“Gentlemen, you can’t fight in here. This is the war room.” —President Merkin Muffley, Dr. Strangelove
Events in the last year have pushed the conversation about digital transformation to a new level of focus for senior executives at financial institutions. The conversations taking place, however, are very different depending on the job title and the goal.
Executives at the financial institution who have responsibility for customer service, digital banking and retail sales have one perspective. These execs have a very, very large voice in planning. If this is all the same person, she/he also has a bullhorn. The reality these people are dealing with is clear and indisputable. Some examples:
The reality going forward is clear: a financial institution’s success and growth depend on providing a frictionless banking experience. Customers want easy and early access to their money with no overdraft fees. They want tools and support that make them feel they are healthier financially. If they want to survive, financial institutions need to provide a data-driven, targeted experience that delivers customized, useful products and services to customers.
Over the next five years, delivering on this reality will be the easiest thing for FIs to agree they need to accomplish and the hardest thing for them to execute well.
Chief financial officers have another view of reality. Every conversation Cornerstone has with CFOs now includes digital transformation, or maybe just transformation.
Here is the CFO reality:
So, return on assets at financial institutions dropped by 50 basis points in 12 months. Shareholders and boards understand why this happened, and now they want to know how their institutions are going to get it back. A steepening yield curve, fewer loan loss provisions and increased loan demand will certainly help recover some of this, but not all 50 BP.
FIs deserve credit for reducing non-interest expense in 2020, or at least holding it relatively flat. But there is no way to recover ROA without reducing non-interest expense to assets. Here, things have not changed much for the industry. On average, 50% of non-interest expense is people, 10% is facilities and offices, and 10% to 12% is technology, which is virtually untouchable. The remaining 28% to 30% can be an opportunity to the extent that it is not committed/fixed costs.
The point? CFOs need to understand that the digital evolution that will get customer and loan growth is the same one that will get required efficiencies and NIE reduction by getting that growth without corresponding increases in people/facilities costs.
There is nothing better in planning than having one initiative that can meet two distinct and required needs. It will be important, though, that these executives understand each other’s realities.
CFOs must recognize and accept that a digital journey that is judged by the customer experience it creates is messy. It involves trial and error. It involves throwing out some investments and starting again. It involves spending with no immediate, hard return on the investment. At some point, almost every fintech company has written off an investment or expenses. That will be the reality at banks as well.
What the digital leader must recognize and accept is that no matter how great the new customer digital experience, if it does not improve the financial performance metrics that the CFO must have to create viable long-term results, it probably won’t matter in the long run. Well, maybe it will to the new owners.
“Five years ago, we thought of the Web as a new medium, not a new economy.” –Clement Mok
New research reveals that almost half of mid-size banks and credit unions are at less than 10% on their digital transformation strategies going into 2021.
Click here to download What’s Going On In Banking to learn more about financial institution’s priorities, fintech plans and future forecasts for 2021.