Digital transformation has been the catchphrase of the banking industry for years, but the need to fully embrace the digital imperative has been vastly accelerated by the Covid-19 pandemic. While banks have moved mountains to meet the changing needs of customers who are turning to digital banking in droves, there is one huge constraint holding them back – and it is has nothing to do with technology.
In a recent digital banking report, 72% of the 300 US financial services executives surveyed accepted that the sector faces a moderate to significant skills gap threat. Furthermore, 75% felt there has been minimal or no progress in upskilling for digital or technical needs. The problem, it seems, is that banks are finding it hard to recruit highly skilled people and cannot train their existing workforce fast enough.
“Clearly, this is one of the most important challenges and this is evidenced in the massive growth of fintech acquisitions and fintech partnerships that banks are involved in,” remarks Alexander Hillman, senior vice president and head of banking and financial services at WNS. “They wouldn’t need to take that path if they could do it on their own.”
“The talent gap is a result of banks having a tradition of not renewing or updating their skills, as their legacy systems were working well enough for a largely captive client base,” he adds. “It was hard for customers – particularly businesses – to move to a new bank, so there was loyalty and convenience. But that has been disrupted, not by one fintech that does it all, but through many that each do a little piece very well.”
As a transformational BPO player, WNS has supported both banks and fintechs in accelerating their growth, so Hillman has seen the story of disruption and digital transformation from both sides.
“Customers no longer need a one-stop-shop because they can shop around for asset management, payment, small business lending and other services, which will be very polished and simple, with quick onboarding and funding,” he says. “Fintechs are very easy to use and are low on overheads, because they have no bricks and mortar.”
Invest, acquire or partner
In some ways, the lack of technical skill sounds like a simple problem to solve – just hire some more talent and level up the IT team. Sadly, that strategy may not deliver what banks need.
“The skillset at financial institutions is not as great, because fintechs have so much money that they can pay high salaries and compensation, and offer better work-life balance,” Hillman explains. “So, they attract the best talent and bring together teams from all over the world. Top talent will ask why they would want to work in an office when they can have more flexibility at a fintech and more upside potential from compensation and equity.”
“This is a market-driven by talent,” he adds. “So, it is hard for banks to recruit. Fintechs have such high market valuations. Banks need to react, and fast.”
That was the case before the pandemic. Now, the need is more acute than ever. KeyBank CEO Chris Gorman has stated that Covid-19 accelerated banking’s digital transformation by five years. Hillman thinks it now looks more like seven.
To make up ground, three potential strategies have emerged: prioritising internal training and re-skilling, hiring from competitors, and partnering with – or acquiring – a solution provider. Hiring may be prohibitively expensive, and training will also require a large investment and will take a long time to complete. Therefore, engaging with fintechs in some way may seem to be the best solution.
“Banks are buying niche players before they grow to become big fintechs,” Hillman says. “Or they are creating partnerships. Some fintechs are targeting specific consumer segments, including the unbanked, who find the appeal of neobanks to be irresistible, as there are no fees for opening an account. Other fintechs target small businesses with very attractive funding.”
“Another segment is the fintechs in the software market to build APIs and tools that will help the e-commerce world,” he adds. “These are the ones banks will acquire or partner with. Doing so accelerates interactions and provides better service for their customers. Banks acquire or partner with these fintechs because of scarcity of talent and the fact that they need to move fast to develop their services.”
In 2021, the acquisition of fintechs has been big business. Goldman Sachs is set to buy home improvement and healthcare lender GreenSky for $2.24bn. Lloyds Banking Group will acquire self-directed wealth platform Embark Group for £390m. US Bank has agreed to purchase Bento Technologies, a San Francisco-based company that provides small and medium-sized businesses with debit card-based payment and expense management tools.
There is no single solution
Acquisitions and partnerships will help to push banks into new digital territories and provide access to high-end – and expensive – talent. That strategy alone, however, is not sustainable in the long term.
“Banks still need to upskill internally,” believes Hillman. “They need to provide a better experience in online banking or mobile banking, but the tools, architecture, and user interface will be different. Banks require more than an online chat function to help guide customers through an unfriendly online banking environment.”
“They still need to improve user experience, so they need to hire or train data analysts to get a 360-degree view of customers through different channels. They need to upskill internally – even if they won’t get the top talent, they require people to do the basic work. They need a competent workforce, not just top talent, so there is an obligation to invest in training to keep their existing talent.”
The tremendous acceleration of digital transformation opens up the possibility of banks losing substantial market share to market disruptors – fintechs that focus on niche services and deliver excellence. Banks must, through alliances, acquisitions and internal upskilling, accelerate their transformation strategies and plug the skills gap. Failure to respond adequately puts their very future in doubt.