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Digitization in Banks is Changing Finance Relationships

by | Nov 6, 2019

Photo by Jonas Leupe on Unsplash

Professor Arnoud Boot shares his thoughts on how digitization in banks changes finance relationships and what digital banking strategies they should apply to stay relevant.

Arnoud Boot is a professor of Corporate Finance and Financial Markets at the University of Amsterdam.

He is Chairman of the Bank Council of the Dutch Central Bank (DNB), and the European Finance Association (EFA).

For the last three decades, he has been publishing about the role of banks in society and lately, he’s been publishing about digitization in the banking sector.

In the following interview by our Country Director Linda van Goor, Professor Boot shares his thoughts about digital transformation in banking and proposes some examples of digital banking strategies to stay relevant to customers.

You’ve been explaining over and over that banks’ added value compared to any other actor in the financial system stems from relationships between bankers and corporates.

In your latest pieces, you talk about the challenges of banks in a quickly digitizing world.

Does digitization fundamentally change the character of finance relationships, or is it basically a different way of doing the same?

Prof. Dr. Arnoud Boot: The answer is almost an academic answer, and the answer is both. With big data and all kinds of different databases, you can build replicas of information about bank–client relationships which can really threaten the traditional bank form of relationship.

Basically, it can manifest itself in an extreme way, which is not justified, because banks may respond in a way they haven’t responded  before. “We can no longer hold on to the customer, relation banking will become less important in the future and therefore we are going to invest in it less”, if that’s the response of the banks, it is a self-inflicted response to something which is a threat but they could have accommodated much better.

How should banks embrace the possibilities of digitalization?

Prof. Dr. Arnoud Boot: Of course there are disadvantages, and there are advantages.
The disadvantage is the legacy, their current operations. The way they have been growing over time is more or less at odds with how they should look in the future. So they have a major legacy issue in terms of the type of people they have, the type of systems that they have, the size of head offices, just the physical infrastructure that they have, all of that will become less important.

They need to have different people; people that understand social media, people that understand databases, explore databases, that can in a much better fashion interact with the client and understand the environment, and to understand the environment, the bank will have to create its own network or platform.

That’s the way they have to move forward. They have a benefit in that traditional bank client relationship which will not disappear. So they have to find a complementary way to accommodate the new databases, the new world, the new type of competitors, and then build on their traditional strengths.

So their biggest challenge you say is their legacy and especially the legacy of material, of machinery, people for sure, some other skills – but the core skills, they should cherish them?

Prof. Dr. Arnoud Boot: They have to think that ultimately all this data analysis, gathering databases, understanding the environment, understanding the needs of the customer in a much broader sense than what they had to do traditionally (because that’s what the competitors will do, that’s what the big databases will do), how they acquire that new skill and how that new type of skill becomes complementary to the traditional skills.

Observing platforms all over the place, what makes a difference between one platform or another?

Prof. Dr. Arnoud Boot: Keep in mind that we are in a changing environment, the existing platforms is all trial and error; and as a financial institution, you have to be part of the trial and error – but don’t take the existing structures that you see as being the endgame.
We don’t know how the future will look, and how platforms will look, but you have to stay and that’s the main message of the financial institution.

The main message or the main question is ‘How do I stay relevant? How will I be relevant?’, and then understand from academic research, the little academic research that we have so far on these issues, that this points at complementarity. 

At every level, for example, credit risk combined in the traditional type of information the banks have, with the big data analytics type of information that becomes available, it’s in the combination where there is a substantial benefit, and since the banks have access to the old skills, they should, in conclusion,  be in the lead with respect to this complementarity.

 

Prof. Dr. Arnoud Boot will be speaking about the Financial Industry Digitalization and New Business Models at The Portorož Business Conference (PKP) which will take place on November 14 and 15.   

Register here to attend.

Dr. Linda van Goor

Country Director Benelux for Opportunity Network, Independent expert European financial regulation.

Dr. Linda van Goor

Country Director Benelux for Opportunity Network, Independent expert European financial regulation.

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