How to Improve FSIs' Ability to Select the Right Digital Partner?
Also in this issue: There are FSI Executives With Courage to Terminate Digital Initiatives, Other FSI Digital Transformation Weekly Reads
How to Improve FSIs' Ability to Select the Right Digital Partner?
In another newsletter, we discussed how FSIs tend to ineffectively partner with more advanced vendors in hopes of leapfrogging their digital transformation. Despite the numerous vendor-related research offerings available, selecting the right partner for digital transformation remains a surprisingly difficult task. For decades, FSIs have attempted to improve this process through Vendor Management Office and Procurement, and more recently, with Innovation/Labs to prototype potential solutions. This approach is starting to yield positive results, and there is also a new research platform available on the market.
According to the latest Innovation in Retail Banking report, 60-80% of the surveyed banks are actively engaged with digital partners, yet nearly half of them express dissatisfaction with the results. This finding aligns with my own professional experience in other areas of financial services and insurance.
To avoid falling short of expectations, FSIs should assign enterprise-wide owners for the shared functions (e.g., Account Opening). These assigned owners should be empowered to make decisions regarding digitization, make-or-buy considerations, and vendor selection. While Vendor Management Office (VMO), Procurement, and internal user groups are expected to provide input, the overall strategy should be determined by the owner of the shared service (see this newsletter for more).
The above approach may appear straightforward, but transforming the internal operating model is no easy task. Therefore, the next best option is to select a partner/vendor that aligns with an FSI's suboptimal operating model and the current stage of digital transformation maturity. The closer the fit, the lower the risk of “breaking” a good vendor solution, as aptly summarized by Jim Marous in our Twitter exchange:
This alignment with the operating model and stage of digital transformation is not only misunderstood by FSIs but also by their partners and investors. In a way, these players have incentives that discourage understanding this crucial point. When an FSI approaches a partner seeking the most advanced solution and is willing to spend $10 million, it is impractical to expect a response like, 'Sorry but considering your FSI's maturity phase, it is unlikely that you will fully leverage this comprehensive package. Let's start with a more focused use case for $1 million.' Partners are understandably strongly motivated to sell the latest full-stack solution with all the bells and whistles.
How do advanced fintechs perceive partnering with FSIs? They conveniently consider it a matter of technology model fit. Here is a recent slide from QED Investors, shared by Simon Taylor on Twitter:
So FSIs are reluctant to consider the fit with the operating model and transformation stage, and partners share the same sentiment. The only hope lies in independent third parties to simplify such analyses, with Gartner being a notable example. Gartner's Magic Quadrant offers a starting point for assessing the potential fit between FSIs and vendors by showcasing the directional maturity of the vendor's technology.
Gartner's vendor analysis is enhanced by the freely accessible customer feedback, conveniently organized by FSI segment, size, and region, and including negative commentary. However, it's worth noting that the current scale of customer feedback represents only 0-10% of the industry players, varying across different FSI segments.
While there are other research firms besides Gartner that offer similar services, the average FSI, which utilizes hundreds of digital/tech/data partners, currently lacks a comprehensive content platform for finding conclusive insights about vendors used by peer groups. Therefore, it is intriguing to observe the emergence of a startup called True Digital which aims to specifically address this need for banks and credit unions in the United States.
True Digital's business model incorporates three promising elements:
Exclusive access for FSIs only (excluding vendors, consultants, etc.).
FSIs are required to provide data before gaining access to others' information.
Low access fee, less than $10,000 annually.
Interestingly, the founders’ background lies in innovation within the Bitcoin banking space. Hopefully, their unique business model would result in the critical mass of information at least for the US banks and credit unions in the US. Then, a similar approach could be copied for other FSI verticals. With enough data, the fit between partner solutions and FSIs could be finally determined at scale.
There are FSI Executives With Courage to Terminate Digital Initiatives
Repeatedly, the CEO of a global FSI asked the top 50 executives on a video call, 'Can you do me a favor?' The attempt at empathy fell flat with the participants who were hoping for the CEO to provide clear direction and explain accountability for missed expectations. The line between 'empathic' and 'pathetic' is crossed when FSI leadership is unwilling to delve deeply into execution. One of the most challenging tests for FSI leaders is determining when to terminate expensive digital pet projects championed by other senior executives.
One of the first questions I ask FSIs undergoing transformation is, 'When was the last time you terminated a significant digital/technology/data initiative?' A typical response falls within the range of five to ten years. Occasionally, the room of executives falls into silence as they struggle to recall even a single instance. Hence, it is not surprising, as discussed in last week's newsletter, FSIs spending 5-10% of their revenues on digital transformation create massive overcapacity in certain areas of the organization.
An extreme case study addressing the aforementioned overcapacity, albeit outside the FSI industry, would be Elon Musk taking on Twitter. Within six months, he cut 90% of the staff while more rapidly implementing new features. However, within the FSI industry, tough decisions are rarely heard of anymore. Therefore, it was intriguing to come across this article about Laura Merling, Chief Transformation and Operations Officer at Arvest Bank.
Here is how the article describes the context when she arrived in 2021:
The 60-year-old bank, formed from the successive mergers of 14 regional banks, was planning to launch a neobank, an online-only service with national ambitions, as a way to ensure its future growth.
In another newsletter, we discussed the negative track record of similar attempts by large FSIs. In all of those cases, the decision to shut down came too late. For example, it was bewildering that Goldman Sachs would even consider entering a new customer segment with a new product and a novel partner. More astonishing still was that Goldman had to lose $3 billion before deciding to shut down that experiment.
Fortunately for Arvest Bank, Laura Merling joined the bank before it started burning cash at the rate of its similarly ambitious peers.
When Merling arrived in October 2021, Arvest had already begun the transformation process: conducting the first in a series of annual “Driving Change” surveys of staff attitudes and experimenting with the new core banking software around which it planned to build the new bank.
This is where it is helpful to appoint a transformation leader, not just a standalone officer or CIO as typically done, but ideally someone in a business leadership role with complementary responsibility for digital transformation. It should also be someone willing to act as a change agent, to some degree an outsider. Laura's background in digital leadership roles in the Telecom and Automotive industries, all outside of the FSI sector, provided her with a fresh perspective on what made sense.
The plan for a neobank was dropped, and instead, says Merling, “We set forth a new mission. We wanted to be the leading community-focused bank serving commercial and small businesses.”
… That meant building new applications and processes around its commercial loans — and making some changes to its core IT infrastructure.
For the loyal leaders familiar with the key playbooks, translating the above message into an understanding of Arvest Bank's maturity should be easy. The bank was operating at Level 2 while attempting a Level 5 play. Laura sensed an impending disaster and successfully changed the bank's course, focusing on foundational IT fixes to applications and infrastructure, and then leveling up to Step 3.
Every FSI has at least one significant digital initiative that the majority of stakeholders know is not going to work. They are afraid to speak up, fearing the potential repercussions of upsetting their peers and jeopardizing their job security and chances of promotion. Hopefully, some of you will be inspired by Laura's example and choose not to wait until your FSI's Board and CEO bring in an outsider to terminate those digital programs.
Other FSI Digital Transformation Weekly Reads
Legacy Thinking Can Destroy Digital Banking Transformation
Calling Everything Digital Transformation Is a Recipe for Mediocrity