The upside and downside to the digital shift

I’m starting to hear of some very significant digital and multi-channel budgets being put in place by many of the leading retail banking brands in 2012. It’s about time!

While I won’t name names or budgets, I’ve heard of mid-sized banks dedicating more than $50m to Internet, mobile and social-media this year, and large banks in the range of many hundreds of millions. It’s obvious from some of the outcomes in 2012 that major brands like Citibank, BBVA, CommBank, and Amex, for example, are putting some major spend into various initiatives on the digital engagement side. Key to these activities is some groundwork around platform development, staying competitive on the customer interface side, exploring the mobile wallet and new forms of loyalty around payments, and of course, big social media plans.

2011 was a tough year for many bank brands

As earnings reports have been coming in this quarter, it’s no surprise that 2011 was a tough year for the big banks. Of course, I’ve also heard of major brands in the space whose budgets are woefully thin and spell major problems for them on a competitive front this year, some of these banks are already hurting. How can I argue that budgets for digital are too thin in the current environment? Well, when a major global brand in the space spends less on social media globally than the cost of deploying one branch in central London or New York, and they are yet to have any type of coherent social media strategy (no real Twitter presence as an example), that is a budget out of kilter with the reality of customer behavior and acquisition/retention mechanics.

The Intertia Problem

While I’m sure I’ll hear the justification that the economy and particularly the ongoing Euro crisis is the primary cause, there must be a recognition that banks are simply carrying a lot of redundant capacity, based on the old paradigms of the way banks should operate, and are under-invested in the new platforms and skills that will help them grow their business out of the current economic malaise. This appears to be forcing banks to try new fee structures to cover the costs of legacy business operations, rather than adapting the organization and thus cost structures. I could call out legacy branch infrastructure again, but I won’t beat a dead horse, as they say – the economics of that are becoming glaringly obvious to most. So let’s take two other simple examples where the organizational behavior is skewed by inertia:

Account Opening and Administration
With average account acquisition costs being in the range of $250-350, you would think that someone would have connected the dots between the need for a signature card (and related physical handling) at account opening, with the cost of acquisition. The easiest way to reduce acquisition costs is get rid of the paper. Which brings us to annual costs for checking accounts too. With an average checking account costing around $350 a year, sending paper statements, printing checkbooks that are never used, charging big fees for wire transfers so that you prop-up your dying legacy check business, all smacks of a business driven by inertia.

What’s my account balance?
This is the number one requested piece of information from the bank today, and while we provide internet banking access to this piece of information, the dominant method of a customer getting this is still through an ATM or through the call centre. A far simpler mechanism would be sending the account balance via text message when a major transaction occurs, at set intervals (say weekly) or as defined by the customer. The cost of sending a text of your balance to a customer 10 times a month, is less than the cost of one call to the call centre for the same information, and less than two ATM balance enquiries (based on current channel cost estimates). The deployment of mobile wallets will massive reduce these ongoing costs as well.

Investment prioritization

In terms of size of budget, here is my rough take on where the investment prioritization is occurring across the board:

  1. Mobile
    Clearly, whether it is deploying new mobile apps, iPad apps, playing with mobile wallets, or geo-location features and offers, Mobile is the big play in 2012 and everyone wants a part of the action.
  2. Social Media
    From deploying monitoring stations, building service paths organization-wide to cope with social media requests and incidents, building new loyalty programs powered by social platforms, or trying to tap-in to friends, likes and advocacy, social media is a big play this year.
  3. Acquisition/JVs/New Appointments
    Acquisitions are a tough one because it is only the larger organizations who are looking at this, but there’s an effort to acquire key skills, technology and business practices emerging though acquisition, and significant dedicated funds for exploring new lines of business. With CapitalOne’s acquisition of INGDirect, and other moves, we’re going to start to see this being a sizeable component of global plays in the space as the bigger players try to acquire core capability. We’ve seen banks like Comm Bank in Australia start to make strategic investments in core skills at the top, such as the appointment of Andy Lark, along with major changes in their budgets internally around digital. While Andy is billed as the Chief Marketing Officer, he bares little resemblance to the marketing officers of most banks traditionally.
  4. Core Systems replacement to cope with channel mix
    I think this one is obvious
  5. PFM, Big Data and Analytics
    I’ve put all these in one bucket, which isn’t really fair, but for many organizations the start to collating their big data into useful information only occurs through the move to PFM (Personal Financial Management) tools behind the login. The need to connect people to their money, to target cross-sell and up-sell messages and otherwise monetize account activity and data, is a big priority.
  6. Engagement Marketing and Collaboration
    Increasingly we’re seeing dedicated efforts at partnerships, API layers, new marketing initiatives across broader platforms and other such mechanisms. We’re starting to see a new slew of ‘business development’ and ‘partnership’ resources emerge as banks look beyond their own walls for growth opportunities. Expect this to grow significantly over the next 3 years as we see more JV, incubation and acquisition budgets emerge as well.

The downside to the shift

Clearly these changes are all good for staying relevant to consumers, changing business practices to adapt to new behaviors, and better aligning costs with operations as they shift. However, the downside is that as you move away from legacy operations there’s a lot of dead wood.

AUSTRALIA is on the cusp of a white-collar recession with insiders warning that thousands of jobs are at risk in the finance sector, after it emerged yesterday that ANZ planned to cut 700 jobs.

While many banks used the global financial crisis to ‘downsize’, the reality is that there are going to continue to be significant job cuts in the sector as a result of re-tasking the organization for the new reality. In fact, my estimates are that we’ll lose many more jobs to the ‘shift’ than we did in the global financial crisis. Sure, there will be new hires as well, but the reality is as we downsize branch staff, manual operations and traditional marketers, we simply don’t need the volume of skills to replace them on the digital front. Even in-branch we’ll be using technology to avoid queues, speed up transactions, and hence reduce branch staff footprints.

Joshua Persky, an unemployed banker, on the job trail

It’s inevitable in the shift to digital within finance, that some humans will be replaced by technology efficiency gains. As we really start to see digital making progress, those legacy skills sets will become glaringly obvious on the balance sheet. Unfortunately, it’s either lose legacy operations staff or lose customers and profitability.


  1. A well written article as ever, Brett.

    Just a pity you seem to be talking about banking in 1982, rather than banking in 2012.

    The traditional overheads you describe with legacy infrastructures imply bank branches still process account data internally – like some old village bank – which of course, they don’t. Its all processed centrally, like, well, a digital bank has to.

    I know, because I spent three years on the programme to remove those services into service centres for account processing, voucher handling, risk management and loan management and yes, on-line banking.

    The branches are just a shell staffed by people very similar to the back-end staff in the service centres. They could sit anywhere. What they do is a tiny cost of the service overall provision.

    The ATM’s are replenished and maintained by an outside company – and until you’ve discovered the means to move to a cashless society, will still be needed. Not sure how you’ll provide that service, but that’s by the by. Maybe you have a vision of Utopia where everything is tap to pay. Good luck with that!

    Bottom line, what any bank still needs – bill payments, direct debits, bank transfers, regular and irregular payments, inter-bank credits, plus the hardware, like back-end mainframes and system inter-connects and networks – all have to be provided by someone – even if you’re a digital bank.

    If a digital provider merely piggy-backs onto a conventional provider for its processing, the host will simply pass their costs on to the digital provider. You’ll simply be funding the “legacy infrastructure” that you depend on – and pay a premium for that too, ultimately passing those costs on to your customers!

    Ironically, the less of these legacy facilities the banks provide, the less benefit of scale the banks will enjoy and the more they’ll have to charge the digital start-ups for their basically parasitic service with a thin front-end veneer, therefore the more the digital providers will have to charge.

    I would suggest you pray the banks maintain that legacy infrastructure, because without it, you’ll have a lot more money to find and you may discover the enthusiasm for using that over-priced smartphone on its overpriced data tariff to pay for an overpriced digital banking service isn’t worth a click.

    But maybe I’ve misjudged digital and it doesn’t need a conventional back-end – in which case, I take it all back. Digital banks truly are the one true way. Visionaries, I salute you!

    • brettking says:


      Your characterizations aren’t entirely accurate. There’s a difference between core capability to support a digital bank, and legacy capability.

      Firstly, the paperwork of account opening is still done in a legacy branch, then it’s entered into a computer either in-branch or in a central processing centre. For a client opening a current (checking) account, and a credit card, a combined form may be executed, but the data is entered twice into two different systems. It’s not uncommon for customers who’ve opened a CASA account and a credit card, to receive documentation from the bank with errors in one or both of the accounts, such as incorrect addresses, differences in spelling between the debit card, check book and credit card, etc. The centralization of processing, is not exactly a seamless, flawless system.

      The problem for me is still largely unnecessary manual processing and handling. On your comment that branch staff are a ‘shell’ as a tiny cost of overall service provision, the economics I’ve looked at don’t bare this out, but I can see in some derivations that might be the case. Regardless, the manual processing and any paperwork are simply no longer required in this process. So they are still simply legacy costs.

      With my experience on the Movenbank side (and with other global banks), I can tell you exactly what the cost of processing, etc is, and I can tell you it is generally fractional compared with the traditional costs I see accounted for by most retail banks on the acquisition and day-to-day account management side. Sure, I need a core system, and I need processing capability. Do I need “legacy” systems? No. Do I need legacy processes? Absolutely, not.

      The key debate here, and what I was trying to get into, was not around legacy technology infrastructure, but legacy processes that simply aren’t defensible. Current IDV processes are a big one for me. I’m sorry, but regardless of what defense you want to mount on a central processing basis, maintaining the current signature card and IDV process, is not smart – it’s risky and expensive.

      There’s much work to do. Let’s not confuse core processing capability with the dead wood of manual processing, processes that have already been successfully replaced by other more progressive institutions, and older legacy systems that require significant work-arounds to work in today’s environment.


  2. Thanks Brett – that’s clarified things enormously and now provides a far more focussed argument – which, ironically, reinforces both our positions!

    Am I right in saying that your main objection with legacy architectures is the form filling, resulting duplification and capacity for mistakes and costs associated with that?

    OK – get rid of the paper. If its not necessary for digital banking, why should it be needed for a branch?

    Just give the induction staff (those opening the account) an iPad/whatever and let them fill it on on behalf of the customer. Their familiarity with the process (unlike the customer) will speed it through and provide an opportunity for up-selling. Why do I feel there is such an opportunity?

    Now I have to put my psychological hat on.

    When you give a customer a chance to think during any process, they will start to think out loud. That’s an incontrovertible fact. Let me tell you about doctors in general practice – bear with me!

    Many doctors find that a patient will visit them with a problem. while they’re writing the prescription or waiting for the patient to get dressed, the patient will say “oh by the way, I’ve also got this lump/rash/pain etc”.

    This is so common, it actually has a medical name – doorknob syndrome – Google it to see the results.

    I’m lucky enough to have spent time on both sides of the banking fence – working along side front-line staff in branches as I waited to get access to the systems I was about to install, fix or upgrade where I couldn’t help but overhear the conversations and on the digital side where the flow and click rate were key.

    What your readers may not realise – but I’m sure you will – is that in on-line or phone banking, customer contact times are measured in seconds per month and strenuous efforts are made to reduce that. Many a time I’ve had my backside kicked for a system that was slow or not running at the optimum – believe me, its not something you forget. Barclays once fired their ATM director for the simply mistake of getting a date change wrong one weekend that took the ATM’s offline!

    But my key point is that for a digital bank to make money it has to sell things that are sold from left field – door-knob syndrome sales – yet digital is absolutely not optimised to do that. Particularly not local app-based digital. Retail on-line is about minimising clicks to cart. Conventional retail is the diametric opposite – its about slowing the customer down as much as possible to keep them in store while they think or impulse (door knob) buy.

    Every bricks-and-mortar retail environment offers side-sells. Buy a car and where you sit while the process completes and look around you. You’ll see the floor mats, accessories, clothing. Porsche is the greatest exponent of this. Go and check out a Porsche showroom. I defy you not to buy something you never went in for!

    Your greatest challenge is to deal with that disparity. I’m sure you can fix that, but I’m worried that’s not in any of your published discussions.

    Again, this will be something you’re aware of, but your readers may not. Check the site that you contributed to,

    And click the “role of the branch” tab, tab 3. The chart shows the customer engagement value matrix – you’ll see my point. Digital is low, branch is high.

    In summary, I absolutely agree with you that the legacy processes are terrible and should be re-vamped to use the technology now available. Paper is a ridiculous concept and has no place in any modern commercial environment. Believe me, I know I also worked on the IBM AS/400 systems in one bank that managed the vast paper storage facilities for all that paperwork!

    But to sweep away the entire legacy environment because the forms sometimes get filled in wrong is a bit like throwing out the baby with the bath water!

    I’d recommend that along with all your web and UX developers, you get some retail psychology people in before you burn too much start-up capital on cool-looking but ultimately ineffective digital front ends.

  3. Ron Shevlin says:

    Totally agree with the sentiment, but will quibble over one word: Inertia. I don’t see the problem as inertia, I see it as POLITICS.

    When you give a manager a budget, s/he will do things: 1) Attempt to prove that the return on that investment (budget) is really high, and 2) Attempt to ensure that next year’s budget goes up (or at least not down).

    These might not really be mutually exclusive points as #1 is used to accomplish #2.

    Any new channel suffers from having to steal budget away from existing channels. Or, more accurately, from stealing budget away from the MANAGERS who run those existing channels. And that’s a whole easier said than done.

    My solution would be to take the more successful managers from existing channels and put them in charge of the new channels. I wouldn’t buy the BS that they “don’t understand the new channels” blah blah blah.

  4. Brett King says:


    I’m a big fan of contract-based (or output-based) budgeting for this reason.

    It was interesting to see TD’s approach to handling this problem. They appointed the ‘manager’ who was holding the branch budgets, to head up digital – then told him to go find budget. A pretty practical solution IMHO


Speak Your Mind