A digital transformation agenda for banks addressing bank leaders’ concerns on emerging technologies, consumer-centric innovations, and technical solutions.
Key Takeaways
Key Takeaways
Three primary concerns for digital leaders include building competitive customer experiences, hiring for critical positions, and addressing technical challenges.
Digital leaders are pressed to address core technology trends.
These include open banking, banking as a service (BaaS), and embedded finance.
Banks must build a specific strategy around the pursuit of innovation.
They may embed research and development within daily operations or source and commercialize technologies using purpose-built parts of the organization.
I. Digital Leaders’ Concerns
Bank executives responsible for digital products and services—whether they own the user experience, technology, or innovation—face three key challenges to building a competitive advantage based on technology.
Building Competitive Experiences
Building Competitive Experiences
Banks struggle to match the quality of Big Tech and fintechs’ digital services. Digital leaders are charged with building personalized experiences based on the trove of customer data they own or have access to. But creating the experience customers expect is fraught with challenges—especially when banks attempt to build such experiences across multiple channels, across business units, and across products.
These leaders need to think about how to participate in emerging channels. Open banking, in particular, has raised the question: How should banks enable their customers to work with fintechs while still controlling customers’ access and experience? The challenge for digital leaders is to connect what they develop in-house to fintech experiences outside the bank. Enabling customers to control how they connect with fintechs from within the mobile banking app is an early path.
Grappling with Limitations
Legacy infrastructure holds back the digital experience. Banks face huge technical challenges using the data they have, let alone using more as they create or gain access to it.
“To deliver great experiences for the customer, you must have great data,” said Jaidev Shergill, president and managing partner at Capital One Ventures. “But if that data isn’t good data, and if you can’t use it for the right thing, then it’s useless. It’s just a cost.”
Necessary investment in digital transformation can cost billions of dollars and is never complete. JPMorgan Chase, for example, noted it will spend nearly $4.5 billion in 2022 just on evolving their technology. Meanwhile, they’re still operating with a fragile and inflexible legacy infrastructure.
The digital-first, product-led organization is still a work in progress. Old ways of working and tension between parts of the organization responsible for digital and for financial products make it challenging to rapidly build, deploy, and iterate on a cohesive customer experience. Digital leaders have made progress—with the support of senior leadership that has embraced the need to reshape the organization around digital needs.
Attracting Talent for Critical Positions
Banks are seeking ways to attract talent and incubate an Agile culture. Technology-focused financial institutions find themselves lacking the software engineers and data scientists they need to build experiences and adapt to technology challenges. They may also lack the dedicated financial resources to compete for them.
“Hiring talent for the innovation function is not just about the skill set. It’s almost more of a mindset thing because it’s hard to know exactly what trend will hit you next year.”
— Imran Khan, Head of Global Innovation, TD Bank Group
Over half of US financial services executives said talent acquisition and retention challenges were one of the biggest risks to achieving their growth goals, according to a January 2022 survey by PwC. Talent demand extends to analytics, design and customer experience, product management, data science, and technical delivery.
Banks compete with other industries for the same pool of talent. Since the pandemic upended the work environment, banks have had to rethink how they can attract talent used to flexible work environments. Many have struggled with this.
“If a really high-quality engineer is being offered a job at a bank versus at a LinkedIn or Facebook or Google, there is a very different value prop and very different pace at which they can exercise their skills,” said Dhruv Goswami, managing director and partner at Boston Consulting Group (BCG).
Digital leaders must staff up for open banking and BaaS. The fintech ecosystem’s explosive growth and broad consumer adoption of fintech means that in-house digital channel strategy can’t be limited to what the bank alone can deliver. Leading banks have anticipated this: They’ve hired and promoted executives to run their API strategies, focusing on open banking and developer centers and working with legacy vendors who increasingly sell supporting solutions.
II. Technologies to Watch
Artificial Intelligence
For the largest banks, AI is a critical focus of research and development. That commitment is evident, for example, in Bank of America’s patents: Artificial intelligence and machine learning-related patents made up almost a fifth of the bank’s 341 patents granted in the first half of 2022. We expect the rapid pace of AI research and development (R&D) to continue: Almost 25% of banking executives worldwide say that, within the two years, AI will be the most effective technology, according to a January 2022 survey by Economist Impact.
AI will dramatically change the bank’s business economics. AI has many opportunities to make banks more efficient—in both the front and back office. On the back end, AI will help enable business process automation, the analysis of increasingly large data sets, and more sophisticated cyber security.
“The ability to deal with unstructured data and use machine learning and AI to make the decisions that you need to is going to increasingly become more important,” Capital One Ventures’ Shergill said.
Behind-the-scenes AI is often unwittingly being adopted by customers. The technology is behind facial and voice recognition (biometric authentication), personalized offers and experiences (digital banking), natural language processing (virtual and voice assistants), and predictive analytics (real-time offers across channels).
“Machine learning in particular is really starting to embed itself in many aspects of the customer experience,” said Rohan Amin, managing director and chief product officer at Chase. It’s gone beyond protecting customers from fraud, he added. “Now it’s being used to surface content and experiences.”
Virtual assistants have boosted AI’s profile Ten of the 23 banks analyzed offered a virtual assistant in their mobile banking app, including Bank of America, Capital One, Chase, Citi, U.S. Bank, and USAA. Additionally, Truist launched a virtual assistant in September.
Open Banking, BaaS, and Embedded Finance
“You’ve heard the term like ‘the AWS moment for banking infrastructure?”
— Luke Purcell, Partner and Director, BCG Digital Ventures
Banks are making their core technology available to fintechs. Surveys demonstrate the broad adoption of embedded finance and, by extension, open banking and BaaS—even when customers aren’t aware. For example, 42% of consumers have used embedded payment services such as Apple Pay, Google Pay, or Shop Pay, per a December 2021 survey by Morning Consult.
Bankers are deeply concerned about customer ownership. Each bank needs to balance the business it can gain from providing products through alternative distribution channels and the loss of exposure to the end customer. On the consumer side, though, fintech and banks have disagreed about the data the latter can and should share.
But banks are becoming service providers to developers. Retail banks are newly focused on APIs and open banking—which have applications for linking account information, account-to-account payments, alternative credit scoring, and income verification, among other things. As they think about how to participate in nontraditional channels, they’re considering what products and services to offer and how.
“If I believe my technology’s the best in the world, why am I not offering it up to everyone else and become the player that provides X, Y, Z service?”
— Michael Abbott, Global Banking Lead, Accenture
Developer centers across lines of business are increasingly sophisticated. Some of the largest banks—including JPMorgan Chase, Bank of America, Wells Fargo, Citibank, U.S. Bank, and Capital One—offer robust developer resources. Leading financial institutions (FIs) have a developer center, an API marketplace, developer sandboxes, simulation suites, and tools and analytics for testing and launching. And they offer solutions for fintech, such as the following from JPMorgan Chase:
- Account data sharing
- Information retrieval
- Know-your-customer support
- Payments initiation services—in Europe
Commercial banking can provide a cue. APIs have been a part of commercial banking and treasury services for years. Banks might offer API-based services related to treasury management, securities services, payment instructions, and enterprise resource planning, according to Dominic Venturo, executive vice president and chief digital officer at U.S. Bank.
Legal issues, risk controls, and technical challenges still loom. The need for banks to work with data networks, aggregators, and developers in order to participate in open banking, BaaS, and embedded finance means they lose partial control of their walled garden. This can introduce or exacerbate security flaws. At the same time, fragile legacy infrastructure may struggle to cope with the pressure.
Some retail-focused FIs are making BaaS a core component of their business model:
- SoFi revealed its BaaS plans with its acquisition of Technisys, a core banking platform, in March and payments processing platform Galileo in 2020.
- This year, Starling Bank extended its BaaS platform, Engine, from the UK to the rest of Europe.
- Small regional FIs like Evolve Bank and Trust, Lincoln Savings Bank, Cross River Bank, MVB Bank, and Coastal Community Bank have turned themselves into BaaS partners.
Blockchain
Blockchain’s potential use cases apply across the bank. Blockchain’s applications for clearing and settlement, payments, trade finance, identity management, and syndicated loans will make it invaluable to commercial banking as we know it. (Unsurprisingly, 73% of digital transformation leaders worldwide in banking and financial services believe blockchain will be critical to realizing their digital transformation plans, per an August 2021 survey by WNS and Corinium.)
Blockchain-based payments are an immediate use case. Blockchain lowers costs, particularly for high-value, high-volume transactions. It increases settlement speed to real-time (eliminating exchange rate risk for cross-currency transactions) and enables transactions 24 hours a day every day of the year. It also has applications for simplifying operations, such as tracing bank guarantees and letters of credit across parties, making reporting faster and automating compliance. Here are specific examples of blockchain used in financial services:
- IBM World Wire, an open-sourced blockchain payment system
- PNC, Santander, and American Express’ use of RippleNet.
- JPM Coin by JPMorgan Chase, a blockchain-based token first used commercially in 2020
- Wells Fargo Digital Cash, an internal ledger used to track payments
Patent hauls highlight the banking industry leaders in blockchain. In 2021, Bank of America held the top spot among US banks based on number of blockchain patents that it held or that were pending, according to Harrity & Harrity. Capital One was second, followed by JPMorgan Chase.
DeFi and the Metaverse
“We’re in the Apple Newton phase of the metaverse, if you know what Apple Newton is.”
— Michael Abbott, Global Banking Lead, Accenture
Digital leaders must contemplate how to react to decentralized finance (DeFi). DeFi, and by extension the metaverse, could herald a new era of disintermediation for the bank—in which the bank’s role in asset custody, money movement, and other financial services is diminished. The bank has a clear role to play facilitating payments as an intermediary between traditional and decentralized financial systems, but in the long run, if banks don’t collaborate to develop payments standards for the metaverse, fintechs will cut them out entirely, said Michael Abbott, global banking lead at Accenture.
How Banks Have Adapted
Leading banks have evolved to support both far-research and development and modern ways of working for day-to-day digital product releases. Banks’s digital and innovation groups have adapted to the need differently, but there are some common threads.
Implementing Innovation Strategies
“Digital needs to be embedded into strategy and business as usual”
— Imran Khan, HEAD OF GLOBAL INNOVATION, TD BANK GROUP
Despite banks’ different approaches to innovation, one thing is universal: They’re improving day-to-day development and baking innovation strategies into the bank’s operations. There are a few ways to look at these strategies and how they’re implemented.
Ongoing Development
Banks are responding to the need for customer-centric product development. They rely on Agile, empowered product teams to iterate their everyday digital properties—sometimes leading to substantial, immediately noticeable changes for the end customer.
“Very few banks are there yet, but they’re all somewhere in that journey,” BCG’s Goswami said. “It’ll take time. It’ll take a lot of change of old guard, change of old mentalities.”
- Organizations today are designed to rapidly develop and deploy digital products. Over the past few years, heads of digital have pursued Agile ways of working and built multidisciplinary teams to keep pace with the release cycles of digital challengers. “Our product groups don’t have to go through a lengthy business case,” Chase’s Amin said. “Those teams iterate and experiment because they own and control the process.”
- A design-led mentality has taken over product development. Banks aim to be design-led, leaning on user research, constant testing, sophisticated analytics, and customer feedback to iterate on their digital properties—reverse engineering from the customer’s needs and the experience it provides them.
- Digital groups’ semi-autonomy is taken seriously. Some consultants have suggested ring-fencing the digital team to avoid bank bureaucracy and old ways of working, where digital instead owns its profit and loss, engineering, product, and talent. Chase’s product teams work on a specific product operating as their own entities within the FI.
- Enterprise-wide strategies. FIs are increasingly building capabilities to deploy across multiple lines of business. While retail banking gets most of the public attention, common functions, such as software platforms, tools, and libraries, exist across retail and commercial banking and for employees using the banks’ nonpublic digital tools to do their jobs.
Banks are using innovation centers to improve digital teams’ ways of working. Components common to corporate innovation centers are a customer testing and market research center, a “community space,” and a work environment reminiscent of a tech company’s campus. Banks are also creating innovation centers as separate from the organization, though this could mean that the organization at large doesn’t change as desired.
Corporate Strategy for Emerging Technologies
Strategic Investments and Corporate Venture Capital
Banks’ digital organizations aren’t necessarily built to anticipate disruptive market forces. Thinking more than five years into the future “is not something that business and product leaders typically have the time, energy, or expertise to do,” U.S. Bank’s Venturo said. Separate innovation groups can dedicate themselves to what’s over the horizon: They might rely on corporate ventures, accelerators, and labs—as distinct entities or subtly woven into business units across the organization—to stay on top of emerging technologies and trends.
Corporate venture capital’s (CVC’s) role is to develop new solutions rapidly from outside the traditional bank. CVCs and strategic investment arms act like venture capital firms under the bank’s corporate umbrella: They invest in startups with the potential to serve the bank’s business needs with novel products and help them develop their businesses by making introductions within the bank and to others in the industry.
- CVCs’ primary task is to identify startups that solve for the banks’ business challenges (challenges that fintechs don’t necessarily solve), invest in them, support business development within and outside of the bank, and commercialize proofs of concept.
- CVCs don’t always require a business case to invest. Their secondary task is to find potential disruptors whose use case isn’t yet clear.
“We want a small portion of portfolio companies developing things that are just unexpected, things that we find that are so intriguing that weren’t in our normal visual scope but could be disruptive.”
— Jaidev Shergill, PRESIDENT AND MANAGING PARTNER, CAPITAL ONE VENTURES
Examples of CVCs include Capital One Ventures, Citi Ventures, Truist Ventures, Ally Ventures, x15ventures, and JPMorgan’s Strategic Investments Group.
Investment Themes
Corporate ventures and strategic investors articulate investment themes beyond fintech. A bank’s strategic investments might not exclusively apply to financial services or fintech. The bank has enterprise-level problems to solve that aren’t unique to its industry. That fact is evident from both Citi’s and Capital One’s venture portfolios.
Investments don’t necessarily fit neatly into a category but follow these themes:
- Fraud, Security, and Identity
- Storage and Exchange of Value
- Data Warehousing
- Analytics and Automation
- Enterprise Management
- Digital Services and Experience
Investment portfolios emphasize the diversity of venture arms’ interests. Some portfolio companies have been blockbusters. Others have quietly made names for themselves within fintech or enterprise software. For example, Snowflake—a cloud-native data warehousing company that was a Capital One portfolio company—went public in September 2020 and is today valued at about $50 billion. But there’s a much longer list of companies with different applications—for example, in talent management, open-source software development, AI-driven business intelligence, blockchain and digital assets, travel, lending, core processing, risk management, and digital banking platforms.
Accelerators
Incubators and accelerators help build a network of burgeoning talent and technology. Examples include the following:
- Barclays’ Accelerator program in partnership with Techstars
- HSBC’s accelerator program in partnership with T-Hub
- Wells Fargo’s Startup Accelerator
They might have social objectives, like Bank of America’s Breakthrough Lab, which focuses on fintech startups owned by under-represented minorities, or JPMorgan’s Financial Solutions Lab, in partnership with the Financial Health Network, which works with fintechs and nonprofits focused on financial wellness.
Innovation Labs
Some units build and test technologies without a clear goal for ROI. Groups of employees typical of a large digital organization—engineers, product managers, designers, and technologists—work on projects that don’t necessarily have proven business cases and aren’t ready to be put into production. Examples of such groups, which are nominally outside the day-to-day production of the bank’s digital properties, include Capital One Lab and Numo (affiliated with PNC). However, Chase’s Amin and Luke Purcell, partner and director at BCG Digital Ventures, noted innovation labs might be distributed across the bank.
The Checklist for 2023
Focusing on Tomorrow’s Emerging Channels Today
Banks need to address future product distribution. As they look ahead to the next two to three years, banks should be laser-focused on open banking, BaaS, and the emergence of open finance. The unbundling of the bank is both a threat and opportunity they cannot ignore—and something many have only begun to address.
According to interviewees, the incumbent bank has three overlapping ways to play in emerging channels:
- Direct to consumer. Offer banking products and services through traditional distribution channels that the FI owns, including digital and omnichannel.
- Embedded while retaining a brand presence. Embed banking services in another experience but retain the bank’s branding. This might be in a co-branded experience or as part of a marketplace strategy, such as distribution through a third-party super app.
- White labeled and embedded. Embed the bank’s products deeply inside a fintech or consumer brand experience, entirely masking the bank’s brand and bypassing a customer experience created by the bank. This is the case with fintech BaaS relationships, in which the sponsor bank’s brand is typically just in footnotes.
“The innovation center, the venture arm. Each of those has their place within creating or expanding the revenue pool of these businesses.”
— Luke Purcell, PARTNER AND DIRECTOR, BCG DIGITAL VENTURES
Multiple approaches can lead to the right outcome for built-in innovation. One strategy does not fit all banks. Those that can afford to invest substantially in technology have the luxury of trying different ways of developing the bank’s digital properties. It’s prudent, too, for the organization to bet on multiple approaches, whether they might include an innovation center, corporate lab, venture arm, or other parts of the bank that can have a role in developing technologies that the bank adopts.