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#196: Digital Transformation in Retail Banking

#196: Digital Transformation in Retail Banking

Welcome to Episode 196 of CXOTalk. I’m Michael Krigsman and I’m an industry
analyst and host of CXOTalk. Each week, and actually sometimes more than
once a week, sometimes twice a week sometimes three times a week, CXOTalk brings to you
conversations with the most interesting and innovative senior executives in the world. And, we talk about leadership, we talk about
technology, and the impact on the enterprise. And today, I’m so thrilled to talk with
Rüdiger Schmidt, who is the Chief Information Officer at Banco Sabadell, which is one of
the largest banks in Spain. And it’s a company that was founded in the
late 1800’s, 1881, around that timeframe, and you can imagine digital transformation
has completely transformed its business. And we’re going to hear a very interesting
story today. Rüdiger Schmidt, thank you so much for being
with us! Hi, very happy to be with you again. And you’re, right now, just outside Barcelona
in your office? That’s true. I’m here in the office at this moment, quite
alone, so I’m much closer to the weekend than you are. So it’s 7PM, and we met first last spring,
when we did this kind of conversation live on stage in Madrid, and so it’s great to
see you again. And so please, Rüdiger, tell us about your
role, and tell us about Banco Sabadell. Sure. So, I joined Banco Sabadell July last year,
so I’m quite new here, after working 18 years in several management positions in Deutsche
Bank, in IT. And, I’m the global CIO. I’m responsible for all IT development,
IT structure, IT strategy for the group. Banco Sabadell started as a very tiny bank
supporting local industry in the city of Sabadell – that’s where the name comes from. And for a long period of time it only had
one branch in Sabadell. But then it started to grow slowly, always
focused on business banking. And then in the late 90’s-2000’s and on,
it started an incredible growth rate. Banco Sabadell has integrated twelve banks
in the meantime, and with those mergers, it became the fourth largest bank in Spain. If I look at the integrations, the first two
took around 24 months, the last 3 integrations – technical integrations of a bank, that means
starting a project to take over all IT and data, took 5 months. So, Banco Sabadell was a real integration
machine, and so it profited from the crisis in Spain, so it was one of the few banks surviving
and becoming stronger after the crisis. And that made us the fourth largest bank in
Spain. The next step, then…so it was a local bank,
then it was a regional bank, then it became a national bank, and the next logical step
was to become an international bank. And that happened with two steps, so on one
side we started with Greenfield Bank in Mexico, which went live successfully early this year,
and we acquired TSB Bank from Lloyd’s in the UK and I am in the middle of the integration
process. So, in numbers, Sabadell in Spain has roughly
6.5 million customers, in the UK more than 4 million customers, so around 11 million
customers. In Spain, we have 2,300 branches, more than
600 in the UK, and overall more than 20,000 employees. When I was in Madrid, I was struck by how
many branches there are. Banco Sabadell has branches everywhere you
look. Now, when you think about digital transformation,
what does that actually mean in practical terms, for Banco Sabadell? Ok. First of all, it’s not just a digital transformation. It’s a transformation of the whole bank,
and digital is just one important piece. But in fact, we talk about transforming the
bank, and not just digital transformation. And the branch network is a very important
part of that transformation. First of all, let’s have a look at what
is happening: Why are we transforming? What is happening out there? There is, of course, a digital revolution
and it is now. When a client comes with his or her mobile
device into the bank, it has probably more CPU in their hand than the computers we have
on the desks. And, there is this cloud with nearly unlimited
network bandwidth, which makes it very easy for newcomers to get into the business. So digital is a big trend, but there are others. There is the low-interest situation of the
bank, so margins are shrinking for banks. We do not make money with certain traditional
business. So it’s a paradox that we don’t like that
clients bring us deposits, because we don’t need any funding, because the Central Bank
gives it for free. So if we want to put deposits there we even
have to pay for it. And, it looks like this will take longer so
the whole business model is shaking. And then of course the whole regulatory requirements
haven’t stopped, so we still are facing new regulations: MiFID 2, IFRS 9, PSD2 and
you name it. So these are the three big factors which make
us think how to transform the bank. And in the past, the bank made money with
it’s balance sheet, nowadays, we have to think about new ways to make money. And the CEO described it best this week on
a conference, and he said, “We have to transform our clients from balance sheet consumers to
platform users.” And that is what it’s all about, the bank
has to become a platform while we keep our business and being a servicer for lots of
transactional business. And for the money, we have to become a platform
for much more, in order to grow and be profitable in the future. That’s very interesting. So, that term “platform” in the technology
world is kind of loaded, because it means the place where you come to have all of your
technology needs met. And so, when you talk about a platform, the
bank being a platform, what do you mean by that? Ok. Again, going a bit back in history, when somebody
talks about “bank” and “platform”, they talk about a core banking platform. And a lot of banks are struggling with their
core banking platforms because they missed the point to renovate them, which has two
impacts. The first impact is the regulatory requirements
are very difficult to be met, because we don’t get the data out of the systems we need for
the regulator, and their systems are not real-time; they are not transactional enough; they are
not service-oriented to be the backbone for a digital bank. Banco Sabadell is lucky in that in the early
2000’s, before the banking crisis, they did a complete overhaul of the core banking
system. So we are in the good position that we have
a very stable, robust, 24 x 7, real-time core banking system, which is our banking platform
behind that. Then, we developed our digital platform, and
we are continuing to develop it. It’s called Proteo. And we are now at Proteo 4, where we built
that layer on which we want to create our services to publish them to the outside world. Our ambition is to do it a bit like Amazon;
every service we build should be built in a way that we can use it also for third-parties. We are not there yet, but working on that
one, and, it all moves into ecosystems in both directions. So we will own more interfaces that others
can use our bank as a service. So for example, we have an ERP provider here
in Spain who is directly linking their ERP system with our core banking system. Of course, always when the client gives the
authorization. But, we also want to look in whether we, in
our secure environment, could sell things that are services which are not directly related
to our banking offering. So, when you think about the bank, and what
the bank does, it’s no longer just about people coming in and depositing money. You’re providing all these different services,
and they’re all resting on top of this technology platform that you’ve built. Is that a correct way of saying it? That is true, yes. We are still evolving the platform. The thing is, if you started very early on
giving those services and we were always having these technology things, at a certain point,
your digital platform becomes a legacy and you have to evolve it, so we have a lot of
digital services now more than ten years old and we need to renovate them again. So, there’s this very close tie between
the technology that you’re buildings and the most fundamental strategic goals for the
bank, from a business standpoint it sounds like. Yes, that is true. That is maybe also the greatest thing, coming
from the history of the bank, that it was quite a small bank, very aligned, always aligned
on very strategic goals, whether it was the twelve integrations of other banks, it was
always a huge project where the whole bank was involved, or weathering the storm of the
big banking crisis. It aligned the company a lot. So, Banco Sabadell never had the time to create
silos, neither technology nor on the business side, and that is something we have to preserve. It helps a lot in the digital transformation
where we work hand-in-hand with all businesses. When you say you never had the time to create
silos, silos are one of the real challenges that companies have, especially a company
that’s over 130 years old. When you said you didn’t have the time to
create silos, can you elaborate on that, and explain how you’re different or why you’re
different in this respect, relative to all of your competitors that are heavily silo-oriented? I think that, first of all, it’s done from
the top. The senior management of the bank does not
allow any silo-building and there’s a clear focus on the strategic goal of the bank. There is always a 3-year strategic plan that
aligns all business and infrastructure functions. Secondly, certain functions in the bank were
never aligned to business, but kept central. If you want an example of this: the whole
data structure, so all our data, the creation, the processing, the output of data warehouses
are central and we always talk about data. We never allowed different areas like finance
risk, marketing, have their own data models, data warehouses, and then at the end, you
have trouble bringing them together. You see a lot of banks failing now responding
to regulatory requirements because they just don’t get the data together or they do not
match. So there is always a very clear strategy that
data is relevant to the corporation, and never to a single area, which gives us a strategic
benefit, and the rest is the level of collaboration among the areas in the bank. So you have a strategic mandate from the top
to do this, and then you have set up systems so you have a view of the data that crosses
the silos, and then you have a culture that respects the need to be cross-silo, and that
emphasizes the need to be cross-silo. Are those the pieces? Do I have that correct? Perfect summary of what I said. So now, you’ve got these technology systems,
the platform as you term it, that enables you to offer services to customers. Can you give us an example of the kind of
services that you provide to customers that rely on this platform, and why the platform
makes it possible to deliver these services in a better way than your competitors? Ok, so just recently this Monday we launched
our new wallet application, where we have the classic wallet function of the bank with
credit cards. And we added to that the new instant payment
platform, which is an industry platform in Spain for instant payment, person-to-person. We integrated that immediately into our wallet
platform and into our digital capabilities like electronic signature, fingerprint lock-on. So we were able to launch it on time with
added functionality and we have seen after a few days that the percentage of adoption
of instant payments via mobile overall in the Spanish banks is higher than our market
share in retail banking. That means, we have higher adoption among
our clients to that new service than any other bank in Spain. And that was possible by combining this new
functionality with existing services and our architecture to build that new app. So this technology architecture is truly more
than a strategic advantage, it sounds like the technology platform is the thing that
enables you to be responsive, to be agile, to offer new products and services electronically
very quickly to your new customers. That is true. We have a platform which is very well-architected
from a services point of view, but also business services from electronic documents you can
find electronically and present electronically. A real multi-channel architecture, although
I don’t much like the word “multi-channel”, as you know, helps us to be very quick in
deploying any service to any channel, and even deploying services to third-parties with
our open API. We have several questions coming in from Twitter,
and let me ask Arsalan Khan’s question first, but Shelly Lucas is asking about Blockchain. Shelly, we’re going to be talking about
Blockchain next, so we’re going to stick with Arsalan’s question which says, “What
happens when 3-year strategic plans become obsolete due to technology and workforce advancements?” It’s very easy. You have to adapt. So a 3-year plan gives you a strategic guidance
on where the bank wants to be, but when there is a change in the environment, you have to
move very quickly and change and adapt to that plan. You see, a strategic plan like the last one
was the goal to go international. I’ll give you an example, which meant the
goal behind it was a certain percentage of our business volume would come from revenues
outside Spain to be more independent from economic cycles of just one country. So that is the strategic plan. For example, TSB, the division in the UK,
wasn’t even known when this 3-year plan was started, but it was an opportunity during
that period which we took, and that is true for any change and also technology change. We would just adapt, we were not a slave to
our plan. It would give us guidance [to where] the bank
strategically wants to go. And before we again, jump into Fintech and
Blockchain and open APIs, and there’s a whole bunch of things we have to talk about;
you say you’re not a slave to the plan, but back to this, you’re a 130 year old
organization. And how does a 130 year old organization create
a culture where you can adapt and embrace change the way you have? There are much younger organizations that
have endless struggle with this. How do you do it? Well, I think it is the permanent challenge:
never be complacent with the status-quo. And that is true for all areas. So we are leading in cost-income ratio within
the Spanish banking sector, with roughly 50% cost-income ratio. That doesn’t make us complacent, we say
“We’re the best,” we have very strict plans to do cost-reduction programs. That’s just one example. Never be complacent with what you have, you
have to always try to become better. We have clear plans to be leading in client
satisfaction, in net promoters score, in all sectors we are working, and we are measuring
against that. So, we always have to set the goal higher,
and keep it moving. Never be complacent; that’s what we do. You mentioned your goal is to have a very
high net promoter score, so let’s talk about customer relationships. I know you have invested very heavily in things
like APIs, social media, mobile, big data, so tell us about that. Ok, open API is an interesting thing. We were the first bank in Spain that organized
a hackathon. It was very successful. A lot of ideas came out of that, but we needed
something. And it was, for the first time, experimental
with the hackathon where programmers could develop their ideas. So we had, on the first day, a mock up for
the open API, and we saw a lot of interesting things coming out and maybe we should have
open API, and so we developed standard open API for classic account balance, transaction
inquiry, money transfer. And, what we saw is that on one side, there
are currently more than 20 startups, but also, SMEs, who are in the process of adapting to
that API and using that API. In the beginning, I told you about that ERP
system in the cloud which is connected to that. But, on the other side, what we have seen,
the open API is not only interesting for the outside world. In our innovation labs, for example, we started
experimenting with a tangible bank hardware device for clients in the client’s home. That means for our own product, we saw that
the easiest way to build that is using the open API. So suddenly, the open API becomes an enabler
for an internal project, because it’s much easier, more standardized to use that. And, that is very interesting. And now this open API will enable us very
quickly, if for example one day Amazon Echo is translated to Spanish and available in
Spain, it would be for us very easy to integrate a thing like Amazon Echo or similar devices
to our core systems. In Europe, we have a new regulation, the Payment
Service Directive 2 coming up. Early 2018 will be the date where banks will
be obliged to open APIs for third parties. And that is the same way where, first of all,
we already have it, we have to adapt it to these standard interfaces but we know how
to do it, how to adapt it; but the more important thing is for us it’s much more than a regulation,
it’s an opportunity, not only to open our API to other banks, to FinTech to integrate
to it, but we can start thinking about using our services to the bank-ends of other banks
and give services to clients even when they have the account in other banks, for example,
with the advantage of being already able to work with our APIs. Social media, we started very early to have
a 24/7 active social media team always scanning what’s happening around the world. So, if there might a system outage and they
notice on social media, they will contact immediately the people… discussions about
some local opinion [on] bankers, we’re talking criticizing the bank’s strategy, it’s
statement, where then our chief economist contacted them on social media and said, “Let
me explain, then, what is behind it and how that works!” And after that, this popular guy tweeted,
“Thanks! Well, politically I still have a different
opinion, but thanks Banco Sabadell, you explained a lot of things I didn’t know before!” Another nice anecdote on the social media
is that our team picked up once a message from a taxi driver in Madrid, who was tweeting
and complaining about the service of his bank, which was not Banco Sabadell, because he was
waiting for his POS device account terminal for more than three months. Our social media team located this guy, checked
the next branch, and checked whether they would be able to give his a POS device and
open an account with him quickly. So, they did it, they said, “Look, go to
that branch, open an account with us and you will get a POS device immediately.” Which was good, we had a new client, but then,
as this guy was very active on social media, he tweeted around the world how great this
experience was, and he never expected that could help. Today, we have 30% of market share of POS
devices in Spain. If somebody says you cannot make money with
social media, we have proven there are ways to do it, but you have to do it very good. On the big data piece, of course we are doing
what everybody’s doing: using advanced analytics, predictive analytics, patter analytics combining
our standard transactional data with outside behavioral data from the internet. But last year, we said we have to do more. We have to build products and services around
our data. Together with our innovation team, we developed
an idea, the system is called Kelvin. The name comes from Lord Kelvin, who said
one time, “You cannot prove what you cannot measure.” And we use data from our more than 250,000
POS devices we have with clients in Spain, and analyze that data, and give services to
our clients to store. So, a client of Banco Sabadell with a POS
device gets a webpage where he can check, what is the medium-sized ticket of people
buying in my shop? What is the medium-sized ticket of all my
competitors around. Of course, anonymized, but always focused
on the business he’s running. How sticky are my clients? Do they shop around, or are they only buying
with me? We can tell you 80% of your clients are buying
shoes with you and only 20% are shopping around. If it’s the other way around, maybe he should
do a loyalty program with clients. So, we measure client loyalty because we can
tell him, if his clients are buying elsewhere, [or] what type of client is buying. Always anonymized but statistical data, what
is the salary of the clients who are buying in his shop, and compared with the average
salary or average age of clients shopping at his competitors. So, extremely useful information, nobody else
can get that data; fully respecting data privacy and security but extremely valuable for the
retail stores. And we have several examples where we [have]
retail stores or chains saying, “Well, we take Banco Sabadell because nobody else can
provide that service.” So, I want to just point out to the people
that are watching: when you use social media, it’s not just to give pat, standard answers. It’s actually to interact with your customers
and give them genuine support. You mentioned that your Chief Economist has
responded over Twitter to explain what the bank is doing, so I just want to point that
out to people listening. I think this is a very important point. Yes, you’re right. Now, what about FinServ startups, and Blockchain,
what is your view on that? What are you doing with startups? What are you doing with Blockchain? What are your views on that? Ok, let’s start with the Fintech world. I see two types of Fintechs: one type which
says, “Well, I do a better retail bank than the other banks do. I have a nicer front end,” and that is true. They can build new stuff, very fancy things
around that and give standard retail services. The problem here, and I would have put a lot
of money in that kind of Fintech, I would be worried, that with that kind of business,
you wouldn’t make any money. I explained it in the beginning today, that
having a lot of money of clients in your current account deposits costs you money today. On top, you give them debit cards, ATM excess,
and so-on; so I am thinking about, “What is the business model behind it?” to that
effect. There are other Fintechs, very interesting,
which go much more vertical, which pick one product, one value chain, you look transfer-wise
for money transfers across country, Kantox on FX products, which I believe are very interesting
because they take one product vertically front-to-back and disrupt the existing model, and, that
it’s always current whether it works or not but that is very interesting. And, we work with Fintechs. I am not a believer and supporter in investing
a lot of millions like other banks did, in these NewCo banks, because of lack of a sustainable
business model from my point of view. I would rather look for Fintechs that can
be good providers of technology and help us improve our services and for our clients. We are happy to work with them, we are happy
to be a client of Fintechs in order to provide better services to our clients. On Blockchain, of course, we are not the size
of a bank that is changing the rules of the game and [trying to] substitute Swift with
Blockchain. But we see a lot of potential there. There are still a lot of questions, the maturity
of Blockchain is still quite low. I don’t think it could currently support
very large amounts of what we do in transactions. One thing that will not work in Blockchain
is real time, so in real time, certain transactions will not work. Nevertheless, it has a huge potential to substitute
all businesses, or disrupt all businesses where you have a trusted third party in between. So, it could be custody business, it could
be trade finance business, for example. And, together with smart contracts, it could
be a very disruptive business. So, no maturity, but very high impact, if
that will work. We are experimenting with Blockchain as well. We are, for example, looking whether we can
use Blockchain to build escrow accounts for the collaborative economy, because you always
have two parties, p2p, who have to trust each other and there has to [be] some money, usually,
you do that in escrow accounts when you have a large business, and possibly, Blockchain
gives us the possibility to do that for very small amounts in that collaborative [space]. So we are looking at that, we are collaborating
with other banks, and definitely, very high on our radar. So with startups, Fintech startups, you said
that you prefer to partner with startups that can provide services or benefits to the bank,
as opposed to invest because you’re very focused on them, the partner at the startup,
having a sustainable business model. That is true, yes. And, with Blockchain, given the limitations
that you described, why do you think there is so much excitement and noise around Blockchain,
given what you were just talking about? It is just the potential. If I maybe it’s visionary, but saying in
the future, there will be no custody business, and the share of a company won’t be held
in a custody by the bank and you don’t have all that settlement clearing around, but a
share in a company is just a smart contract in the Blockchain, and any corporate event
like a dividend payment, is an event in the smart contract where, automatically creates
a payment [in] the Blockchain to the shareholder; if you imagine that, if you imagine in trade
finance, you know how much paperwork is around there, so all this trust thing – are the goods,
which are ordered abroad, really coming or not? Imagine [it going] in the Internet of Things,
where a container arriving in the harbor at Barcelona and the chip in the container tells
the smart contract of the trade finance, “I’m here in Barcelona. You can pay the money,” where today, the
amount of paperwork that’s around that, the impact can be huge and revolutionary in
certain business areas. And there are a lot more in the interbanking
settlement clearing whatever, there’s a huge potential. Again, we are not the ones who are the size
to do that move, but definitely, we will follow [it] very closely, and look for Blockchain
for innovative products, like I explained before, to use the technology for our purposes
like I explained before. So, Blockchain needs to be fit to the appropriate
task or activity. We have very little time, but we have a question
from Eric Juncker, I hope I pronounced your name correctly, who asks: From a technology
point of view, he thinks Blockchain is mature enough, so is your concern with the technology,
or the application of that technology in banking products and services? I think Blockchain as an algorithm is mature,
no doubt, but there are a lot of questions to be answered. Regulators, nowadays, if there is a custodian
or a clearing interface, they can easily enquire data and control. So regulators in financial services have a
lot of concern about their ability to control when things are happening in Blockchain. These are questions which have to be answered. There is another study, I don’t know whether
it is true or whatever, but you have to think about, if international payment, if all international
payment were to be run on Blockchain, there would not be enough energy on Earth to hold
all the Blockchain nodes that would be necessary to support that. I cannot prove that, but large scale, we still
have to check. So, it will come, but it will take some time,
and we have to resolve certain problems. And we have just about one minute left, and
so, briefly, can you tell us about the future? What are your future plans, and where are
you going? Well, definitely, the bank has very big challenges
ahead. We are still integrating a 5 million customer
bank in the UK and preparing the platform. That is a very big goal for us here. We are improving our digital capabilities
here in Spain, in order to give more services, much more client-oriented, much more coming
from the user, much less bank products you see in our apps, but rather use cases of users. Like an example, I want to pay, and given
the situation where I’m paying, maybe I need a credit card, I do an instant payment
or whatsoever. I put the situation first, and see what is
the best product the client can pay [with] rather than using the bank products, your
credit card, or whatever in the transfer. That is one big transformation we want to
do, and we have our international expansion plans. We just opened up business banking in Mexico
and we are now analyzing whether we can use our capabilities to also start retail banking
in Mexico. Ok, well this has been a fascinating discussion
that’s gone by very quickly. We have been talking with Rüdiger Schmidt,
who is the Chief Information Officer for Banco Sabadell in Spain, and what a fascinating
conversation about the role of the platform and the coming-together of the business and
technology in retail banking and all of the exciting things that you’re doing with their
technology. Rüdiger Schmidt, thank you very much for
joining us and taking time to be on Episode 196 of CXOTalk today. Thanks, it was a pleasure of mine. And I hope you tune in next time, catch the
schedule at, and we will see you again very, very soon.

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