Commendation Award Don't change for the best; be best at change

By Lee Won-hyong

Modern banking has come a long way since the days of 17th century goldsmiths earning storage fees off people who just wanted a safe place for their precious metals.

Needless to say, those who prospered during the transformation of the profession ironically did not succeed by mastering their craftsmanship. Rather, initiatives to operate in a manner that was against norms and conventions became the engines for early banks.

Bankers of today now face similar volatilities. A pre-2008-crisis level of return on equity cannot be sought after using the same business methods under the convergent disruption.

Harsher regulations and remnant instabilities are tumbling over behemoth players like Deutsche Bank, while nimble newcomers are quickly taking over customers’ changing preferences. Consequently, analysts at Accenture expect full-service banks to globally lose as far as 35 percent of the market share by 2020.

At this point, enhancing efficiency through simply cutting costs is still important, but cannot be the fundamental solution. Banking of tomorrow ultimately requires creative mindsets and daring practices that challenge the current modus operandi.

Primarily, traditional banks should become much more flexible, responsive to change and be prompt in grabbing new opportunities.

There is a catch in this statement though; banks with a large amount of retail and legacy structures have clear disadvantages against the suave new entrants in this aspect. Internet-only banks and digital providers have much lighter structures and will readily come up with convenient services at cheaper rates and exploit niche opportunities.

How then, should the traditional banks develop such streams of revenue themselves? The answer is they do not need to.

It is rare in other business sectors for firms to completely own the entire value chain. Nike does not even run its own factories. Rather, it focuses on the brand, marketing and building good relationships with partners. This is cheaper, makes the firm easier to operate and most importantly, it makes the firm flexible.

This network is what banks could also be utilizing. Traditional banks’ system in the status quo is too massive and complex to understand let alone change rapidly. Why not instead, create a network of different firms, both financial and non-financial, that develop and manage products and platforms?

For this network, boundaries between different assets, national borders or even business sectors will matter little. Ranging from niche banking for cafes and mail deliveries to investment in infrastructure for developing countries, the opportunities are endless and are already being explored.

The traditional banks can then position themselves at the centerpiece of this tapestry, focusing on providing these services under their brand. Their job can become management of a distinctive brand and relationships with customers and partners. This is going to be possible because traditional banks have the most important edge over newcomers in the era of customer-centric business models: trust.

This factor has especially become extremely important after years of financial instability. In the aging society, businesses and households need to look ahead and form life partners they can still trust and work with after 50 years. A sense of partnership that includes a human connection, another edge of traditional banks, could cut through these anxieties.

Building a business identity that knows what it is doing and has integrity and responsibilities takes time, and traditional banks are much further out on this line. Moreover, right now, financial institutions and their products are too convoluted for most of the public to assess and compare properly. Traditional banks acting as the consolidated face of such a business network is going to draw more revenue by making interaction with the financial system much easier.

Lastly, banks should keep in mind that being technology-savvy or low-cost are not the ultimate end goals to this transformation process. Banks must instead recognize and accept that end goals will continuously shift around from now on.

Frequency of change in all business sectors has been increasing at breakneck speed over the last two decades and there are myriad cautionary tales available.

Just take a look at the mobile phone and entertainment industries to see how instantly new markets can form and old ones can crumble away. Firms such as Sony and Nokia that deemed themselves as immovable Goliaths in their playing fields were dumbfounded, when it was their field that moved away from them.

These are obvious historical metaphors for the banking industries. Instead of looking for the great blueprint to a one-shot change, banks should instead be establishing a healthy revision system that can persist. New talents should be introduced to provide interdisciplinary insights, and leaders should create an atmosphere where challenging conventions is the norm.

Through consistently monitoring their goals and solutions to match them according to the market, the traditional banks will be able to stand their ground.

Lee Won-hyong, 24, is an international studies major at Korea University in Seoul.