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PFM as meaning: Michal Panowicz on the Digital Transformation

During the 2016 Temenos Community Forum (TCF) in Barcelona, Strands General Manager Pau Velando sat down with digital banking thought leader Michal Panowicz, SVP & Deputy Head of Digital Banking at Nordea. Previously, Michal worked at mBank, a digital frontrunner ranked by Forrester Research as the #1 online retail and SME bank in 2014. 

Michal, thanks so much for taking some time to speak with us today. I’d like to start by asking you:

What is your understanding of the state-of-the-art in terms of digital transformation that banks are undergoing? Tell us your view on the revolution in the industry, and the trends that will shape the future of retail banking?

I have two definitions of what a state-of-the-art digital bank is, but let’s start with what it is not:

It's not a bank that has the coolest mobile app, or that has made a splash with the latest technology here and there, or launched some innovative campaigns…

For me, a state-of-the-art bank is one that can serve customer requests throughout the product or service life cycle, which is: inform > offer > open > amend > extend > transact > close.

Any one of those activities along the lifecycle must be done digitally: end-to-end, without any manual intervention between request and fulfillment. When you have that, magic things start to happen! Even the branch becomes a digital channel or touchpoint, just with a human-based user interface. 

These touchpoints become portals through which the customer enters into a product relationship, where they input data to a specific device and in a specific format or context. 

The other definition is outcome-based, determined by the percentage or share of sales events that are executed in digital. It's interesting because people mention many strategies: go for Millennials, do mobile-first (God forbid), do mobile-only (even worse!), cut costs, redo the branches, do something fancy for customers…  

These are often taken as silver bullets, but they are misleading as they can put you in a silo. Isolated strategies neither contribute to the core, nor can be extended universally across business processes.

You mention business process management - a discipline that's been part of the banking transformation for more than 20 years. It's said that banks are very inefficient in handling internal processes...

Would you agree that now the consumer is driving banks to find new ways to sell and deliver products or services? Is the consumer truly at the center of transforming internal business processes and the way banks sell?

I wouldn't agree. That might be the narrative but in essence I don't think it’s true. It could have been done before, if the consumer was truly in the center. Even 10 years ago there were capabilities to do it: banks could have re-engineered processes to be executed end-to-end digitally and the business case would pay for that.

So what's the difference now?

Maybe right now we finally have examples of people having performed it, but it's a superficial observation of what's happening rather than realizing what ingredients you have to run your FI to produce your product, and observing the capabilities and available resources to actually leverage them and perform. 

The thing is, banks have been lagging in taking stock internally. But what has changed is that we finally have examples of it happening. Take mBank - who heard about it 3 years ago? A small bank in the middle of Poland - not Silicon Valley, not at astounding scale - BUT it is an example of digital actually working, happening, and producing to become profitable.

Would you say a solid PFM is at the heart of digital banking?

I believe that what we call "PFM", should be called as such not for the financial management aspect, but for functionalities like transaction aggregation, search, data standardization and cleaning, and most importantly, meaning (which we call "categorization").

That's why PFM is so essential to the user experience, because it goes beyond transactions to form the core of the relationship. It’s universal, constitutes a primary relationship and is the gateway to another activity that most people do which is liquidity management. Most PFM tools help you to detect very easily, whether you have surplus or liquidity, and then helps people to make decisions.

That's the core - out of that you can build many other things, but PFM is absolutely essential and I would never go into any digital banking transformation without a best-in-class PFM engine. Plain and simple.

I recently read a quote that said, “The customer is not king - he's a dictator!” Do you agree?

There are many attractive quotes that sound super cool, but in the end, customers vote with their legs and wallets - which really indicates whether they are kings. Some still stick to laggard banks whose digital experience is now 20 years old!

So if you test this quote for its observable value right now, it's not always true. But that doesn't mean we shouldn't do things for the customer, au contraire - but from a different perspective, and for different motivations. 

So what type of customer demands do you think banks should listen to? 

First, give people real options to act remotely: inform them, give them an offer, allow them to open products, change, amend and extend, give digital options to move, transact and close.

It doesn’t have to be complicated, and will unlock tremendous value because suddenly the cost of ownership decreases as you eliminate the need to visit the branch which is infrequent and costly, especially in terms of time; people really prefer to watch TV or spend time with their kids. Give an alternative and they will find it useful.

The second thing is to give information, not just unintelligible data. Transform that data into something that gives meaning to those transactions: the place of purchase, who the money comes from and where it goes, the exact purpose of that value transfer. People call it categorization, but that is a technical term for meaning. 

Finally, once customers have useful information, give them advice that allows for better financial decision-making. You proactively extend ability to make decisions, instead of hassling people to all the calculations inside their head. Support users so they only have to make a decision. It's about convenience, trust, proactive service, and value. And you have tools right now to do it!

Where are the biggest needs in the personal finance space? And what kind of tools can meet them?

Imagine the basic scenario of helping people to understand and act on the balance: after all, 98% of people check their balance upon logging in.

But, they don’t get an explanation of where this balance comes from, where it's going - yet that's what they really want to know when they log in... they have to mentally compute so many things themselves upon seeing their balance: “Do I have too much liquidity or too little?”  And this is the magic moment for dispensing advice: “Too much?  Do something with it! Invest! Too little? Cut spending! Don't buy stuff! Borrow from someone! Consume some savings!”

When you have that key contextual advice, you can act on it immediately. Imagine you just log in, and in 3 seconds you solved a life issue… these unexpected situations are happening all the time.

People keep talking about Big Data - which by the way is already waning - why? Because it was improperly understood and so far badly implemented (by banks). But why would you go about Big Data when most banks can't even handle simple data?

Very interesting point - so if you were to spend one dollar, where would you put it: in UX/UI or in Big Data/artificial intelligence?

I won't have a proper answer, because you cannot decouple one from another! Assuming all other things being equal, if you took the capabilities and services the banks have today, and only did the UI - brutally speaking, it's like putting lipstick on a pig. It looks good and maybe extends a little bit of the value, but not enough.

Similarly, if you only do machine learning, users get the outcome, but they wouldn't understand it as the information wouldn’t be represented well. All this to say, it’s never either/or - UX/UI and machine learning must go in parallel. Too many banks go UI-only, or rely on a new app to solve these problems. 

Given that you cannot easily decouple UX and ML, which are two sides of the same coin, where do you place banks that are not pursuing these investments and  sticking to the traditional banking model? Will natural selection cut them out of the market?

Sooner or later, absolutely. It might not happen anytime soon, as customers consider many parameters like brand, the hassle of switching, rates that might be better at another bank, even branch convenience because it might be around the corner...

So we won’t see an exodus in 3-4 years from banks that don't invest in UX and ML, but slowly and surely it will happen - and I think in an accelerating fashion, especially if competitors are other universal banks with competitive offerings and a similarly respectable brand and whatnot.

Consider the flipside, which I have witnessed firsthand at mBank: first we executed the digital transformation, while adding additional elements to acquire customers. From there we could manipulate other, non-digital parameters, and propose a very strong comparable proposition which in turn increased customer acquisition. It was a step change. Many of my former competitors and colleagues scratching their heads on how to tackle mBank, which is becoming a leader in terms of brand value. 

Interesting: you present the digital transformation as a growth strategy whereas some players believe they have to go digital as a defense mechanism...

In most cases, I don't see the distinction between a defensive or offensive strategy; it works on both sides. If you are attractive for others to switch, that means it should be inherently more attractive to stay. 

There might be a difference if your acquisition drive is based on offers to hook new customers, then it's just pure offensive. But if you go digital, it's both. Especially if you transform your core business, which I will always advocate to start with, because if you don't it’s almost like admitting an incapacity for change. 

Do you believe traditional banks have very heavy backpack of legacy systems that will not allow them to move as quickly as the customers demand?

Let's qualify two things: one is customer demand; the other is it being more expensive than slow by definition. However by observing mBank - already a full-scale universal bank - it definitely has a different environment than a startup, for sure, however you can build out from there.

 Unless your infrastructure is completely crumbling, in most cases you can change the experience. You can add products like PFM for liquidity management, and everything else that brings value: informing, testing, UI, committing to scalable change - all of these are ancillary systems you can add, and produce a very solid digital banking proposition even on an average legacy system.

So saying legacy systems cause inertia - I believe it's an excuse. The problem is not legacy systems, but rather the legacy mindset and emotions, which is a very different problem class to solve for.

I agree completely. Michal, this has been a very insightful and interesting conversation. Thank you again, and we wish you all the best!


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