Managing and Leading in VUCA World
Angshuman Madhab Dutta
1. Industry Overview – Banking
2. Prevalent business model driving revenue and Profit
3. Black Swan Concept
4. Changes that can create major effect in the way the industry operates broadly
5. Lessons drawn from other industries
Banking Industry Overview
The banking industry is highly fragmented and includes segments such as retail banking, corporate and investment banking, and asset and wealth management. The global banking sector is considerably healthier now than it was 10 years ago, at the start of the global financial crisis. The largest banks in the world have significantly improved their capital position in the years since the crisis. The progress banks have made in strengthening their balance sheets and moving past legacy conduct matters is reflected in expectations for financial performance. For banks globally, 2018 could be a pivotal year in accelerating the transformation into more strategically focused, technologically modern, and operationally agile institutions, so that they may remain dominant in a rapidly evolving ecosystem.
This metamorphosis is far from easy as most banks grapple with multiple challenges: complex and diverging regulations, legacy systems, disruptive models and technologies, new competitors, and, last but not least, an often-restive customer base with ever-higher expectations. In this outlook we explore the challenges most banks face in balancing the need to restructure their foundations for the long-term with finding near-term growth. We believe the global banking industry still faces material challenges to delivering sustainable profitability.
1. Cost pressure
2. Subdued income prospects: It is widely perceived that an increase in central bank interest rates will solve the industry’s weak revenue growth problems by boosting interest income, but this may just be palliative.
3. Accelerating competitive challenges: Banks are facing increased competition from a range of new market entrants, including digital banks, FinTechs, institutions offering high-touch and high-tech branch services, e-commerce and telecommunications firms, and in some markets, platform banking providers. Such challengers have emerged in response to rapidly changing customer expectations and behaviors, and are forcing banks to invest in customer technology to prevent customer leakage and preserve their value chain
4. Cyber risk is the top evolving risk
5. Managing reputational and conduct risk remains a high priority
6. Shifting regulatory priorities
Themes for Long term Growth
1. Customer centricity: – Long-term sustainable growth in the banking industry seems only possible with a radical departure from a sale- and product-obsessed mindset to one of genuine customer centricity, and further rationalization of strategies to target the right markets, customer segments, and solutions.
2. Regulatory recalibration: -2018 presents an opportunity to modernize regulatory compliance and bring together disparate silos created for individual compliance goals.
3. Technology management: – To help banks become more agile, bank chief intelligence officers (CIOs) should manage their portfolio of technology assets to emphasize activities that truly differentiate the bank. Externalization efforts should be focused on generic functions with an emphasis on cost efficiencies.
4. Mitigating cyber risk: – The potential for cyber risk has been increasing with greater interconnectedness in the banking ecosystem, rapid adoption of new technologies, and continued reliance on legacy infrastructure designed for a different age.
5. Fintechs and big techs: -Fintechs continue to lead innovation in the banking industry by sharpening their focus on customer experience. Banks face a number of choices: replicate what fintechs are doing, respond with equally innovative solutions, become more symbiotic and less competitive, or pursue a mix of these strategies that fit their unique capabilities and market positions.
6. Reimagining the workforce: – Banks should consider rethinking their workforce strategy given how work is evolving—with increasing automation18 and greater diversity in the labor pool.
Banks should capitalize on the shift to a mobile centric world by reorienting targeting strategies, product portfolios, and delivery models.
VUCA Analysis on the Banking Industry
Black Swan Concept
Black Swan is a metaphor used to describe any event which was not expected to occur. This concept was popularized by Nasim Taleb, through his book, The Black Swan. The term was coined based on the ancient assumption that black swans did not existed but were later discovered in the wild. This term has become widely popular in the world of business.
Quoting Nasim Taleb, the idea behind developing this concept was to explain-
1. The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).
3. The psychological biases that blind people, both individually and collectively, to uncertainty and to a rare event’s massive role in historical affairs.
From we have inferred from the author, this concept can be used to determine some event which is an outlier, that occurs unexpectedly and it makes a huge impact on the industry and the biases which are associated post occurrence of the event, explaining the possible prediction and prevention of the event (also termed retrospective predictability).
If we look at the world around us, we can name more than a handful of such occurrence. The World Wars, the dotcom bubble, the 9/11 disaster, 2008 financial crisis, extreme inflation in Zimbabwe and many more.
According to this theory, Gaussian model is not a perfect fit to use in case of events with unpredictability and unbound within a certain interval. At this point two models, viz. Mediocristan and Extremistan can be introduced. Mediocristan refers to properties which are gaussian in nature, like height, weight etc. Extremistan consists of properties like market size, person’s wealth etc. which is not limited in a certain interval and one outlier can change the entire distribution.