OPINION: Is there a future for the traditional universal bank?

Written by Philippe De Backer, Global Leader and Juan Gonzalez, Partner, Financial Services Practice, Arthur D. Little

“The universal banking model is inherently unstable and unworkable. No amount of restructuring, management change or regulation is ever likely to change that.”

These were the words of John Reed, the former Chairman and CEO of Citigroup, back in 2015. Since then, the decline of the traditional global bank has only accelerated thanks to the disruptive impact of fintechs.

Given the advantages these new challengers possess in terms of their digital-first model, lower cost structure, lower capital requirements and greater flexibility, is it all over for the universal bank?

The answer is not necessarily. Despite the issues banks face they can still survive and prosper – however they need to act fast and embrace disruptive change, focusing on six key priorities.

1. Pick your battles and embrace the ecosystem

Few banks are now able to operate universally, delivering a full range of services to every potential customer group. Banks therefore need to focus on where they see the opportunities are. That process begins by developing a clear picture of the future. What will the industry look like in three to five years’ time – and what do they want their role to be?

Then learn from the enemy – what techniques can banks adopt from the fintech playbook? Asset-light models such as triangular strategies and reselling products from third parties can help target particular niches, replacing the old model of recycling customer deposits into loans. What capabilities and structures are required to thrive in these areas?

Whatever the future vision is, survival requires it to be radically different to where the bank is today. Thinking too small is not an option. Essentially banks will need to shed long-established activities, re-evaluate acceptable levels of risk, restructure systems and processes, and invest fully in new technology.

2. Put the customer at the forefront of everything

Moving forward, the customer must truly be at the centre of everything the bank does. As fintechs have demonstrated, using technology to be customer-centric delivers clear value and differentiation. That means that banks need to digitise effectively, building processes and experiences that consistently meet customer needs on a personalised level. For example, banks need to become seamless problem solvers, offering ‘one call resolution’ to save customers’ time and effort.

The clock is ticking – open banking means third parties can access customer data held with another financial institution, so banks have to monetise their wealth of customer knowledge, before rivals do. This creates opportunities, but generally only for early movers as they capture and retain customers. The time to act is therefore now.

3. Invest in technology and innovation

Technology is a key enabler for successful future banks, from increasing productivity to delivering a seamless customer experience. However, over time traditional banks have built up huge estates of complex, expensive to maintain IT systems that they now struggle to manage, let alone innovate through.

Overcoming this challenge requires tough decisions, replacing legacy systems and writing off many large, existing investments. Instead, banks should embrace the cloud to cut infrastructure costs and become technology agnostic, using architectures that allow for easy integration with third-party solutions and facilitate migration from legacy IT solutions.

Banks also need to proactively identify, nurture, and adopt future innovations. This includes working with partners and start-ups, incubating promising technology and potentially scaling it externally. A credible innovation strategy ensures that the products and services of tomorrow that the customers are seeking can be rapidly delivered.

4. Put in place the right leadership and governance

Having the right person in charge is key to a legacy bank’s survival and future success. What is needed above all is a leader who understands how to be ambidextrous – able to deliver significant growth and productivity improvements in the short term, while simultaneously redesigning a bank’s business model and moving it to the new point of arrival in the future.

In most cases this means more emphasis on “Exploring” – innovating for the future – to better balance “Exploiting,” which has typically been the main focus for legacy banks.

Getting the right CEO is linked to wider governance, after all the board appoints the CEO. Do board members have the right skills, capabilities, and foresight to understand the radical nature of the transformation needed? Does the make-up of the board need to change to bring in a more diverse mix of open-minded individuals, representing a range of different gender, race, and experience profiles?

5. Align values and culture

A new world of banking needs a new, more open, and customer-focused culture. This starts with the CEO. They need to be able to convince the organisation that the old days of banking are gone, and that new ways of thinking are needed.

The right culture and behaviours are crucial to recruiting and retaining the right people and skills. It has to meet the beliefs and expectations of the workforce, particularly younger generations, around areas such as demonstrating a clear purpose and embracing Environmental, Social, and Corporate Governance (ESG) factors across the organisation.

6. Set aside the corporate ego

One of the challenges for all but the largest legacy banks is setting aside their corporate ego and realising that they can no longer go it alone. To deliver exceptional value to their customers banks must be willing to work in partnership with fintechs and tap into their digital knowledge and experience to fill gaps in their portfolio.

Essentially, they need to take an ecosystem and platform approach. This does entail a loss of brand visibility but gives the opportunity to strategically shape the partner ecosystem to deliver longer-term benefits.

Disrupt or be disrupted

Banks might feel that the need to transform has been overhyped and that the fintech challenge will wither. That’s simply not the case. Digitisation and competition have destroyed the traditional universal bank model, and existing players have to embrace radical change if they are to stand a chance of surviving over the medium and long-term. The time to act is now to stake a place in the banking ecosystem of the future.