How a cultural mind shift can help traditional banks innovate faster

Tra­di­tion­al banks increas­ing­ly recog­nise the need to inno­vate and embrace new tech­nolo­gies to remain rel­e­vant and com­pet­i­tive in a world of rapid dig­i­tal dis­rup­tion and the emer­gence of chal­lenger banks. Yet while there is a will­ing­ness to trans­form, organ­i­sa­tion­al cul­ture can some­times get in the way.

“There is a lot of desire to inno­vate and change and that’s very dif­fer­ent from a few years ago—incumbent banks know that they need to change but the real­i­ty is they have to remain focused on safe­guard­ing their cus­tomers’ funds and on being com­pli­ant and on things not going wrong,” says Lewis Nur­combe, glob­al vice-pres­i­dent of sales at Cur­ren­cy­cloud, a cross-bor­der pay­ments provider.

Reg­u­la­tors also say it is essen­tial. Pent­ti Hakkarainen, mem­ber of the Euro­pean Cen­tral Bank’s Super­vi­so­ry Board, said in a speech ear­li­er this year that dig­i­tal trans­for­ma­tion is a must for banks as chang­ing cus­tomer demands and pres­sure to reduce costs and increase effi­cien­cy leaves them no option but to embrace mod­ern tech­nol­o­gy.

“The desire is there to change, but it’s just they have to pri­ori­tise pro­tect­ing what they’ve got already,” adds Nur­combe.

Much of the lega­cy infra­struc­ture that banks have is focused on those priorities—keeping the lights on and pro­tect­ing the sta­tus quo.

“Cul­ture falls in behind that because invari­ably when inno­va­tion projects don’t work, we blame it on cul­ture,” says Nur­combe. “But usu­al­ly it’s just some­one from a tech­ni­cal team say­ing you can’t do it because it expos­es the sys­tem to risk. So cul­ture and lega­cy tech­nol­o­gy as a block­er to inno­va­tion are com­plete­ly inter­twined.”

The old school way of think­ing was that every organ­i­sa­tion must own and con­trol every aspect of what they do

One of the chal­lenges that large finan­cial insti­tu­tions face with their cor­po­rate cul­ture is that they tend to focus on spe­cif­ic skills, expe­ri­ence and edu­ca­tion when hir­ing staff, rather than on per­son­al traits that could indi­cate a more cre­ative mind­set.

“What you tend to find with­in cor­po­rate cul­ture is that peo­ple become dis­pens­able from the per­spec­tive that if you are unable to per­form a spe­cif­ic func­tion, they will replace you with some­body who can, and that deci­sion is usu­al­ly based on a cou­ple of check­box­es,” says Arno von Helden, head of Shyft, Stan­dard Bank’s FX-focused fin­tech app. “The real­i­ty is there are more sig­nif­i­cant fac­tors to an individual’s suc­cess or fail­ure such as dri­ve, ambi­tion and passion—things that you can’t mea­sure by tick­ing a box. And so it is very much through that lens that cor­po­rate cul­ture strug­gles to advance sig­nif­i­cant­ly and be inno­v­a­tive and entre­pre­neur­ial in their think­ing, because banks are look­ing for indi­vid­u­als that tick cer­tain box­es.”

Part of the issue is that when organ­i­sa­tions reach a cer­tain size, they often lose the entre­pre­neur­ial spir­it that led to their cre­ation in the first place. Take Stan­dard Bank as an exam­ple. When it was found­ed in the 19th cen­tu­ry, it was cre­at­ed to fill a gap in the market—providing loans for sheep farm­ers in the East­ern Cape of South Africa. Yet as organ­i­sa­tions grow in size and stature, risk-tak­ing nat­u­ral­ly starts sub­sid­ing, says von Helden.

“You become more focused on pro­tect­ing your brand and not los­ing cus­tomers,” he says. “At that point, you start fill­ing the organ­i­sa­tion with indi­vid­u­als that see the world from that per­spec­tive. They’ve come in to pro­tect that and start pre­sent­ing risks to organ­i­sa­tions such as ‘how can this dam­age our brand if some­thing goes wrong?’ So organ­i­sa­tions become very risk-averse and that is not a fer­tile breed­ing ground for inno­va­tion.”

That means banks need to find a bal­ance between this risk-averse mind­set and hav­ing a more inno­v­a­tive cul­ture.

“The cul­ture of the organ­i­sa­tion needs a lev­el of risk aver­sion because if it was just a bunch of cow­boys or mav­er­icks run­ning all over the place, chances are that would do some dam­age,” says von Helden. “Banks shouldn’t be switch­ing from a risk-averse cul­ture to a risk-on culture—there needs to be a hap­py medi­um.”

Some incum­bents are attempt­ing to solve this prob­lem by cre­at­ing stand­alone fin­tech busi­ness­es that oper­ate inde­pen­dent­ly from their wider organ­i­sa­tion.

“The banks that we’re see­ing be most suc­cess­ful at doing this are actu­al­ly silo­ing off busi­ness units or cre­at­ing brand new busi­ness units that look a lot more like a start­up organ­i­sa­tion,” says Nur­combe. “What that does is it allows them to cut away all of the pol­i­tics that you typ­i­cal­ly see in a huge organ­i­sa­tion where you’ve got con­flict­ing organ­i­sa­tion­al or depart­men­tal pri­or­i­ties.”

It can also enable organ­i­sa­tions to hire peo­ple who have a growth mind­set, for instance those that have worked in a fin­tech or start­up envi­ron­ment rather than some­one who has been at a tra­di­tion­al bank for a long time, Nur­combe says.

“Most impor­tant­ly, it means that they can step away from that envi­ron­ment where they need to pro­tect what they already have into say­ing ‘we’re a brand new organ­i­sa­tion, we need to grow and cre­ate some­thing that dri­ves val­ue and that peo­ple want’, and as soon as you switch to that mind­set, that’s when you can real­ly build new things,” he says.

That approach is some­thing that Stan­dard Bank has adopt­ed through the launch of Shyft.
“The rea­son why we cre­at­ed a fin­tech with­in an organ­i­sa­tion is because the organ­i­sa­tion itself strug­gled to actu­al­ly solve prob­lems that required inno­v­a­tive and entre­pre­neur­ial think­ing,” says von Helden. “The organ­i­sa­tion was putting in place strate­gies and tech­ni­cal capa­bil­i­ties in the hope that they would solve those things, but they weren’t actu­al­ly solv­ing them in the way that they need­ed to be solved.”

By oper­at­ing as a fin­tech start­up, employ­ees can be more cre­ative and adopt a more entre­pre­neur­ial mind­set because they will have a vision about what they want to achieve and how they want to grow the busi­ness, and that gives them a greater sense of own­er­ship, says von Helden.

“Banks need to cre­ate vehi­cles and oppor­tu­ni­ties to explore new endeav­ours,” he says. “Large organ­i­sa­tions don’t need to all of a sud­den rein­vent their cul­ture, but they must cre­ate envi­ron­ments where ideas have a forum and there are peo­ple that can nur­ture and grow those oppor­tu­ni­ties when required.”

There is a lot of desire to inno­vate and change and that’s very dif­fer­ent from a few years ago

The advan­tage of this approach is that it can enable banks to test new ideas and fail with­out it adverse­ly impact­ing the wider busi­ness.

“You don’t need to build the final solu­tion from day one, just inno­vate for a very tiny sec­tion of your cus­tomer base or maybe it’s cus­tomers that you don’t even have yet and build an MVP (min­i­mum viable prod­uct) that solves a real­ly spe­cif­ic cus­tomer prob­lem,” says Nur­combe. “There’s no rea­son to expose your exist­ing bank to this inno­va­tion, you can do it on the side and remove all the risk.”

Banks can then devel­op new prod­ucts at their own pace and slow­ly move cus­tomers over when they are ready rather than rush­ing to migrate all cus­tomers in one hit and then risk desta­bil­is­ing exist­ing busi­ness lines.

“One thing that the fin­tech com­mu­ni­ty some­times over­looks is that banks make huge amounts of rev­enue already today and they’ve got bril­liant busi­ness mod­els that work,” says Nur­combe. “Some­times, it doesn’t actu­al­ly make sense to inno­vate and can­ni­balise a bril­liant rev­enue stream.”

The tra­di­tion­al banks that are doing the best job at this are inno­vat­ing in small steps. Nur­combe says this approach mir­rors what Kendall Roy in the HBO show Suc­ces­sion calls the ‘Strat­e­gy of a Thou­sand Lifeboats’, where an organ­i­sa­tion builds lots of lit­tle life rafts that are mov­ing away from the big sink­ing ship and one by one, they inno­vate.

“That’s what the suc­cess­ful banks are doing at the moment,” says Nur­combe. Incum­bents can also learn from chal­lenger banks around how they approach inno­va­tion, he says.

“A lot of the neobanks have been cre­at­ed with an inno­va­tion mindset—it’s been about growth, it’s tech-first—so there’s a dif­fer­ent cul­ture built in,” says Nur­combe. “But the main thing that dig­i­tal banks have done well is that, through neces­si­ty, they haven’t tried to build every­thing them­selves, they’ve been very recep­tive to part­ner­ing with third par­ties and pulling togeth­er dif­fer­ent solu­tions. Tra­di­tion­al banks could still learn a lot from that.”

There are three main rea­sons why banks should con­sid­er part­ner­ing with third-par­ty providers rather than try­ing to devel­op their own tech­nol­o­gy in-house. The first is speed to mar­ket.

“If you’re a bank with a huge cus­tomer base, it’s real­ly impor­tant that you focus on tak­ing some­thing to mar­ket and adjust­ing it to your cus­tomers,” says Nur­combe. “What you don’t want to be doing is try­ing to build every­thing from the ground up—by the time you’ve done that the mar­ket has moved on or the oppor­tu­ni­ty has been lost or some­one else has built it already. That speed to mar­ket is some­thing where the real­ly suc­cess­ful neobanks have been so fan­tas­tic.”

The sec­ond ben­e­fit is that banks need few­er resources to main­tain third-par­ty soft­ware, help­ing to reduce run­ning costs.

“The old school way of think­ing was that every organ­i­sa­tion must own and con­trol every aspect of what they do,” says von Helden. “Now that we’re in an age where tech­no­log­i­cal advance­ment is hap­pen­ing at such a rapid pace, it becomes almost impos­si­ble for one organ­i­sa­tion to have all of these dif­fer­ent sys­tems and be at the fore­front of the devel­op­ment of all of these sys­tems.”

A third rea­son is that third-par­ty providers like Cur­ren­cy­cloud con­tin­u­al­ly inno­vate and devel­op their prod­ucts in line with cur­rent reg­u­la­tions, help­ing to ease the com­pli­ance bur­den for banks.

Finan­cial insti­tu­tions should there­fore focus on their core offering—providing bank­ing ser­vices to cus­tomers— and part­ner on every­thing else.

“Let’s go to a third par­ty that is 100% focused on, say, inter­na­tion­al cross-bor­der pay­ments, who can pro­vide best-in-class tech­nol­o­gy and who will take own­er­ship and respon­si­bil­i­ty of the devel­op­ment of that with­out us hav­ing to invest in the tech­nol­o­gy our­selves,” says von Helden.
All of this requires a new way of think­ing that embraces a more col­lab­o­ra­tive oper­at­ing cul­ture.
“The ini­tial feel­ing among incum­bents was to pro­tect your­self from this,” says von Helden. “Now the real­i­sa­tion has set in that it’s no longer about pro­tec­tion, it’s about part­ner­ship. And it’s about lever­ag­ing those part­ner­ships and being rel­e­vant. That’s a com­plete­ly dif­fer­ent way of think­ing. It is an open, inte­grat­ed, plat­form mind­set, ver­sus a siloed bar­ri­cad­ed mind­set of pro­tec­tion.”

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