For centuries, banks have based their customer relationships on proximity and familiarity, but the ubiquity of digital technologies has given rise to a very different paradigm. Customers expect banking to be faster and easier than ever before, and financial technology providers are eager to deliver.
Dave McKay, CEO of the Royal Bank of Canada (RBC), recognizes what’s at stake—and RBC is turning the threat of digital into a massive opportunity. By harnessing the most exciting technical advances, such as artificial intelligence (AI) and blockchain, RBC is fending off digital attackers and reinventing the banking business for the digital age.
McKay recently sat down with Michael Shanahan, a BCG senior partner, the North America leader for the Insurance practice, and a member of the firm’s People & Organization practice. Edited excerpts from their conversation follow.
At a Glance
Born in: Montreal, Quebec
1987, BS, University of Waterloo
1992, MBA, Richard Ivey School of Business, University of Western Ontario
2014–present, RBC, President and CEO
2012–2014, RBC, Group Head of Personal and Commercial Banking
2008–2012, RBC, Group Head of Canadian Banking
1988–2008, RBC, began as a computer programmer and moved into RBC's retail banking arm
Dave, it's great to have you today. We're in a world that is changing astonishingly fast: new digital platforms, AI machine learning, big data and analytics, mobile. It’s ubiquitous, affecting all of our lives. How do you see the challenges, the issues, and the impact?
The biggest change is that consumers, for the first time ever, are broadcasting their needs to a global audience.
Look at how we competed and how we dealt with consumers. When they were getting married, having a child, or starting a company, when they needed a mortgage, a car loan, or a loan for their company, they told their family and maybe their friends, and then they came and told us. We met their needs in a bilateral relationship, and banks competed for that relationship through proximity, having branches at every corner, having great people who were able to build relationships and add value, through brand and product.
We competed on that basis for 150 or 200 years. We had that unique relationship and business model that brought the customer into our world, versus us going to them, and we met their needs, competing in a traditional way along the same business comparatives. Today, the consumer is in a social media world, on multiple sites, talking to friends and sharing likes on Facebook, moving in Google’s search environment, shopping on Amazon, or posting images on Pinterest or Instagram. For the first time ever, they're broadcasting to a global audience who's reading what's going on in their lives and what their needs are.
Sometimes, we're going to be the last to hear about those needs. So how do you discover and build a relationship with a customer when they're communicating in a very different way than they have for the past 150 years? All of those competitive premises around physical proximity and the types of relationships are being challenged.
Margins will accrue to those who truly own the customer relationship. That's why I've said for a long time, you really don't want anyone between you and your customer, not in any business model, including the bank model.
Of course, the biggest fear for a lot of established businesses, and particularly banking, is that's exactly what will happen. You'll become a utility, an infrastructural utility in the middle of a value chain, where the margin basically goes to others. What do banks need to do to resist that and fight for margin?
You have to redefine the business you're in. Are you in the mortgage business, or are you in the homeownership facilitation business? Are you in the auto lending business or the transportation facilitation business? Are you on the revolving operating line for a commercial account, or are you going to be the digital CFO to a commercial bank? You have to redefine the relevant problems and pain points you're trying to solve for your customer and create value, create connectivity to your brand and franchise.
If you continue to aspire to do the same thing that you've done for the past 150 years, I think you can expect that someone's going to step between you and your customer. Someone with a broader value chain will squeeze the margin, if not take you out completely.
How are you going to face this future? What capabilities and strategies do you need?
There are three things you have to do well to capitalize on the trends we talked about.
One, you need incredible data—we compete on data scale, knowledge of the customer, and franchise scale, all at the same time.
Two, you have to move to a partnership model, to create those value chains, to create that understanding. To build out a different customer experience requires a core partnership model.
Three, you have to harness the core technologies that enable all of that, things like AI and blockchain. That requires different skills in the organization and different thinking to move in that direction.
You’ve got to do all three of these things very, very well, and they require very different skill sets than we've leveraged in the past.
Do you think the banking industry is moving fast enough?
In some ways, yes. In some ways, no. I think that the nontraditional, disruptive startups can build a slicker process with less downside risk, because they don't have a customer franchise. But that's not a model for success either. In financial services, because money is so important to your consumer, and because their risk tolerance is low, it's very difficult to acquire customers purely on the basis of a simpler process.
I think I'm more concerned about fintechs—for lack of a better word—who attach themselves to social media platforms and feed off the rich data set. If you're just building a better process, and you're outside of that world, you don't have access to a true data feed of what's going on in a customer's life. If you're using traditional marketing strategies and channel strategies, it's not going to work. It's too expensive, and we've seen that already.
In some parts of the lending world it has worked, but it's difficult. Companies that are attaching themselves to rich data feeds, in these platform ecosystems, are on to the core change that we need to make. What data feed do we use to discover our clients, to understand their needs, so we can meet those needs? I think that's where we have to be concerned.
Describe a leader profile that you think is necessary for this future disruption. What are the critical things that you need to see in a leader?
Leaders need to be bold, empowering, incredibly curious, and humble. These are the key characteristics if you want to build a platform ecosystem and extend your business model. The key success factor for all of this is a humble organization. You need leaders with the humility to say "I can't control everything, I can't be everything, I need partners, I need to team inside and outside the organization."
The ability to do all of this is critical. The curiosity, as I mentioned, is absolutely vital—to constantly ask questions inside the organization about what's going on in the world, because it's changing so fast and it's complex. You need the curiosity that drives you to learn and understand, not thinking that you have all the ideas, not the edict from the top, "I've got it all." You never have it all.
In some ways you could say the banks that build that leadership capability faster than others will be the ones that succeed. What do you think about that notion?
It comes down to people and to the drive toward creative outcomes. People can attract and keep good partners and decide who’s working and who’s not. That is a multifaceted skill set. We are in competition not just with other banks. We’re in competition with nontraditional platforms and social media companies for the best and brightest in our society, and we’ve never seen the level of competition that we have today for top talent.