Banks: Rigid Decision-Making and the Bureaucratic Trap

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You and I already know that if you want to keep up, you have to be innovative. For banks post-2008, it’s all been about struggling to survive. There have been increased regulatory changes, and measures and efforts have been taken to get costs under control while increasing revenues. Many banks are still dealing with the constant disparity between a high fixed-cost structure and lackluster revenue streams.

On the regulatory side, banks know roughly what they can expect; progress has been made in building capital and improving efficiency. The assumption is that now the focus is on staving off the competition that is being mounted on the technological and process fronts by Fintech. Very few believe that the entire banking industry is once again on the verge of becoming much more innovative. The banks need to step up their game, since the number of competitors has increased. By working with limited funding mainly from VCs, Fintechs have managed to disrupt banking by attacking lucrative positions on the value chain. They are willing to accept the risk that their products may not succeed, and this allows them to pursue innovation much more aggressively. In reality, banks can’t afford to offer clients products that may not function properly. So when it comes to Fintech, banks are not competing on a level playing field.

Why are banks so rigid when it comes to decision making?

It always boils down to a decision: Will banks continues to maintain their existing operating budgets and simply go through the motion of finding “additional funding” for innovation projects? Or will they reallocate some of their operating budgets towards innovation?

Some banking insiders keep advocating for cost-neutral adjustments of strategic development, in keeping with the relevant mega-trends, and then to invest relatively small amounts of money in tactical innovation projects. This seems like a suitable compromise. It would certainly allow banks to gain valuable experience to compete with Fintechs. However, what should seriously alarm banks is systemic disintermediation. It’s the perfect storm bearing down on banks. All the while executives are trying to hold on to legacy systems. Banks should consider drastically shortening strategic planning cycles, seeing that Fintechs have managed to dramatically compress timescales for disruption. Legacy systems cannot be allowed to operate indefinitely without delivering tangibly competitive results.

Why are banks still stuck in a bureaucratic Trap?

It’s no secret that the common denominator of acceleration and disruption in Fintech is a reduced level of bureaucracy. As an example, the trajectory that Alternative Finance has taken is in part due to the lack of bureaucracy and regulation. This has spawned an infrastructure that is delivering choice and efficiency.

Fintech disruption has been accelerating at such a high rate since 2014 to a point where constant change is the new normal within the financial services space.

Why are banks not making plans to institutionalize change and “change agility”?

Instead of fighting to become movers, banks are just continuing to follower emerging Fintech trends. When it comes to technological innovations, banks seem to have decided to occupy a strategic position, namely the interface with the client. Just attracting the attention of a client is not good enough anymore. That’s a follower mentality and not a mover mentality.

The changes being precipitated by Fintech are very complex and inherently multi-disciplinary, which means banks need new ways of managing change. Consequently, the new operating models that result from the Fintech revolution are in themselves highly disruptive and complex to implement. What does that mean? To be responsive and proactive when it comes to the Fintech revolution, banks must force themselves to pivot towards institutionalizing change and “change agility”.

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About 

A marketing expert for the first-to-be-licensed E-Money institute in Germany, PayCenter GmbH. He has experience in developing online marketing campaigns, online & mobile product launches, and EU funding regulation. He is an active fintech blogger with interests in online banking, mobile banking, mobile payment, and insurance.

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