Banks without a digital core will fail

Building on the discussion of data being key to disruption, I often use the phrase ‘digital core’ in this context.  Therefore, I was intrigued when someone asked for a definition of a ‘digital core’ and one of the replies was there isn’t a core anymore. 

I wondered what they meant and, in explanation, they referred to the idea of a central point of systems – a mainframe – is no longer the way the markets operate.  Systems should instead be spread across server farms in the cloud so there is no single point of failure.  I totally agree, and therefore felt it worth a little more explanation of digital core as so many misinterpret what this means.

First, I have defined my terms several times before:

But it does no harm to reiterate some points, such as this one.

So a digital core is, in essence, the removal of all bank data into a single structured system in the cloud.  The data is cleansed, integrated and provides a single, consistent view of the customer as a result. 

That’s a big ask, and most banks tell me it’s not achievable.  Silo structures and line of business empires protect data sharing and lock client information in their product focused empires; creating a single, cleansed store of cloud-based data is too insecure, creating the opportunity for any cyberattacker to bring down the bank; a single data store would not be good for risk management purposes; etc, etc.

I understand all these concerns, but don’t agree with them.

The product-focused empires are the problem.  You cannot have customer-centric operations if your organisation is product aligned.

Cyberattackers also find it far easier to steal from fragmented systems than one that can track digital entries in real-time across the enterprise.

Equally, banks are pretty darn poor at risk management in their fragmented, product-focused structures, as evidenced by two meetings with my bank recently.  The first meeting is with my business relationship manager, who tells me all the ins and outs of the banks’ SME operations.  I then, for the first time in living memory, allowed my new personal relationship manager to visit.  He had printed and read very carefully all my information and wanted to complete an up-to-date fact find for KYC and sales purposes.  That was fine.

Halfway through the conversation he asks: “what do you do for a living?”  I said that I thought he would know as I talk to my relationship manager often.  “Oh”, he says, “that doesn’t show on our records.  Who did you talk to?”  I explained that it was Paul, my SME manager, as I have my business account with the bank.  “Oh”, he says, “I didn’t know that”.

This is fairly typical of all banks I talk to – their corporate, commercial and retail bank systems are separated and never the twain meet – but it’s not the way a digital bank would work.

A digital bank with a digital core would immediately create the inter-relationship profiles of the digital footprints of all individuals who touch the bank.  That is the way you can drive contextual relationships and offers to those who touch the bank.  It is also the only way you can drive a consistent, augmented and informed approach to clients who touch the bank.

Equally, a digital bank has a single digital core of data in the cloud that can then be accessed by any form.  The digital core is independent of the processors, and hence you can take out a server or a system at any point and replace it with a new processor, because you have no reliance on the engines.  Your reliance is on the data being clean and consistent.

For me, it is a critical factor in developing the digital bank and yet whenever I get into a conversation about this with a bank, I’m told it’s too difficult.

It may be too difficult but I suspect that if banks don’t bite this bullet, the fintech specialists who do get the data structures right will eat their lunch,

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Data personalisation strikes to the heart of bank disruption

I’ve heard a lot of talk this morning about Big Data at a conference here in Barcelona, and had a realisation half way through.  The conversation was all about the move from mass markets and customer segmentation to the market of one and peer-to-peer personalisation.  In other words the deep data mining demanded by Don Peppers and Martha Rogers in 1:1 marketing in the 1990s is finally here.  It took twenty years, but here it is.  Yet this is the heart of the debate about digital disruption, fintech startups and bank responses. 

The reason why banks are being accused of being old and stale and slow, is that they are finding it very hard to adapt from product selling to mass markets through traditional media engaged via channels to offering contextual services to individuals via social media that provides digital access.  This is all part of the evolution, or revolution if you prefer, of banking and the heart of this is that the fintech startups are focusing upon putting control in the hands of one.

For example, at a recent US conference, there was a lot of talk about Venmo.  Venmo is a social payments app that acts as both a way of ensuring bills are paid between mates and also being a social share.  We all go out at the weekend and Dave pays so Chris, John and Erin send money via Venmo a few minutes/hours later.  The next time we go into Venmo, where’s Brett’s payment?  Hmmmm …

What’s Big Data got to do with that?

Not a lot.

What’s that got to do with the new market of one?

A lot.

The market of one is all about making the individual the centre of control and supporting them in controlling their lives.  The market of one can only be served by apps that leverage data and personalise it.  So Venmo’s secret is not deep data mining but allowing deep data sharing.

It’s also interesting that Venmo came through Braintree into PayPal, and PayPal now have one of the hottest apps out there.  For example, Venmo processed $141 in payments in 2013 increasing four0-fold to $700 million last year.  Could PayPal have created Venmo?  Not really.  PayPal are already being called an incumbent legacy, as they’re over a decade old.  Ten year old firms find it hard to stay fresh, as even Facebook demonstrated.  That’s why the new tech firms are acquiring and investing fast to keep up.  It is why Braintree acquired Venmo and PayPal acquired Braintree in a similar way to Facebook acquiring WhatsApp and Instagram. 

PayPal would not be able to create Venmo anyway as Venmo came out of an idea of two mates in their 20s who owed each other money after a long weekend.  A bit like Facebook, Tinder, Snapchat and more, these apps come from people seeing context and then looking at how to use new tools from Big Data through Cloud to Apps to provide real-time sharing and sourcing of needs.

And this is where we do see the banks struggle, as they cannot create these new apps as they don’t have the structure, capability or organisation to do so.  But what they can do is seed fund these apps, buy their companies, partner with the founders and more.  And that’s what Jamie Dimon is alluding to in his shareholder’s note, and it’s what banks need to wake up to in the new landscape.

The new landscape demands that banks work 1:1 with relevance to the individual’s needs.  If the bank cannot deliver this through their archaic systems and structures, then they have to rebuild the bank through working with the new systems and structures. 

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