“Transformation” is one of the most commonly heard buzzwords in the banking and financial services sector. Almost every institution wants to transform the way it operates, the services it offers and how it interacts with customers. This is a response to customers who are driving this transformation through their demand for a better experience. In many ways, Asian consumers are leading this change.
But transformation is a difficult and slow process, given the difficulty in changing legacy systems, infrastructures, work culture and regulatory landscapes. Often, it simply doesn’t work because old systems and ways of working are too deeply entrenched.
One way of getting around these difficulties and challenges is to establish a greenfield business, for example, by setting up a digital-only bank beside the existing business. In such banks, there is very little or no tie-back to the existing bank. Everything is fresh, including new technology, operational processes, and banking licenses in some cases. There are, of course, less extreme scenarios, where some of the technology and people from the existing bank are leveraged, but we see that the more freedom a greenfield bank is afforded from its mother bank, the more it can innovate quickly and respond to customer needs.
This is an important consideration for incumbent banks because tech entrants, such as payment wallets, are disrupting the industry. And there is fintech, which is changing the way financial services can be delivered. Fintechs were initially seen as a threat to banks, but increasingly, they are being seen as partners. They typically focus on narrow elements of the banking value chain, and they excel at building solutions that are often more advanced than what the incumbent banks have today—at a fraction of the cost.
Finally, there are several challenger banks establishing in the region, and we expect more of them to launch in Asia over the next one to two years. The Hong Kong Monetary Authority, for example, began accepting applications for virtual banking licenses last year, which are likely to be issued this year. Those who have applied include telcos, fintech companies and global banks.
And, generally speaking, return on equity is down for many banks, there is a substantial increase in regulatory expectations, and in some markets, there are trust issues among customers. All of this leads to one universal truth in banking: The time for change is here.
Greenfield could well be one of a number of bets in a rounded portfolio of investment initiatives, but there are a few things organizations must be mindful of.
Many banks have explored how they can offer a better customer experience and superior offering to their customers, but there is still a temptation to go into that exercise with a legacy view of what the customers want, rather than doing customer research and experimentation. There is a risk that these products and services would not solve customer pain points. We recommend being extremely focused on your target customer personas and running rapid experiments. This is a new concept for most incumbent banks and requires them to develop new muscle memory.
Everyone today uses the term “customer centricity,” but the key questions are: Do you begin every investment by identifying who the customer is and what their pain points are? Do you collect evidence that gives you the answers to both? Organizations need to know more about their customers before they start building products and services for them.
Does taking the greenfield approach mean giving up everything at the existing bank? Not at all. The existing bank is most likely undertaking some digital transformation anyway, be it around technology, people or cost reduction. Some of that should, no doubt, be continued, as this is a hedge. Launching a greenfield business is something different that entails starting afresh and doing something in, typically, nine to 12 months. Any new innovation investment should be looked upon as a race to materiality—the rule of thumb I use is six to eight quarters and 10 percent of revenue. One can flex those numbers for each situation, but you want these investments to achieve materiality to enjoy the benefit of continued funding and support.
After this period, certainly with some lessons learned, elements of the greenfield technology and processes may be relevant to apply back in the existing bank’s business. Additionally, this model could be used to launch in a new country where the bank may want to launch a new product or service. This allows for faster time-to-market, future-proofed technology and a lower cost to serve.
It’s only a matter of time before the large technology players pivot to this space, and then it will be difficult for the incumbent firms to respond to that disruption.
One critical aspect in setting up a greenfield bank is getting the right talent, which can greatly impact the new venture’s chances of success. What an organization should look to introduce are new ways of working, customer obsession and a startup mentality.
We are seeing most incumbents largely building out teams of new employees, with as little as 15-20 percent of the talent coming from the existing organization. This brings a venture mindset to the organization. Of course, a small group of individuals from the older bank—whose skill sets are particularly critical—can be brought on board. But in our view, new banks need a different kind of experience going forward. Those brought into the team must have superior tech skills, even if they don’t have extensive banking experience. In fact, banking experience of more than around five years may be a challenge, as these employees can potentially bring with them the legacy mindsets that banks are trying to shed.
How a greenfield venture is incubated is another determinant of its success. We believe the right approach is to ensure the venture has executive committee sponsorship, but that it is free to test and learn, outside of the business-as-usual organizational constraints.
Ideally, somebody from the board of the existing bank is part of the executive leadership team of the greenfield venture, as this person can help remove organizational inertia and reinforce a startup mindset from the top down. This leader can often remove blockers that could otherwise leave the greenfield venture team delayed for months at a time.
One of the biggest blockers of innovation in incumbent banks is the technical debt that’s accumulated by legacy technology. Often the vast majority of the technology budget today is spent just on keeping the lights on and maintaining existing systems, leaving very little funding for technology innovation.
New greenfield ventures can take advantage of cloud-based core banking solutions, high degrees of automation and the ability to plug in fintech solutions in a modular fashion, from day one.
Not only does this lend itself to being more technologically advanced and flexible, but it can be delivered very fast and at a fraction of the typical cost of banking technology today. There are many innovative “plug-and-play” solutions available, and there is an interesting trade-off to be determined between retaining flexibility and ready-made products.
Identify the Best Path Forward
There used to be a view that people need banking, not banks. However, that has not necessarily been proven true—while we’ve seen a lot of interesting entrants to the market, today it is perhaps fair to say most consumers (those who are banked) still use an incumbent bank for the majority of their financial needs.
However, instead of banks or banking, as customers, we just want banks to do better.
There is a window of opportunity for banks to innovate and provide the kind of experience that customers are demanding and deserve. It’s only a matter of time before one or more of the large technology players pivot to this space, and then it will be difficult for the incumbent firms to respond to that disruption. Thus far, it has mainly been “small tech” encroaching upon their turf. A big tech player would pose an entirely different threat altogether.
In closing, our advice to incumbent banking organizations is to focus on three key questions: What are my innovative bets that I believe will be transformational? Second, which of those do I believe can be the next billion-dollar business? And lastly, which parts of my existing business may not necessarily be part of our future journey? We recommend you manage those into what we call the “productivity zone” and divert any cost savings toward new innovation instead.
More about the greenfield approach can be found in Oliver Wyman’s State of the Financial Services Industry 2019 report.