Neither Strategic nor a Plan

Banks' digital transformation strategies continue to be undermined by legacy thinking.

My favorite current legislator said this during a hearing with the Postmaster General:

I’ve heard that you have a new strategic plan, but I’m really concerned that this plan may neither be strategic nor a plan

I’ve come to feel similarly about most banks’ digital transformation plans.

A majority of banks claim to have a plan for digital transformation. When Cornerstone Advisors, as part of our What’s Going on in Banking 2021 report, asked mid-sized bank executives when their institutions launched (or were planning to launch) their digital transformation strategies, 76% said that they had already launched a digital transformation strategy or were going to launch one in 2021.1

Despite this, I continue to see evidence in the market that these strategic digital transformation plans are, for most banks, neither strategic nor plans.

The purpose of digital transformation is to harness the unique capabilities of disruptive digital technologies — the internet, most prominently — to fundamentally change the value propositions that companies deliver to their customers.

I’ll let Clayton Christensen elaborate:

Disruptive technologies bring to a market a very different value proposition than had been available previously. … Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

By this measure, the vast majority of banks’ digital transformation plans fail. They may make an existing product or process better (a sustaining innovation, to paraphrase Mr. Christensen), but they don’t fundamentally change the underlying value proposition. They don’t capitalize on the disruptive characteristics of the very digital technologies they are implementing.

I’ll give you an example.

Every bank under the sun has either implemented digital account opening or is planning to implement it. The theoretical beauty of digital account opening in financial services is that by distributing a (mostly) digital product through a digital, self-service channel, a bank can essentially eliminate transaction costs and marginal distribution costs. This would allow banks to become enormously profitable as they scale and spread their fixed costs across a larger customer base, just like the ultra-profitable SaaS companies everyone admires.

Here’s the problem — most banks that implement digital account opening insist on including a manual underwriting component, which enables a human underwriter to review and work on applications that fall into the gray area between an obvious yes and an obvious no. The benefits of this manual step (in terms of risk decision quality) are questionable at best, but the downside is undeniable. By making the process dependent on occasional manual intervention, these banks are ensuring that their transaction costs will be handcuffed to their growth, forever. Great for loan underwriters.2 Not so much for customers or shareholders.

There are many more examples of legacy thinking undermining digital transformation in banking, so I asked a few of the smartest people I know in fintech to contribute their own “rants” on the examples that drive them crazy.

Risk Management Policies

Simon Taylor, Co-founder & Head of Ventures, 11:FS

Policies are what banks have in place to manage risks. Regulators look for banks to show “they are in control” of their risks. So the development of a policy was at one point likely a good solution.

Let’s say a regulator has created a new regulation. This regulation ABC123 must be adhered to within 2 years from now. Banks will have a specialist team who review the regulation and work with the regulator to understand in more detail what it means in practice. Then banks set about creating a“policy document”.
Policy documents have owners, usually a single person. That policy owner is the person who effectively owns those rules. They may have a team of people who help manage those rules across the bank, but any change, or deviation from their policy must be “signed off” by the policy owner.

This means one person (usually very senior) needs to understand the nuance of a specific client, or delivery in order to sign off a deviation from policy. The reality is that this can take months, and require so much effort, deliveries are changed to accommodate the policy, whether or not the proposed solution was good for the customer, lower risk or not. How good or bad the change was for the customer is not the point. The point is the sheer effort it takes to deviate from policy, even if it’s the right thing to do.

This policy and committee driven approach to control may seem draconian, but it has a couple of obvious benefits.

Often regulators will ask to “See a policy document”, which a bank can duly provide at a moment’s notice. Auditors too, will look for a policy document, and then attempt to provide independent assurance that the policy is indeed being followed.

Auditors, who are specialists in regulation and policy, tend to audit documents and spreadsheets. Auditors spend a significant amount of time helping regulators understand emerging risks and craft new regulations. It’s little wonder then, that they often recommend solutions to banks like policy documents and spreadsheet risk logs, that require a lot of auditing, as a solution to regulation.

Oh and the best bit? The regulator never said any of this had to be the way banks implemented regulation or managed risk. It just sort of happened.

It's like all the best things in life, equal parts ineffective and unnecessary. Like Pineapple.3


Ohad Samet, Co-founder & CEO, TrueAccord

Banks invest tremendous amounts of money in customer acquisition. In the past, expanding your account base has relied on welcoming new customers. With almost 95% of households in the US already banks according to a 2019 FDIC survey, what’s old is new again: banks are going to encounter a lot more past customers who’ve had a “breakup” with the bank.

The problem is that most banks don’t know how to get over a breakup, especially one caused by a customer’s temporary financial hardship. Whether through low-NPS debt collections processes or blacklists like ChexSystems, banks have traditionally pushed struggling consumers out of their system in a less-than-gentle way. Almost no bank (or lender, for that matter) has a structured program to welcome failing customers back once their issues have been resolved — and that assumes the customer wants to come back, given the way they were treated last time. It’s time for banks to measure NPS throughout the full customer lifecycle (yes, even in collections and recoveries) so breakups aren’t so painful, and to find a way to re-acquire those customers, before their neobank competitors do.

Product as the Primary Unit of Value

Jake Gibson, Founding Partner, Better Tomorrow Ventures

Branches, by themselves, aren’t the problem. It’s the mental model behind a branch-based distribution strategy that’s the problem. Banks think in terms of manufacturing commodity products at scale and forcing them onto the general population through these large distribution networks.

The automotive industry provides a good example. Incumbents don’t think “what transportation problem does my customer have and how can I best solve it?” Instead, they think "I have a grey Honda Civic here. How do I get someone to buy it?"

Branches are like car dealerships.

Banks have structured their entire businesses the same way — every product has its own separate team with its own CEO and its own P&L responsibilities. They are factories manufacturing widgets with no flexibility to redesign the widgets or the manufacturing facilities without a massive overhaul of their core culture and principles.

And then each of these departments are siloed like different showrooms, so you are treated like a new customer every time you engage with a new product team, regardless of how long of a relationship you've had with other product teams in that same bank.

You, the customer, are not the primary unit of value in the decision-making framework of a bank executive. The products are. The checking accounts, savings accounts, loans, etc. are the central figures and you are simply revolving between them.

Process > Relationship

Frank Rotman, Founding Partner, QED Investors

Many years ago when I worked as an Executive at a Fortune 500 company, I decided to go on the journey of building a custom house. After some research, I settled on SunTrust as my home lender because they were local and had a very good construction-to-perm loan program. The experience was quite good and I was very happy with them during the build process and throughout the repayment process.

Years later, after leaving the corporate world, I wanted to do some remodeling and thought that a HELOC would be a great fit as my cash flow hadn’t yet stabilized (hello VC world!), but I had built up a lot of equity that I could borrow against (I owned 90%+ of my home by that point).

I honestly expected that it would be such a no-brainer for SunTrust (who was still holding my original mortgage on their balance sheet) that they would just mail me a checkbook. I didn’t even shop around!

Silly me. I only wanted access to about 15% of the equity I had in the house, but SunTrust’s underwriting process was unsparing — 6 weeks, lots of paperwork that I had to fill out, proof of employment required by my employer, and a home visitation by an appraiser that took 3 hours!

Banks pride themselves on being relationship businesses, but most aren’t and have never been. A simple definition of a relationship business is one that reduces friction and/or reduces price because they already know the customer and have access to information about them. Banks suck at this even though they have some of the best ‘truth files’ out there.

Why do banks treat existing customers opening new accounts the same as a new customer who they've never seen before? Because they work ‘forwards from the process’ rather than ‘backwards from the customer’.

“Owning” the Customer

Shamir Karkal, Co-founder and CEO, Sila

“But won’t we lose ownership of the customer if we do this?”

I have lost track of the number of times I’ve heard that comment. Usually from a bank executive who has something like "customer" or "retail" in their job title. If I am feeling particularly snarky I’ll respond:

“Ownership of people was outlawed by the 13th Amendment in the US, except as punishment for a crime. So, unless you are punishing your customers, NOBODY owns the customer.”

Back when I was a consultant at McKinsey, I used to just accept that worldview at face value. Banks built branch networks to entice customers to walk in and buy a product, usually a checking account. This was an expensive proposition, and banks’ cost of customer acquisition was frequently $1000+. But once that customer bought a product, the bank “owned” them. The bank would leverage this “ownership” to cross-sell those customers more products over time. Eventually that initial cost of customer acquisition would be offset by the revenue streams from multiple products, and over the lifetime of the customer, they would make the bank a profit. 

Even back in 2008, there were cracks in this story. Folks were starting their product search by Googling for a product instead of walking into the nearest branch. Fewer and fewer customers were walking into bank branches. And despite their customer “ownership”, most banks struggled to cross-sell products. The average bank customer purchased a measly 2 products from their bank, and the vast majority of retail customers were unprofitable for banks. But increasing that 2 to 2.2 dramatically increased the banks’ profitability, so banks hired teams of consultants to help them figure out how to make it happen. And those consultants built decks analyzing the optimal waiting time in the branch (it's about 10 minutes — just enough time for a helpful salesperson to pull you out of the queue), and comparing your strategy to best-in-class benchmarks like Wells Fargo.4 

And then in 2009, my good buddy Josh Reich sent me an email. That email led to the founding of Simple and helped kick off the neobank revolution.

And you know what neobanks rarely talk about? Customer “ownership”.

In the digital world your competitors are only a click away. In this world it’s very hard to hide behind obscure legalese and making money by fee-ing your customers to death is a losing proposition.

Nobody owns customers. They were always free, and now they can exercise that freedom.

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Short Takes

(Sourced from This Week in Fintech)
  • What to do when they sue?

    One of the biggest and least-known companies in the debt collection space, Sherman Financial Group, bucked the trend over the last year and actually increased the number of debt-collection lawsuits it filed.

    Related: Solosuit, a fintech startup focused on helping consumers deal with debt collection lawsuits using automation, recently demoed as a part of Y Combinator’s Winter 21 batch.

    Short take: The debt collection industry is going to have to be dragged kicking and screaming into the 21st century. I expect the success of TrueAccord and the pressure exerted by Biden’s CFPB to spur significant new fintech investment in this category over the next couple of years.

  • Paying creators on platforms.

    Clubhouse partnered with Stripe to introduce payments for creators.

    Short take: The interesting twist here is that the creator gets 100% of the payment (the fan making the payment also has to pay the Stripe processing fee). Clubhouse gets nothing. This is both a smart acquisition play for Creators and a consequence of Apple’s 30% tax on all payments made through iOS apps (monetary gifts are exempt if they are completely optional and the app provider doesn’t take a cut).

  • Lobbying: A growing fintech line item.

    Payments companies formed a new industry group, the Payments Leadership Council, set to focus on e-commerce and small business issues.

    Fidelity, Square, and Coinbase launched the Council for Crypto Innovation, a new D.C. trade group lobbying for digital currencies. 

    Short take: Coming on the heels of the formation of the American Fintech Council and the Financial Technology Association, it’s pretty clear where a lot of these late-stage investment rounds raised by the big fintech companies are going. Another thing for banks to complain about.

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Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.

Twitter: @AlexH_Johnson



To the 12% of banks who said they don’t have a digital transformation strategy and don’t plan to develop one: I hope your customer acquisition strategy involves a time machine.


I recently heard this described as the ‘John and Mary problem’. John and Mary work in our loan underwriting group. They’re great people. We’re all for technology that makes them happier and more productive, but we couldn’t possibly implement technology that would replace them.


Editor’s note: this last bit is rubbish. Pineapple is delightful.


As I’ve written before, Wells Fargo was patient zero for the cross-sell problems that have engulfed the banking industry over the last 15 years.