Keys to Becoming a Digital Bank

Jim Marous: Hey Chris, it's great to have you on the show today. It's been a long time since we've seen each other in person, but we obviously follow each other quite a bit on Twitter, LinkedIn. I read your articles on The Finanser, and you probably pick up some of mine on The Financial Brand.

Chris Skinner: Yeah, I do. I know you've disrupted yourself, that you're now slim Jim and for every pound you've lost, I've gained one. Thank you.

Jim Marous: Well you know, if I can send them overseas, I don't care where they land. It's just glad somebody's picked them up. Yeah.

Chris Skinner: There you go. I mean I'm expanding my empire. You're slimming yours down, but it's great to talk to you again, Jim.

Jim Marous: Yeah. Well, you recently got interviewed by our team at The financial Brand about one of the most debated questions on our industry and that is, how do you become a digital bank. Without repeating the entire interview, which is obviously available on The Financial Brand website, what are the keys to becoming a digital bank from your perspective?

Chris Skinner: Well, I spent decades in dealing with banks around technology and in particular obviously in the last decade is become FinTech and digital and popular. To be honest, technology and finance has been driving the industry for decades. About two years ago, having written so many books about how technology is changing banking, I got fed up with hearing, everyone's saying that banks don't understand technology, because they do understand technology. They've been dealing with it for decades.

Chris Skinner: The issue today is that it's not about the technology, it's about the culture and the organization to embrace technology. I went through the last couple of years interviewing people at C level within five banks about how they're dealing with digital and transformation and the cultural and the organizational and the mindset change. From those 40 interviews, so I've got about 30 key things that I've picked up that fall into four major buckets. The four buckets are working out what to do, how to do it, doing it, and then doing it better forever, which is continuous improvement.

Chris Skinner: I summarize it, as in digital transformation, it's a transformation that if you don't get it right, then you will disappear. It doesn't mean you'll die. You'll probably get acquired, merged into another organization over time. I think the best way to summarize this is with Charles Darwin's view of the survival of the fittest, which is it's not about being fit, the fastest, the strongest, the most intelligent. It's about being the most adaptable to change, but working out what to change and how to change is actually the hardest thing, because if you change in the wrong way and get it wrong, then you won't survive.

Chris Skinner: I think a lot of banks are getting it wrong. What I mean by this is that if a bank thinks that digital is a project, a function with a budget, and with a leader that's delegated by the executive team to be the chief digital officer, they will fail, because that's not digital transformation. That's treating digital as a channel. What you have to do is treat digital as a complete change of the company, its culture, its people, its organization, its structure, its products, its services, everything. There's not many financial institutions that are doing that well.

Chris Skinner: The ones I picked out that aren't doing it well, the key lesson for me is that the executive team are half digital people. They have a strong background in dealing with technology and telecommunications and they have a mandate from the board to change the bank and not focus on shareholder revenue and profit and return. They focus on digital transformation and organizational change. That's a key mandate they've been given, which I just don't see them in many of the other financial firms.

Jim Marous: Does that put, well, call it the mid tier banks at a tremendous disadvantage? Because most of the mid tier banks are led by and their board consists of people that have been in the industry forever, are continuing to do it the same way. As you mentioned, most of those boards are not consisting of technology people and tech engineers, things of this nature. Many of the leaders have come up through the ranks and doing it the bank's way. Is this putting probably the mid tier banks at a tremendous disadvantage more than even the bigger ones and the smallest?

Chris Skinner: Yeah. I mean it's easy to take a swipe at institutions generally, if they don't have technology savvy, digital savvy people at the leadership level of the organization. A lot of banks, mid tier and tier one, are delegating digital to people below executive level. Those are the ones I'm pointing at specifically and saying, "They will fail at digital transformation," because transformation requires leadership. You and I both know this, because we both talk about it. You have to have a vision. You have to have a burning platform. You have to have a change program. You have to have a focus upon exactly what to change and how to change and making that happen.

Chris Skinner: The mid tier banks do struggle with this because the mid tier banks, if you're a tier one bank then even if you're slow to change, the fact is you're still a tier one bank and you've got the billions of capital and millions of customers to make that happen. If you're a really small bank, you can pivot really quickly. We've seen quite a lot of community banks and thrifts and credit unions in the U.S., doing quite a good job of doing that. Not all of them, but there's some like CBW and Radius, that I see quite often talking about digital and doing new things. If you're a mid tier bank then often you're caught in the headlights, because you're not big enough to be big enough to deal with the capital and the markets that the tier one guys are dealing with, and yet you're not small enough to pivot quickly, so you end up being acquired or merged.

Chris Skinner: There's a few mid tiers that are doing some interesting things, but I think if you go to the five banks that I've picked for my last project, around how are they doing digital transformation, they're five of the top 50 biggest value banks in the world. What I focused on is how do you make a big company change. If these big companies can make those changes happen, there's no reason a mid tier company can't. They just need to get the right factors in place.

Jim Marous: When you look at the traditional financial services firms, who do you believe to be considered truly doing the best as being a digital bank? What banks stand out?

Chris Skinner: Sure. I mean, I took the list of the top 50 highest valued banks in the world, two years ago, and ticked the boxes next to five of them that I felt from media and external perspective, were doing well. I had JP Morgan Chase, which may surprise you, but I think that Jamie Dimon and the organization does get technology, BBVA, who for 20 years have been doing a lot around digital transformation, ING, and with ING Direct and ING as an organization, they are very much a technology focused organization, DBS in Singapore, which is one of the best digital banks in the world now, the best bank in the world from Euro money and over the past five years, and one that wasn't on my radar but when I was speaking to friends in Asia, said, "You must talk to China Merchants Bank," which is a Chinese consumer retail bank based in Shanghai.

Chris Skinner: I included them in the process, I'm sorry, Shenzhen. All five of them have given me interesting lessons. A lot of things that are consistent across all five, no matter what geography we're talking about, and some things that are different by geography, but of the things that are consistent, there's about 30 major steps, lessons that came out of them that are consistent across all five.

Jim Marous: It's interesting with every one of the banks you mentioned, and we just did research on innovation in retail bank and we realized that there's a tremendous correlation, without getting into the chicken or the egg theory, between innovative banks and banks that are the most advanced in digital transformation. In addition, they tend to be the most successfully financial. They seem to get the best customer experience scores and they're using the most advanced technologies. Did you see the same thing within your organizations? It sounds like you did because when I think of innovation, you do think of the BBVA. You do think of the ING. You do think of the DBS of the world. Have you seen the same thing?

Chris Skinner: Well, a lot of external people have picked up on these banks that we're talking about and said, "Yeah, they seem to get it." Yet what's interesting is in local markets, or amongst some competitors of those institutions, they say, "Oh, it's just marketing. It's just PR making it look like they understand this." What's interesting when you'd go inside these companies, is the consistency of dialogue amongst the executive team and the real commitment to make change happen and digital transformation happen. By way of example, if the BBVA operational leadership executive team is half telecoms and technology people, they have a head of data, head of engineering, a head of customer experience, a CIO, a chief executive who's from a telecoms background as is the chairman, so they have a real balance of banking and digital people.

Chris Skinner: When you look at DBS, then a lot of external people say it again, it's just marketing. What amazed me, as I met about 20 people inside the bank and I just remember one conversation specifically because it surprised me. They were all consistent on their customer journeys, user experiences, a long journey through digital to convert the bank from proprietary to open to cloud. I met the chief financial officer and after about half an hour of the conversation, she hadn't mentioned shareholder return, or profit, or return on equity, return on investment once. I just said, "Why haven't you mentioned the financials? You're the CFO." She said, "Well, as long as you focus on the customer journey and the customer experience and delivering the best that it can be, that all follows."

Chris Skinner: Now, I've always believed that myself, which is happy customers make happy business, but they really live that mantra. That their discussion and their whole being is about joyful banking and you go, joyful banking just sounds stupid. They talk about invisible banking, you go, how can you talk about invisible banking because the bank has to be visible otherwise, what, how's the customer know that they're a customer of the bank. They just say, it's about the customer and the experience. They don't want to think about banking. It has to be invisible, but what they want is when they have to think about banking for it to be joyful. It's a really different way of thinking.

Jim Marous: Yeah. What's interesting is, and you're bringing it up [subtlely 00:11:39] in the fact that you've gone through these organizations, it's my impression that everybody within the organization speaks the same language, where they all are passionate about what they're doing. If you ask them, "What does your bank represent," they all will come back with the same answer. Now, I'm not too sure how many banks have that type of uniformity in message and in the view of what they think they're doing day to day. That makes life a lot easier I think for these organizations when there's uniformity of message and brand within the organization and in the way people talk.

Chris Skinner: Yeah, it's an absolutely critical factor and it's all about communication and making sure that everyone has a playbook and a songbook that they can all live by. I think a lot of issues and a lot of organizations is that they don't have strong leadership. Then even if there has done leadership, they don't have great communication. These five banks have both, that strong leadership and great communication. It's based around, not all of these banks, but certainly I'd say three of them had a crisis experience and the crisis being that something had happened that made the board sit up and say, "We're going to fail in the strategy that we set out, so we have to change the strategy and we have to do something completely different."

Chris Skinner: There was a burning platform of change. That's one of the key lessons that if you don't have a disturbance in the organization, an uncomfortableness in the organization, that's very hard to make people to change. Then equally if you disturb people and say, "We've got a crisis, we're going to die," then you have to give them a way to see how they're going to live, a vision. This is where we have to go to make sure that we survive. They have a burning platform, a crisis, an equally strong vision of where they have to go. Then within that strong vision they have the value and a cultural layout of, these are things we believe, this is how we behave, these are our aspirations, these are our goals, these are the things that everyone should live by.

Chris Skinner: A lot of it's wrapped up in really simple to remember acronyms. We want to be first, as in friendly, informed, responsive, service oriented and trustworthy. First stance or something. It's not just being first. It's that we're friendly, informed, service oriented and trustworthy. Then equally, and this is the bit that I hadn't even thought about until it was raised by a couple of the banks, that they as an executive team were given the focus on transforming the bank because they've been in a crisis to achieve transformation. The board said to the chairman and she was active, you have to focus on transformation around digital and customer, and forget about shareholder and profit.

Chris Skinner: Now this is an interesting aspect because it hadn't even entered my mind, because most banks are focused on shareholder on profit. If you have that as your regime, you will only ever do business as usual. You will not transform. Whereas these guys had to transform. They had a crisis, they had a reason why it had to happen. The only way you transform is if you forget about business as usual and focus on business as unusual. That's why that board mandates to say, focus on the customer and digital and not on shareholder on profit, was an integral part of their organizational change.

Jim Marous: Well, it's interesting because right now, one of the things that I talk about that's the biggest hurdle around transformation, the fact that there's not a bank in the world today that's not making money. The pain, as you referred to it, is not there unless something major comes up. Most of these legacy financial institution, legacy bankers say, "Why do I want to change now when things are going so well?" You keep on trying to talk to them about the horizon's a whole lot shorter than it's ever been, but there's a challenge of if things are going well, why disrupt the cart. You sit there and just shake your head and go, because it's not going to stay this way forever.

Chris Skinner: Well, I'll give you a fictional example, but it's based on a real life case study that I'm very familiar with. I'm going to change the names and the countries to suit what we're talking about. Imagine that, let's say ICBC, the Chinese Bank announces tomorrow that they're acquiring Citi Group. What would be the reaction within America, and within Citibank and within Citi Group to that announcement, where Chinese Bank is acquiring an American bank? It would be, I would imagine, horror, shock. I actually know a bank that did that. Not an American bank. It was actually a European bank. It's a Danish bank that had a executive team meeting of the top 200 managers at the bank. That morning announced that they'd been acquired by a Swedish bank.

Chris Skinner: The Danish and Swedish have this thing. You can imagine, it's the same as like the Chinese and the Americans. To announce the Danish bank had been acquired by Swedish bank was like horror, shock, oh my god. The whole day was spent focusing on what that would mean, how they'd need to change, what would they do in structure and focus and organization. It really created an impetus and a purpose to rethink the strategy. Then in the afternoon, having made the announcement first thing in the morning, the chief executive said, "I'm lying, but it got you thinking, didn't it?"

Jim Marous: Wow. It disrupts you. Yeah.

Chris Skinner: Yeah, so you create a false disruption. You get people to move into focusing on what should they do different rather than just doing business as the same.

Jim Marous: Well and then you do run into a little situation where two banks come together and they merge, they put one person to the other. Is that even the impetus to dig your heels in to make sure you get your position at the other bank or at the new bank? Basically you run on your old history, is being different may not be the best desired chance at that point. What's bad is you then get a bigger, bad bank in many cases. We talked about traditional banks, but we have to obviously get into the whole area of challenger banks or bank challengers if you were, and versus traditional banks.

Jim Marous: Obviously in the European Union, in your area, there's a whole lot of challenger banks. Many of them have now been in existence for four to five years. While we may have dismissed them in the past because there wasn't scale, and people were putting their secondary money into an account, all of a sudden the trust factor of these organizations is going up if for no other reason than they've stood the test of time. What do you see as the trajectory I should say of let's say, the major challenge of banks in Europe right now?

Chris Skinner: Well, I'm a big fan of innovation and change and I'm a big fan of the challenger banks. I think their challenge is obviously to be profitable and to grow into substantial organizations. A few of them are starting to achieve that, which is why they're getting unicorn status, but if you look at the unicorn status, what seems to be happening is on the valuation model, each customer they've gained is worth $1 million, which kind of isn't really the sort of model that I think we'll see long term. That's one challenge that they've got, which is to work out their sustainable model of growth rather than a projectile model of growth, based on future valuations and targets.

Chris Skinner: Then the main thing about a challenger bank that I've learned from the UK model, and this is now coming through in many other parts of Europe and Asia, and also I think will come through in the USA, is it's because they really understand the customer journey and user experience, and they've built a business around that from scratch that they are leveraging data intimacy in a really nice way. They do it in a way which no incumbent bank could do because incumbent banks don't have the data architecture to do this, because incumbent banks have a fragmented data architecture based on years of mergers and acquisitions and legacy systems implementations. These banks don't have any of that.

Chris Skinner: As a result of data intimacy because of a cleansed data architecture, the challenger banks are very good at leveraging customer intimacy through artificial intelligence and data analytics. What that actually means in practice is that if I have a transaction on my old bank, I only see a truncated record of where it was and who it was with. Often it doesn't make sense because it's in a language that's based on the old banks' traditional systems. Whereas what I get from challenger banks through APIs and Google Maps and Stripe and other partners, is huge amounts of knowledge about every transaction I make, that I can delve down deep into to find that not just that I paid $40 at a store, but the store on this street corner at that time, on that date with a photograph and a click through.

Chris Skinner: What that means, and there's lots of other things I could add to this, but what it means in practice is that a lot of people now having tested the waters with the challenge of banks, are switching to the challenger banks and saying, "These guys give me far more than my old bank," but they're not actually shutting down their old bank account. What they're doing is they're leaving their boring old bank that gives them boring old transactions with their boring old bills, their tax utilities, their rent payments, whatever, and moving all the life stuff to the new bank, because it gives them all the analytics they want and links that they want to, how they're living their lives and spending money. All of the data about my every day is with challenger bank. All of the data about my boring old life is with boring old bank.

Jim Marous: You know, it's interesting because you talk about now the integration of data analytics, life stage and lifestyle segregation, and then financial services. Well in that whole category you can't help but mention the Googles, the Facebooks, the Ubers, the Amazons and the Apples. Each one of them has recently announced new forays into new areas of financial services. Do you see this trend continuing or do you see that regulators may eventually take a stand against the big tech firms offering financial services?

Chris Skinner: Yeah, there's kind of five layers of question in that question, Jim, as you may know from asking it. You also know that I blogged about this a lot. Basically I've never been worried from a bank's perspective, about Google, Amazon, Facebook and Apple being in banking. The reason being is that if they ever moved into banking, it would kill them. I mean they are fast, agile, innovative organizations that are tech focused with light regulations. Suddenly to move into a heavily regulated, heavily capitalized, slow to change, difficult to maneuver, industry, would just be like sort of putting them in a straight jacket and leaving them in a jail cell. They'll just die.

Chris Skinner: It makes absolute sense then to say, you know what, we're going to focus on the customer front end, the data at the front end, the experience at the customer front end and then partner with the guys who understand the hyper capitalized heavily regulated stuff at the backend, like JP Morgan Chase and Citi and Goldman Sachs. It makes absolute sense and I've written lots about this. My model of finance is based around three companies, the back office manufacturing organization, which is the factory for admin and service, the middle office infrastructure organization, which is all about the links between front and back office, and the front office user experience and customer and distribution and retaining capability.

Chris Skinner: That front office, so many people said for decades now that you can't give that away. We have to own the customer, but no one owns the customer except the customer. Maybe we've finally woken up and recognized that we can partner with people like Google and Amazon and Facebook and Apple, and that they can have the customer front end, but when you lose a payment, where's Google's telephone number? You know, for support, who are you going to call? The backend, the product manufacturing, admin and service, will never come from an organization that doesn't get the regulation, doesn't deal with customers and only deals with them through digital platforms.

Chris Skinner: You have to have a backend that can provide a better service both physically and digitally, and equally add onto that, that when you get to the backend you're dealing with the regulatory structures of the federal reserve, the states, the OCC, and the many others that get involved in how that operates. That has five times more regulation than technology. Bank of America, Merrill Lynch actually came up with a chart, which I use in all my presentations, saying that the average American bank deals with 128,000 regulations. The average American technology company deals with 27,000. Do you really want to get involved in five times more regulation? No, and that's the reason why big tech will never get into big banking. They'll partner with big banking to do finance.

Jim Marous: Payments has already been almost completely disrupted by alternative providers. Do you see another area of financial services that's really at risk due to the ability for alternative providers to provide a better experience?

Chris Skinner: Well, I mean it's not as payments. It's most aspects of finance has a specialist company doing something amazingly well, from robo advisors through to credit and lending. Almost every aspect of finance has a company that's doing something better than traditional banks have been doing it, either through peer to peer connectivity, or through new business models, or new visions and ideas of how to use APIs and apps and analytics to do this. I think the key thing is two aspects. One, banking is needed to be delivered by banks. I don't see anyone else delivering banking. When Bill Gates said, "We need banking, but we don't need banks anymore," he was wrong. I mean, he said that 25 years ago. Since he said that 25 years ago, banks have got bigger and in nearly all aspects of their markets.

Chris Skinner: This naivete of technologists, including Bill Gates, to think that we need banking, but we don't need banks to do that anymore, because banks do one thing that no one else does, and that's act as trusted intermediators of money and trusted stores of money, because they're regulated to do that and licensed to do that by the government. It's like a license to kill, a license to bank. Once you have that, it's very different to doing payments, lending, credit, or mortgages, or savings or investments. It's a key piece that's all about intermediation of trust between people who don't trust each other with money.

Chris Skinner: A lot of people don't get that piece of finance. That is the core of banking. The core of banking is not payments, lending, saving, investments. They are things that we add on to that core of trust intermediation. When we talk about disruption and disintermediation, sure, specialist companies can do these other areas, but they can't replace that core area of trust intermediation. What I keep saying, and you'll know this because you've read my blog and you know me, is the banks really need to go out and look at the companies that are doing the other bits today with technology and see how they're doing it and whether they're doing it better, because there's 12,000 or more FinTech startups worldwide that are doing one of these things with an app, API, or some data analytics, probably a lot better than a bank could do it.

Chris Skinner: There's 12,000 companies focusing on manufacturing, processing or retailing, savings, investments, payments and lending. What a bank should think about is, do they really think one company doing 12,000 things can do it better than 12,000 companies doing one thing. That's my main message to banks today, that in the digital world, the financial institutions should focus on the ecosystem, the platforms, the partnerships, the structures, and say, if there are companies doing an app, API, or analytic really well in the areas outside our core area, which is trust of intermediation through a license, should we partner with them, should we work with them, should we cooperate with them, should we invest in them, should be acquire them or should we copy them and imitate them.

Chris Skinner: I mean work out what to do, but stop trying to do what you've always done, which is to try and do everything. Because one company that does 12,000 things averagely will never be 12,000 companies doing one thing brilliantly.

Jim Marous: Which actually, getting back to your first comment, it's really what differentiates those top five banks that you've talked about from all the others, is they have not been hesitant or shy about building partnerships, making investments, so buying, partnering, the whole ramification and not saying, they don't have to build from within, no matter how big they are. Finally, and I can't believe these podcasts go so quickly when we have these kinds of discussions. You know every year I do the retail banking trends and predictions for The Financial Brand. What bold trend or prediction do you have for 2020?

Chris Skinner: I mean 2020, it's only a year. We've been talking year on year for a long time about radical things. Nothing's radical that's going to happen next year except for my new book. I think one of the things that we'll see next year, particularly in finances, the maturing of artificial intelligence from an embryonic idea to a real technology and practical deployment. Right now most people think AI in banking is a chat bot. A chat bot to me is about as mature as a technology and a view of AI as maybe a children's baby's toy. It's not something that is mature toys. It's way too basic in its operation.

Chris Skinner: I think what we'll see in 2020, there's a lot of bank starting to use artificial intelligence more intelligently, to do more intelligent things. What frustrates me right now is that most AI, even if it is being used in something more advanced than a basic chat bot within a bank, is being used for fraud and risk analytics.

Jim Marous: [crosstalk 00:32:04], yep.

Chris Skinner: Yeah, it's not being used for customer focus, and for customer intelligent service, and customer intelligent marketing. I think customer intelligent marketing and customer intelligent service based on holistic data architectures, using applied artificial intelligence, will start to become a much bigger platform or focus next year.

Jim Marous: Chris, how do people get ahold of you and follow you?

Chris Skinner: Well, I blog every single day at thefinanser.com. I've been doing that for over a decade and there's a strong following on there. Last year, most of my blogs were about everything to do with FinTech and technology. In fact, it's been interesting that this year the top two blogs are around how blockchain and FinTech are struggling or are they. You'll have to read the blog to find out.

Jim Marous: That's great. You've had a lot of books. Can you talk a little bit about just the last book you put out?

Chris Skinner: Oh sure. I mean in a nutshell, in 2014, Digital Bank came out, which is about how to create a digital bank, whether you're an incumbent or startup. In 2016, Value Web came out, which is all about the idea of blockchain and the mobile network and internet creating free, fast, frictionless, real time payments and finance. Digital Human came out in 2018, last year, which is about how everything as the digital connectivity platform is allowing anyone on planet earth to get access to finance, to trade and transact. Then next year in spring, Doing Digital is all about lessons from leaders. The banks are actually doing digital transformation, how they're doing it and what you can learn from them.

Jim Marous: Well Chris, you know this went way too fast, but it does show that we have to get together more often because these conversations are great. Usually we have them over dinner or drinks. I'm looking forward to next year being able to travel and see you again and see your family. You have a great rest of the week and thanks for being on the show.

Chris Skinner: And you, Jim, vice versa. I hope to see you more and equally, I'm sure we'll do this again.

Jim Marous: Thanks a lot.