Banks Brace for a New Wave of Digital Disruption

As Digital Powerhouses Hover, Banks Must Take the Offensive

Faced with Stronger Challenges Than Those Mounted by Fintechs, Banks Need to Emulate Digital Giants and Adopt Full-Scale Digital Transformation to Outpace Traditional Rivals and Ward Off Disruption, Says New BCG Report

BOSTON—Although banking has seen a recovery since the 2008 financial crisis, the industry has entered an era of unprecedented change that will test banks’ adaptiveness for much of the next decade—forcing them to take bold actions that advance digital capabilities and defend their turf—according to a new report by Boston Consulting Group (BCG). The report, titled Banks Brace for a New Wave of Digital Disruption, is being released today.

The report, envisioning a future in which incumbent banks could be disintermediated in key businesses by huge digital players such as Google and Amazon, concludes that most banks, owing to the entrenched nature of day-to-day banking relationships, have kept most of their customers loyal and have not ceded market share to nonbanks. But BCG says that any complacency among traditional banks could lead to severe setbacks.

“Banking revenue pools are just too big and too attractive for today’s digital giants to ignore forever,” says Monish Kumar, a New York–based BCG senior partner and coauthor of the report. “Banking CEOs must set a comprehensive digital transformation in motion to replace the incremental initiatives that are so common today. This will enable banks both to drive disproportionate market share gains against slower competitors and also to defend themselves against the digital giants.”

The report examines banks’ overall recovery since the 2008 financial crisis, as well as the specifics of what banks must do now to position themselves optimally for the future. BCG says that banks need to start acting like digital giants before digital giants act like banks. Successfully achieving this holistic transformation will require coordinated efforts across multiple interlinked elements of the bank as well as mandatory action steps. These imperatives are: drive to scale; digitize end-to-end customer journeys; leverage big data, analytics, and AI; pursue partnerships to increase capabilities and scale; adopt new ways of working; attract and retain digital talent; simplify technology and data infrastructure; and enhance cybersecurity resilience.

The report also says that while most banks have ongoing initiatives concerning some or all of these dimensions, they lack the urgency required to truly embrace the necessary digital transformation. This is a mistake, because such a transformation—which positions a bank to compete better with peers in the near term and with digital giants in the long term—is a multiyear journey that cannot be delayed now that disruption is already upon the industry. The digital transformation journey also forces a strategic reexamination of the businesses in which any given bank has sustainable competitive advantage and those in which it does not. Digital investments in the former businesses are most likely to bear fruit.

“Ultimately,” says Shubh Saumya, a New York–based BCG partner and coauthor of the report, “bank leaders know that digital technology and changing customer behaviors will take the industry in new directions. But many of them no longer think that disintermediation is likely in the near term. They expect an inflection point that will signal it’s time to move faster. That inflection point, however, is already here.”

The report also explains BCG’s recommended action steps for banks in detail.

Drive to scale. Scale—sheer size—which allows for operating at lower unit costs, has always been a source of competitive advantage for banks. Today, however, scale is more important than ever before: it gives banks a much greater ability to invest in marketing and technology. Perhaps most critically, scale today means larger customer bases and more data. These are huge sources of advantage.

Digitize end-to-end customer journeys. Banking products and services are notoriously friction filled and tedious, entangling customers in the machinery of the banks’ legal and risk policies, P&L structures, and legacy IT systems. Although most banks have started to redesign end-to-end customer journeys—precisely to eliminate these pain points and identify better pathways—they must work to overcome the snags inevitably presented by bank operating models, processes, and product silos.

Leverage big data, analytics, and AI. This is the Holy Grail—the use of data and analytics to make banking easier and more personalized for customers, as well as more profitable for banks. When combined with big data, AI can, much earlier than traditional methods, help banks identify customers who might leave for another bank—in many cases, before the customer even realizes that he or she is unhappy.

Pursue partnerships to increase capabilities and scale. For the things they cannot do well on their own, banks must develop a partnership strategy. Many banks have already entered into accords with fintechs, generally by making minority investments. Another possibility is to partner with one of the digital giants directly. This may seem like a risky move, but for a bank with a unique attribute or capability that a digital giant might covet, there could be a negotiation of peers—and a successful partnership. 

Adopt new ways of working. Most banks haven’t fundamentally changed the way they approach their work in decades. This is certainly true in software development. Sequential “waterfall” methods, misalignment of business and technology organizations, and emphasis on product features over customer benefits often produce disappointing results. Banks need to rethink this aspect of their work. In particular, they would do well to move to agile approaches.

Attract and retain digital talent. Even the largest banks, those with the most ample resources, have struggled to recruit and retain the talent they need to compete in a digital age. Although some IT workers currently working in banks may be able to develop the needed skills through dedicated training and coaching, this is also an area in which it will make sense to partner with, or even acquire, high-caliber fintechs or boutique engineering firms.

Simplify technology and data infrastructure. Having the right technology and data infrastructure is a prerequisite to digital transformation. To provide the digital experience that customers expect, banks will need to aggressively adopt the technology paradigms of digitally native companies. This can happen only if banks drop the vertically integrated legacy technology stacks that they’re using today and opt for horizontally layered, platform-based technologies.

Ensure cybersecurity resilience. This is a condition not only for succeeding in a digital age, but also for surviving it. All of the good things that banks are trying to do with the help of digital technology—create step changes in convenience, turn their customers into advocates, and operate more efficiently—can be undone by security breaches. A best practice for banks’ chief risk officers is to identify best-of-breed providers and to Global Risk 2019: Creating a More Digital, Resilient Bank

A copy of the report can be downloaded Banks Brace for a New Wave of Digital Disruption.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or

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