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Kathy Burger
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Detours on the Road to Digital Banking

Digital capabilities are being embraced as the key to future growth. But skills and accountabiliy gaps impede many firms, McKinsey research reveals.

Digital is the word of the moment for business in general and in for banking in particular. It's likely to become one of those slippery buzzwords that means whatever the vendor, consultant, or academic wants it to mean. But for now, it effectively describes a mix of online and mobile capabilities focused on customer insight and building on those insights to deliver customized, real-time, and interactive ways of engaging with customers and transacting business across multiple channels.

[Jamie Armistead, senior vice president of digital channels at Bank of the West, argues: Banks Are Not the Yardstick for Digital Customer Experience]

According to new research from McKinsey, there's widespread recognition across all businesses that effective digitization is key to a growing business, and there's an increased commitment of resources to digital work. More than three-quarters of the executives who responded to the McKinsey survey said the strategic intent behind their digital programs is to build competitive advantage in a current business or to create new business and leverage new profit sources. But there's also recognition of organizational and cultural issues, including skills and accountability gaps, that are impeding many businesses from realizing their digital potential. For example, only 7% of respondents said their organizations understand the exact value at stake from digital.

The study, developed by McKinsey specialist Josh Gottlieb and director Paul Willmott, also found that "larger companies" -- those with annual revenue of $1 billion or more -- had particular challenges around organizational structures and business processes that were seen as impeding progress toward digitization. Finding and developing digital talent, especially in analytics, is another concern, particularly for CIOs and CTOs who participated in the study.

These are all pressing issues for banks of all sizes, and it's no surprise that the McKinsey study revealed that the financial services sector is one of the top industries for spending on digital initiatives, including big data and analytics projects.

Fortunately, there is much evidence that banks aren't just talking the talk about becoming digital. They are investing in and committing to digital channels and products. Digital is reshaping the ways banks approach marketing, and it is shaping the concept of customer experience. For example, Capital One's Financial Independence Day Sale is centered on social media. Its #my360 independence sweepstakes encourages consumers to "declare your financial independence" via pictures and posts on FaceBook, Instagram, or Twitter.

Of course, as many of the McKinsey respondents know, digitization cannot be an end in and of itself. Again, it's encouraging that many financial institutions recognize this -- and recognize that digital banking is not primarily about efficiency and cost savings (though those may be among the benefits). It's not like the advent of ATMs 40+ years ago, when many banks thought they could eliminate branches altogether. Banks of all sizes are upgrading their mobile offerings for consumers and corporate customers to improve engagement and retention, improving their abilities to make data-based decisions, and modernizing core systems and infrastructure to support the digital initiatives -- and become more agile and innovative in the process.

"It's an opportune time to link agility and innovation to the major transformation programs that are going on," Jim Reichbach, global banking and securities leader at Deloitte, told me recently. "Banks investing significant sums on large-scale technology programs, be they core systems or [big] data. Billions of dollars being spent on technology. We're asking: 'You're going to replace a financial system, a core system, or you are building a new data system? How do you do it so it's also agile, rather than end up in same place with an infrastructure and ecosystem where everything takes three years and $100 million [to develop]?'"

That might be considered the fundamental question of 21st century banking: How can banks become consistently flexible, adaptive, and innovative while being consistently efficient, productive, secure, compliant, and cost effective, all while serving a constantly evolving mix of constituents (consumers, corporate customers, regulators, employees, partners, etc.)? The answer clearly involves digitization, but no doubt it goes beyond that.

What do you think about the drive to digitization and how it is reshaping the banking industry?

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
7/10/2014 | 3:24:37 PM
Re: Detours on the Road to Digital Banking
The talent gap can't be overstated enough. We see how difficult it is to land data and analytics talent. With the rise of cloud, mobile and social, they need talent in those areas too. And the competition in all of those areas is going to be hard.
KBurger
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KBurger,
User Rank: Strategist
7/10/2014 | 1:15:03 PM
Re: Detours on the Road to Digital Banking
Here is the slide show link: http://www.banktech.com/management-strategies/4-trends-in-banking-it-employment/d/d-id/1278958
KBurger
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KBurger,
User Rank: Strategist
7/10/2014 | 12:43:51 PM
Re: Detours on the Road to Digital Banking
There are some interesting findings related to this issue in the InformationWeek 2014 salary survey -- some highlights are in this slideshow:
Kelly22
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Kelly22,
User Rank: Author
7/10/2014 | 12:05:15 PM
Re: Detours on the Road to Digital Banking
You're right, attracting talent is a tricky problem. Salary increases would help, but I think culture also plays a big part in appealing to the incoming generation of employees. It'll be interesting to see how the work around innovation labs, data science, etc. affects interest in the industry. Hopefully all that activity will lure tech-minded job candidates to roles in insurance and banking technology.  
KBurger
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KBurger,
User Rank: Strategist
7/10/2014 | 10:25:05 AM
Re: Detours on the Road to Digital Banking
The "cool" factor always has been a challenge for insurance IT -- it was so in 1999 at the height of the dot com boom, and as you note we're seeing it now. Of course, in 2000-2001 during the dot com crash, insurance was a lot more appealing. But I think this also is why we're seeing so much activity around innovation labs, data science teams (such as Murli Buluswar runs at AIG), and also the expansion of marketing and channel strategies into basically tech-driven functions. It's a way to attract a different kind of talent into the organization and in the process hopefully change the culture overall. But it doesn't necessarily solve the challenge of attracting people to be involved in core systems upgrades, replacement and maintenance.
Nathan Golia
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Nathan Golia,
User Rank: Author
7/10/2014 | 8:04:22 AM
Re: Detours on the Road to Digital Banking
This is a problem insurance companies face: Why would the best digital talent want to work at an insurance company instead of a cool startup? And without the best talent at the outset of its digital strategy, the institution can't separate itself from the pack of others playing catchup. Money talks, however, but pouring salary on the problem can breed discontent with others and leads to an arms race where the costs outweigh the ROI by quite a lot.
KBurger
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KBurger,
User Rank: Strategist
7/9/2014 | 10:34:41 AM
Re: Detours on the Road to Digital Banking
It's interesting how efforts to integrate channels & info and eliminate silos often seem to create a new set of silos. I'm sure that challenge is not unique to banking, but again it shows the need to get out of the "project by project" mentality.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
7/9/2014 | 10:23:11 AM
Re: Detours on the Road to Digital Banking
Talking the talk is easy, as you point out. We are seeing many FIs in the capital markets space talk about a digital institution, but most often they are layering additional technology and analytics on top of decades old systems. Data management is actually becoming more difficult and the organization is still exceedingly complex.

Hopefiully, some will also walk the walk when it comes to the true digital enterprise and will start to simplify their businesses.
KBurger
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KBurger,
User Rank: Strategist
7/9/2014 | 9:57:10 AM
Re: Detours on the Road to Digital Banking
Rob, Doug -- absolutely true. Banks are "talking the talk" about digital banking/business, but time will tell how many institutions (of all sizes) understand how to go beyond the buzzwords and really commit the resources & cultural change to it.
RobPreston
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RobPreston,
User Rank: Apprentice
7/9/2014 | 9:53:30 AM
Re: Detours on the Road to Digital Banking
That's the key--if banks want to attract digital talent, they need to make digital part of their DNA. Acquisitions sometimes help, but digital isn't some separate silo--it's got to become part of the bank's DNA.
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