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The bank of the future

Digitization is challenging the very way banks operate. Yet it also represents a significant opportunity, as
McKinseys Somesh Khanna explains.
Novem ber 2014


Digitization prom ises to autom ate and improv e many banking processes.
Y et its not without peril: customer demands and ex pectations are increasing, and
technology is fuelling the emergence of significant new competitors. In this
interv iew with McKinsey s Simon London, McKinsey director Somesh Khanna
discusses how financial institutions can maintain their core operations while
embracing new technologies, and what the digital transformation means to
customers and ex ecutiv es. An edited transcript of Khannas remarks follows.





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The bank of the future


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My kids may work with a v ery different ty pe of bank,

but I do see branches as being quite important to a
multichannel representation of a bank for the
foreseeable future. Will they be as important as they
are today ? Absolutely not. They will be significantly
less important. They ll play different roles, including
being a destination for complex adv ice and problem

Some people are ex perimenting with v ery large

showcase, highly tech-enabled hub branches that are
surrounded by much smaller branches in different
formats, some ATM-only , some with a few or ev en no tellers. Some hav e had quite
a lot of success with those.
There are others that are thinking that the branch of the future may be a v ery
different model, where they hav e six to ten strategically located branches in a city
that supports a v ery strong digital presence. I believ e that many of these ty pes of
models might end up being successful. But ov er the nex t sev en to ten y ears, were
going to find out ex actly which ones will be more successful than others.

1996-2015 McKinsey & Company

Personalizing the customer experience


Digital capabilities can turn the customer journey

into something thats highly personalized.

Its the way in which the dev ice connects with the
interaction that y ou hav e with a branch teller, how
that connects with the messages y ou get as a
customer with y our mailbox , and all of that being
deliv ered in a way that is seamless, that knows y ou,
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that recognizes y ou, that rewards y ou for y our
relationship with the bank. Theres a lot of amazing
stuff that will likely happenand is happening today
in that space. And I think there will be a huge
opportunity for banks to innov ate. They will need to challenge ev ery thing, nev er
settling on the status quomuch as the airline industry transformed air trav el
from an in-person, paper-based ex perience to one of almost complete automation.
Itll also be important for banks to be relentless about learning from ev ery
customer interaction. After all, 86 percent of customers stop doing business with a
company due to poor serv ice.

Why digital is a CEO topic


Being able to take adv antage of, or react to, the

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The bank of the future | McKinsey & Company

digital rev olution requires banks to behav e in way s
that they are not quite accustomed to. It requires
ex tremely clear and quick cross-functional
collaboration. Because of the horizontal nature of the
work, this naturally becomes a topic for CEO
facilitation or interv ention. Thats because the CEO
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sits abov e all of these issues. He or she can encourage
collaboration, break ties when one part of the
organization wants to go in one direction and another
wants to go in another direction, and make
inv estments that wouldnt naturally fit into any one of their inv estment thesis but
are right for the company as a whole.
Who should driv e digital? Sometimes, the CEO would like to tap the head of
operations and technology and hav e them driv e it. Sometimes they want to name a
chief digital officer and hav e them driv e it. Sometimes the role is v iewed as the
natural ex tension of what a chief marketing officer does. I actually think that its
less dependent on the role. Its much more dependent on the person. If the person
is someone that is able to v isualize a future, get the organization rally ing around a
bunch of different objectiv es, and inspire people to actually pursue that path, its
their real leadership capabilities thatll come to bear to pull off digital agendas.

with opportunity in
the digital age

4. Incumbents as

attackers: Branddriven innovation

5. When to change

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Core processes vs. new technologies


3. Connecting talent

This is a hot topic for banks. The issue of hav ing to

deal with legacy platforms has been a thorn in their
side for such a long time, because technology
continues to do what it alway s does: it ev olv es. I can
imagine one taking a pessimistic v iew of this and
say ing, We hav e been working at this for so many
y ears. We hav ent figured it out.

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The optimistic v iewand Im prone to that v iewis

there are v ery few institutions that are adept at
understanding and try ing to figure out how to
embrace and work with new technologies as banks
are. The discontinuity I see right now is that the technologies that people are
working with, with Google and Apple and so on, are v ery different from the
technologies that people that hav e worked in the tech area at banks hav e grown up
with, and the capabilities that they v e grown up with.
So I can imagine a bit of a disconnect. And theres going to be some furious
paddling required to cross this pond. More progressiv e incumbent banks and
financial institutions are already inv esting heav ily in transaction migration,
significantly upgrading web and mobile capabilities, creating centers for
innov ation and testing, and adopting the habits and culture of digitally nativ e

companies by , for ex ample, opening up APIs, pursuing agile dev elopment, and
Some banks say that they hav e not y et learned some of the important skills that
digitally nativ e companies hav e from birth: how to v isualize and participate in far
more broadly defined customer journey ssuch as shopping, trav el, and v acation
as opposed to product-lev el processes, account opening, and onboarding; how
to match or outperform digital nativ es in user ex perience or user interfaces; how
to become deeply proficient in technologies, data, and the rapid ex perimentation
of lev eraging them; how to tolerate failures in ex perimentation; how to acquire or
imitate high-v alue capabilities early ; and how to dev elop a highly prioritized
agenda that lev erages digital to truly differentiate business models and key
customer journey s.
Will banks get there? They alway s do. They will. But I can see there being, at least
from a talent standpoint, some reshuffling required at a pretty rapid pace. When
technology is so central to what y ou do, the scale of the change that is required is
actually quite immense. How do y ou decide how much to inv est in maintaining the
core banking platforms v ersus building new functionality ? Could y ou ov erdo
functionality and starv e platforms and suffer from it at some point in the future?

Changing the efficiency ratio


The efficiency ratio is a metric that many analy sts

look at v ery carefully . The simplest way to think
about it is the ex pense base of the bank div ided into
its rev enue. There are lots of adjustments that
analy sts make. But simply think of it as: What is the
cost that I incur for ev ery dollar of rev enue I



The bank of the future | McKinsey & Company

Digital changes that paradigm. The ability to
automate processesto take a lot of work that is
currently done in a v ery manual, and therefore
error-prone, way and to transform those processes
into ones that deliv er the same outcome ev ery time and that eliminate a lot of
manual workcan shav e off large parts of the cost structure that bank CEOs hav e
considered unapproachable until now.
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I can imagine us about fiv e, ten y ears from now talking about efficiency ratios in

the low 40s, high 30s. The v alue at stake is quite substantial. Between a 30percent plus and a 20-percent minus, in terms of v alue shifts, could be achiev ed
through those that actually adopt and embrace high-quality digital strategies
early , v ersus those that dont.
About the authors

Somesh Khanna is a director in McKinseys New York office. This interview w as conducted by
McKinsey Publishings Simon London, w ho is based in McKinseys Silicon Valley office.





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