers come through the other end of it and boy, are they getting amazing returns.

Jim Marous: Yeah. Yeah. When we look at the changes happening in every industry, not just in banking, I think one of the biggest, again, elephants in the room and referring to that phrase again is the lack of talent to really move organizations forward. Not only is there a gap because my son goes to a university right now and he's taken digital analytics, business analytics, marketing and logistics, and he goes, "It's hard to find the teachers that can teach us now because so many of them will go on to private industry." How do you believe that organizations need to address this challenge going forward?

Alan Trefler: Well, I think they can rely on industry. I don't want to toot my own horn, but Pega with the work that we've done and with our teams of analytics experts and software experts, we've worked to make this real time AI consumable as opposed to so much of the AI that's out there that's some Google or Amazon web service. Those things don't plug in to actual business solutions, which in the banking industry we understand what the key elements are that make somebody decide whether they need a new credit card or not or how they should divide their credit portfolio and then how do you bring that to the customer in real time? What do the agents or the customers talking about in real time?

Alan Trefler: And if it doesn't work that wasn't the right thing. How do you learn from that and stop annoying the customer with the same offer they don't want. Those are what I would describe as the linkage between the highly theoretical AI, which we of course have to do to get started and the highly operational AI, which ultimately is the difference between that sort of personal success and personal interaction you want. Frankly, it's obviously in the interest of the banks that are serving you as well.

Jim Marous: When you're looking at automation also, and you're looking at a lot of roles that are traditional banking roles that some managers maybe you had for 15, 20 years, as those change, do you see organizations have to take it upon themselves to upskill, reskill, may be transformed towards an ongoing learning process to address this challenge from a standpoint of jobs are definitely going to be changing?

Alan Trefler: Well, I think that the opportunity here is to actually uplift and improve the technology that is now central to pretty much every job that exists in a financial services institution. When you take a look at, for example, some of the problems that some banks have had around opening accounts, well, frankly that shouldn't have been opened. A lot of that is because the banks have rules and processes and roles that are not connected to a technical background. There's a great opportunity to actually create tooling that makes it easier for people to change jobs and to do new processes, engage with their customers, but also puts the guardrails around that. So that it's crazy to think that a computer system allowed somebody to sit down at the end of the day pounding in account applications, right? That's a perfect example of where people tried to layer on top of inadequate systems, manual processes that frankly didn't work.

Alan Trefler: You see that time after time. That's why I think it's the perspective that these organizations have that needs to change. And that will put them in the right mindset to digitally transform. Not digitally transformed a little transactions, but digitally transform the actual end to end customer experience where we call the microjourney that organizations do with their clients all the time.

Jim Marous: Yeah, you talked about the microjourney, we talk about implementing the technology. One of the things that we've discussed and we found on the research is that it's more than just buying the technology and it's more than just great partnerships around the technology. There's still got to be a deployment and in discussions with Peg and a lot of the other players out there, we keep on hearing the fact that as big of an issue as buying the technology is really internally understanding how it needs to be deployed in the culture necessarily to give it a platform for growth and for implementation.

Jim Marous: How are you dealing with the whole challenge of changing of culture and getting people to really understand the power of what you're selling?

Alan Trefler: Well, I think there are two parts. One is we're looking to build what's called design thinking concepts. The whole way that you think about using and deploying the technology. We're actually building that into the technology itself. So the technology guides you and walks you through the workflows that you need as an implementer to help make sure that you are hitting your business objectives. And we're really excited by the progress and the speed with which we have. We have clients go live with major systems in 90 or a 100 days that are game changing for them.

Alan Trefler: But let me say one thing. That a comment about it's not just the technology, it's more than that. On one hand that is absolutely true. But on the other hand, I see that being used as an excuse by companies whose technology isn't actually, that's very good.

Alan Trefler: We have a bunch of companies out there now that are just, amalgams or what I call Frankenstacks of dozens or more other companies that have been bought, glued together had the PowerPoints merged. But actually under the covers, it's a collection of technical debt in a mess. I hear those companies sometimes successfully talking to customers saying, "Hey, it's not the technology. Yeah, we'll help hold your hand." Well, yet the technology is wrong as we've learned in lots of industries, there's a reason that Windows phones don't exist, right? The technology is wrong. You can be as big or successful or historically as smart as possible and you will fail in the future.

Alan Trefler: We actually see a lot of that happening. It's a little bit like that old Siebel promise. Just buy Siebel and everything was going to be better. There are lots of new Siebels out there that are just glued together, frankly, messes.

Jim Marous: Yeah. One other thing that's interesting and you mentioned how quickly you can get an implementation in place today, agility and flexibility in the marketplace. Where do you see that playing a role? We didn't really ask it in the survey we did about because it's hard to define how somebody's going to self determine agility and flexibility. How important is that in today's marketplace as opposed to let's do our annual update of systems?

Alan Trefler: Well, I think agility is critical. The reality is it's almost impossible to get things perfect the first time. And the whole culture of becoming more agile has to be based on the thought that things are A, quick to deploy what we call a minimum lovable product. You said, "Love it," but you want to get something in fast. And then easy and reliable and safe to extend and evolve. That's what we call build for change vision is exactly how we think the winners will differentiate themselves from the losers.

Jim Marous: So speaking of winners and losers, you've been with Pega since the beginning and you're the founder and CEO. You've been with the organization a very long time in bank years, but you've transformed the organization over time to address the needs of the marketplace. What's been the biggest change that you've seen the marketplace during your tenure as to what you not only provide the consumer, but how they deploy what you're providing?

Alan Trefler: Yeah. So I've seen a lot of changes over three decades. But the biggest change I've seen is one that's really come on and what I would say the last five years, which is the movement of Pega as a company from being a software company, a company that delivered software to what would we talk about internally is moving our culture to become an as a service company where what we're delivering is outcomes. And doing that whether somebody is running on Pega Cloud and they don't have to worry about the technology at all, but they're just concerning themselves and achieving an outcome or whether they choose to run it on their cloud because we have a multicloud strategy. Everybody is really focused on picking the right technology but not having to worry about it and being able to really get their heads into the business and the business deliverable.

Alan Trefler: Frankly, that's a change that not only has been massive for our business but we see our customers, we see the market increasingly expect as a service treatment. When somebody can go and buy a Daimler car or a Ford or a Nissan and they don't actually, for example, have to worry about the loan. They don't have to worry about the insurance, they don't have to worry about the maintenance. They just pay a monthly fee and they've bought mobility as a service. Well, that includes lots of financial services products in it. That transition is going to be what makes it super important for organizations to think in that middle out fashion that I was talking about because it's in the middle that you'll hit the different channels with amalgams of offerings, some of which have come from your company and some of which don't. And boy, that's going to upend a lot of these businesses like auto lending for example, and a whole variety of offerings.

Jim Marous: Which is interesting because as I look at the transformation to just the name of your company, the dropping of the word systems as far as Pegasystems to Pega what was more than just a simplification of the brand. It really states the way the industry as a whole is transforming, what they expect from their partners. They're expecting more than just the software or the hardware. They really need post-sales service but also having a professional that can really help deploy the solutions.

Alan Trefler: People who are reaching beyond their traditional boundaries to create guidance and provide insight and provide partnership like we do with our customers. And frankly, they need to be able to do it with theirs.

Jim Marous: Well, this timing goes so fast and I really enjoyed talking today. Again, I'm going to do a shameless plug here that for those listeners that are interested, please look on the Digital Bank Report website and download The State of Digital Banking Transformation, which was sponsored by Pega.

Jim Marous: I really appreciate you spending some time with us today.

Alan Trefler: Well, thank you and I hope you get to join us in Boston for our PegaWorld iNspire at the beginning of June. I promise it will be warmer.

Jim Marous: Sure hoping for it. Thank you very much.

Alan Trefler: Hey, thanks Jim. Take care.