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5 min read

Two Executive Views of Digital Transformation, and Why They Both Matter

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A new customer digital experience that doesn’t deliver long-term results won’t matter in the long run.

“Gentlemen, you can’t fight in here. This is the war room.” —President Merkin Muffley, Dr. Strangelove

Events in the last year have pushed the conversation about digital transformation to a new level of focus for senior executives at financial institutions. The conversations taking place, however, are very different depending on the job title and the goal.

Reality According to Customer Experience Executives

Executives at the financial institution who have responsibility for customer service, digital banking and retail sales have one perspective. These execs have a very, very large voice in planning. If this is all the same person, she/he also has a bullhorn. The reality these people are dealing with is clear and indisputable. Some examples:

  • My colleague Ron Shevlin pointed out in a recent study conducted with StrategyCorps that Chime, the big dog challenger bank, now has nearly 8 million customers who consider it their primary bank. Community banks and credit unions, in total, have 56 million. Chime and other challenger banks have quickly moved from being something mid-size FIs need to keep an eye on to being legitimate competition.
  • Bank of America recently reported that in 2020, 84% of all deposits were made through its automated channels (mobile, online and ATMs). Last year, BofA’s digital channels accounted for 42% of total consumer sales, 68% of consumer mortgage sales and 74% of direct auto sales. Chase and other megabanks can report similar results.

    These should be the new targets for mid-size and community institutions. Unfortunately, as illustrated by Cornerstone’s PeerMetrix database of bank performance metrics, consumer sales numbers at mid-size institutions were 10%-15% in 2020—at best a third of the megabank’s sales.

The reality going forward is clear: a financial institution’s success and growth depend on providing a frictionless banking experience. Customers want easy and early access to their money with no overdraft fees. They want tools and support that make them feel they are healthier financially. If they want to survive, financial institutions need to provide a data-driven, targeted experience that delivers customized, useful products and services to customers.  

Over the next five years, delivering on this reality will be the easiest thing for FIs to agree they need to accomplish and the hardest thing for them to execute well. 

The CFO’s Digital Reality

Chief financial officers have another view of reality. Every conversation Cornerstone has with CFOs now includes digital transformation, or maybe just transformation.

Here is the CFO reality:

  • Net interest margin at financial institutions reduced by 50 basis points in 12 months, something none of us have seen the likes of before. This translates to lost revenue of $110 billion pre-tax at banks and $10 billion at credit unions.
  • The loan-to-deposit ratio at both banks and credit unions is 11% lower in a year. There is certainly an argument that this is the result of unexpected COVID-related deposit growth, and those deposits may end up leaving. However, loan sales and balance growth will have an “overweight” strategic focus as FIs look to get this ratio back to pre-pandemic levels.
  • Non-interest income, in total, was flat in 2020.

So, return on assets at financial institutions dropped by 50 basis points in 12 months. Shareholders and boards understand why this happened, and now they want to know how their institutions are going to get it back. A steepening yield curve, fewer loan loss provisions and increased loan demand will certainly help recover some of this, but not all 50 BP.

FIs deserve credit for reducing non-interest expense in 2020, or at least holding it relatively flat. But there is no way to recover ROA without reducing non-interest expense to assets. Here, things have not changed much for the industry. On average, 50% of non-interest expense is people, 10% is facilities and offices, and 10% to 12% is technology, which is virtually untouchable. The remaining 28% to 30% can be an opportunity to the extent that it is not committed/fixed costs.   

The point? CFOs need to understand that the digital evolution that will get customer and loan growth is the same one that will get required efficiencies and NIE reduction by getting that growth without corresponding increases in people/facilities costs.

Seeing Digital Transformation Strategy from Both Sides

There is nothing better in planning than having one initiative that can meet two distinct and required needs. It will be important, though, that these executives understand each other’s realities.

CFOs must recognize and accept that a digital journey that is judged by the customer experience it creates is messy. It involves trial and error. It involves throwing out some investments and starting again. It involves spending with no immediate, hard return on the investment. At some point, almost every fintech company has written off an investment or expenses. That will be the reality at banks as well.  

What the digital leader must recognize and accept is that no matter how great the new customer digital experience, if it does not improve the financial performance metrics that the CFO must have to create viable long-term results, it probably won’t matter in the long run. Well, maybe it will to the new owners. 

“Five years ago, we thought of the Web as a new medium, not a new economy.” –Clement Mok


What's Going On In Banking 2021

New research reveals that almost half of mid-size banks and credit unions are at less than 10% on their digital transformation strategies going into 2021.

Click here to download What’s Going On In Banking to learn more about financial institution’s priorities, fintech plans and future forecasts for 2021.

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