Transforming mindsets: Nathan Bostock on banking transformations

Welcome to Talking Banking Matters, McKinsey's podcast on today's Global Financial Services Industry. I am Buss of Mitzra, your host and a partner at McKinsey & Company. In this series, we present first and accounts on banking leaders and how they are tackling contemporary business challenges to catalyze the company's growth and transformation efforts. Today, we will be exploring transformations in banking with Nathan Bussstock. Throughout his 40-year career, Nathan has led institutions through their full-scale transformations, including Santander UK and the Royal Bank of Scotland. Nathan currently serves as a board member at Lloyd's Banking Group and Centricle. In this episode, we will be discussing how banking is evolving, how financial institutions can successfully solve the present challenges and how organizations can capture opportunities through an integrated change management approach. Nathan, welcome. I think we wanted to really start from the experience and looking back upon your four decades of experience, how has banking transformed over this many years. There are very few people who can draw the arc across all these years. And as you look at the crystal ball, how do you see the key trends in banking coming across? One of the trends that will shape the future of banking. I think it will be useful to discuss this because this will set good context as we think about the top task or classroom issue. No small task. That's that. Yes, so I guess it's a long period to summarize. But let's just pick the major items. I guess the first I would say is the influence of technology. I'm sure if you speak to CIOs today, they'll say technology is moving at the fastest rate they've ever seen. If you go back to when I started, the center of the universe was a branch. And if you wanted something, you went to the branch manager who could make the decision and really you didn't go to anywhere else because that was where your relationship was. Today, that's going to be most likely a mobile connectivity on a digital backbone. And most of those interactions are going to be driven by data. I think in terms of broader, you know, other broader items regulation, regulation has definitely had a significant impact, particularly in the UK, but growing across the world. Probably a couple of key aspects. Certainly the prudential side. I would say that that has driven a lot of change. What it has done though is lead to dilemma in terms of how do I invest for growth versus spending my money on red risk and control. I think the second major trend probably from a regulation point of view has been the influence it's had on consolidation and cross-border acquisitions. Most of those have ceased significantly over now a number of years. I think you've seen the rise of fintechs and they've really driven the art of the possible from new tech. They have a different problem, which is cost of acquisition of customers and profitability. But what it's probably done is force banks into the mindset of I need to transform and be different because I can see that there is a very different way of doing this. Probably the final one in terms of the past, I would say, is that there's been a rise in the markets, things like capital markets, the changes in the bond industry, securitisations, but also the rise in private credit. If you turn to the future, which has an element of those aspects, I think probably if you look at consolidation, I think you're seeing consolidation already starting to come back. You might even see in Europe cross-border consolidation, but really it's the fact that they've become more localised rather than global, and that is driven by the regulators. In order to therefore grow, you need scale. And therefore consolidation almost naturally has to come back. I think in terms of the future, I believe that probably you need to keep your eye on what are five principles that help drive a lot of the things you would want to do, which transform. One is speed, how fast you respond to customers, one is simplicity, so how simple are you to deal with. One is reliability. In other words, are you always there when I need you? I think personalisation, albeit that can vary in the nature and complexity of it, and then I think value for money. I think probably just the last two I would raise is I think that from a customer point of view, the mindset probably needs to move consistently towards, how do I get ahead of anyone else's ability to interact with my customer? And then I think the final one probably is that fintechs are here to stay. If anything, I would expect them to grow. I expect them to grow because the ability to code is becoming easier. The ability to access power processing remains available. And so really the cost of entry, if you combine it with AI, means that you can probably do even more today than you could five years ago and significantly more in three or four years time. Well, thank you, Leigh Dunham. That's quite a challenging position for, you know, CEOs up in common banks and even fintechs to be at. And as you kind of reflect upon your multiple transformation experiences, how do you see CEOs and CXOs lean into the transformation topic in the context of all that you've just said? And how should they approach, you know, transformation? Yeah. How do they get started? How do they reset? Many of our clients are already in transformations. So how does your guidance and concept do us a year? So I think again, if you think about some of the trends, then the reality is the what you've got to do is work out, how is the owner of a super tanker? Are you actually going to employ some of those aspects? Why? Because you do have customers. So you have a fundamentally strong starting position. So the issue is the other way round. So in many ways back to those prints, what you need to be able to do is to bring into the organization, the ability to adapt, the ability to be more agile, the ability to move more at speed, the ability to leverage partners, the ability to integrate technologies quicker. I think there is a question which is, I think, again, has come out of history, which is, I think the design of architecture, technology architecture, an operating model has never been more important. Yes. And I think it's something fundamentally we've been bad at in organizations. Often because organizations have come about because they are multiple acquisitions put together or they have a very siloed organization, et cetera. But if you have a thousand different applications, it wouldn't be unusual. I think there is competition for talent. And I think that that is a big one that organizations need to think about. Banks, for instance, how do you make yourself attractive? Yes. I mean, if I want the best technical engineers, I want the best data analysts. I'm not asking for some of the historic skills. I'm asking for new skills. They're in high demand. I think the AI and the data is obviously AI has become commonplace. Gen AI is clearly something that people are looking to utilize more. Some people are now more advanced on it. I think that helps you with this issue of how do I get closer to the point of consideration? And how do I make something suitably personal, et cetera? How do I make something value for money? Well, if I can reduce the cost of processing using AI, I can afford to add more value into the product for a customer. I would say balancing that investment, again, think hard about, are you investing enough around the growth and around the customer versus reg risk and control? Not that you don't have to mean reg risk and control, but if you're not asking the question, it will gravitate towards that. And just a couple of business type ones, I think, that I would put on the table. One, I think, to move away from retail, if you think of SME and commercial, I think you need to change your mindset a bit away from, I'll call it, product, more towards, how do I help my customers grow? So again, an example is probably the best way to think about it. If I'm doing, say, international, I want to do trade finance. Okay, how about helping companies to be able to find new markets in which to go and take their product, match them with customers in those countries, find them new suppliers and help them optimize their supply? Any of these things actually make you very valuable to those entities. as a pawn. from which you will ultimately do banking. But if they grow, you grow. And then the final one would be, I think there's a real danger of an element of complacency building that is driven off the back of higher interest rate. There is a huge dependency on net interest income and it's a bad one, in my view. So it is vital to think about a business model. And if you were to have the panacea, I would argue that you would probably like to have, let's say, the whole of your cost-based covered by other operating incomes. And then you can flex on the net interest income. - Just moving forward Nathan, I mean, you have led some remarkable transformations. I mean, the work that you did at that RBS, opposed to GFC, and then more recently, the work that you've led at Santa there, where I mean, you have fundamentally shifted the cost curve. You moved the cost income ratio from 64, 65 to less than 45. It's a remarkable transformation. So what are some of the lessons or patterns between these transformations that you've seen that you would recommend or cancel the leaders as this shift into the transformation agenda? - I think I'd probably start first of all from the fact that I think generally people have talked about transformation when really they've been talking about incremental change. And relatively minor incremental change that adds up over time, retailers detail and all the rest, but it's not transformation. And I think there is now a growing sort of understanding that really, and I used Fintechs as a good example, I used, so again, customer experience, what do you consider yourself against? Well, forget banking, it's going to be against whatever is your best digital experience story, right? Whether it's a Amazon or Netflix or whatever. So I think people have started to realize that they've got to fundamentally do a lot, than they were thinking for. And so my first thing would be what I've learned over these things is you need to be bold. And that's often probably two or three times your initial thinking. Now you need help, because one of the key things you've got to do is look at and say, well, how do I get the right skills to be able to understand that potential? - Sure. Then how do I get those skills to be able to execute? But the first thing you've got to do is set the frame at the right level. And I think that's one of the hard ones, because generally, it's much more comfortable to say I'm going to do 10 or 15% in three or five years. And then at the end of five years, really you haven't moved the dial, because with inflation, et cetera, the world hasn't really moved. And you haven't transformed either. So you've just saved a bit of money, but not transformed. So truly, sort of say, I've got to work out the how on earth I'm going to get. People to come with me, the organization to come with me, the regulators to be kept happy. That is a very big thing. And I think that every time I've really sort of gone to it, whether it's the restructuring of RBS from getting rid of the bad bank to restructuring the new, et cetera, in all of those, the real prize is only if you go for full. I'll call it full-fat transformation, not the skinny latte version. Right. No, I think that's a great point. No, I think the point that incrementalism doesn't take you very far is a very important one. What did it take for you to create that transformation more recent examples such as something there? If you were to just summarize and kind of create the hitchhiker's guide to transformations, what are the things that you did that allowed that transformation to happen? And of course, we followed up with a question around what are the things that we do to develop? The first thing to do is, as we just discussed, you need to be bold. The problem with that for a lot of people is, and it's been true in my world. If you hire really good people, do jobs, a business head, a head of retail, a head of corporate, a head of CIB, and you hire your functional heads, et cetera, they can all be very good and are. It doesn't mean that they know or understand scale of transformation or how to do it. Right. And I think the first thing you have to recognize is that sometimes what appears to be reluctance, in an organization is more a, I'm a very busy person doing my job. I have a budget to meet. I've got a regulator on my back, et cetera. So in some ways, what you've got to do is, you've got to be able to do two things. One is you've got to be able to show them the art of the possible and make them more comfortable that actually there is a much bigger potential that you can go to, a different way of doing things. And then you've also got to really work with them on the how. And so some of the things that I've learned in this is that those leaders, because they're not transformation experts, the hardest thing for them to do, but number one on the list is, they really need to dedicate top talent, a hundred percent of the time, to a transformation effort. So I would call it, let's say a workstream lead. So if I'm the head of corporate, I take my management team, I identify a real talent, my real talent, and I put that person a hundred percent on the first string. It's easier to backfill that person in the management team. - Yes. - So it is to actually get a fantastic person in a workstream where you can help them with the skills and the knowledge and things they need to do, but they are capable of then bringing that management team with them, but it also means the head of the business can carry on being the head of the business. - Okay. - So I think that's a critical factor. I think knowing how you're going to access the skills you need when you need them at volume, we're rather than say, well, okay, I need to hire a whole set of people. Because hiring is, firstly, it's very difficult. - Yes. - Secondly, it takes time. It's sequential in a nature whereas actually to do all these things, you need to be parallel processing. - Yes. - But also the reality is, you know, you've got to enter these sort of transformations without all the answers. I always use the analogy of it's like peeling an onion and you only get to the next layer when you've taken the first layer off. And therefore, it's very hard to know exactly what you need. - Right. - And it might be, I need more contact center skills. It might go, I need more agile skills. So finding a way of accessing those is fundamental. - Right. - You then have to think, well, if they're coming in from the outside, then how do I actually assimilate those with management? - Right. - So that actually what I get is a team. That's where the work stream lead can also be really, really helpful because you can integrate those people into a broader vision of what you need to do. I would say you've got to have a vision. I think it's really important that you engage the organization towards an end game. So in Centandaire, what we created was the concept of a digital bank with a human touch. It had to be digital because it's a digital backbone. But also to go to the cost income ratios we wanted, I wanted to be in the low 40s ultimately, because a pure digital will probably be five or 10% lower. But they won't have the human touch. That's got a cost, but it's a valuable differentiation. So create that vision. I think you need to make sure everybody in the organization is engaged. - Yes. I think that one of the issues with the gaining incremental, it's too easy to say, yeah, not over here. - I think so. - No, I'm in risk and we don't need to do anything. Whereas when it's of a certain scale, everybody's looking at it thinking, crikey, I've got to be a participant. And so it's so much easier to bring the organization with you. - And all the more important there, for it to have boredness in your vision. - Yes, you can go together. - The two go very much. You go together, yeah. I think culture is a critical part. And I think that you can't go through these transformations without ultimately defining the culture that you're trying to achieve or the elements of culture that you want to improve. Good example might be to get to this end world, collaboration is going to be a fundamental of importance. So if you don't have collaboration today, how do you identify the aspects and how do you measure? - Yes. - That improvement. And so I think you can't end transformation without the culture also fitting where you want to get. And of course you'll do purpose and values, baby. But there are many different aspects, including the capability of, for instance, being able to drive change. That's very, very important in the execution element of culture. I think the other bit is you have to bring the organization with you, which includes bringing people like the unions, the staff, et cetera. And so one of the ways of doing that is that you minimize redundancy. And what people don't do is they typically don't manage turnover. What they do is they run hard, they fill jobs, and then they end up having to exit lots of people. So it's tough because you have to work out how do I manage with fewer people? But as a journey, it's a much better journey for people. Reskill, I think we reskill probably about 2,500 people. You could do even more today. But all of these things are opportunities. And in fact, again, remote working for periods has increased that ability. So the fact that actually you could have a branch person, you could now be doing a different job. The one thing you have often in our conversations highlighted is that it's what you call it a bid to bid to site. Yes. And you just have a cadence around this. So I think one of the dangers in all of these things is that you need to empower the work stream leads. You need to empower people locally to be accountable and responsible. And you need them to have a cadence of decision making. There will be other things which are harder. And don't fit that. So by think of our transformation, then once a week, we would look to see what are probably the two or three main decisions that we need to be able to make in the next week. That you're going to ensure the weeky, the pace going. The rhythm for the more complex ones, was debate, debate, decide. And the logic behind that was that normally when you debate, you find this information you haven't got in the first one, people come up with very good points that need further investigation. The second time, you've got pretty much everything you're going to have. The incremental benefit from then on is little compared to making the decision. Yes. And that to me is a, that needs to become a sort of mantra of the organization. That and A was you even then to continue to rethink technologies moved on. I think if you don't, it's easy to spread out to three to four to five to six years because actually decisions stall. Correct. I think when you start again, people have this mindset that there must be a few big things that are going to solve the world. There are themes and undoubtedly those things that we would take for instance a contact center might even be a theme. But actually when you get to the heart of it, it's a lot of initiatives. And so we went well over 900 initiatives over that period. We probably canceled during either the initiation phase or as we got further down the road, 20% of those. Why? Because they weren't going to deliver or they didn't meet the risk hurdle, but you've also got to then refill that wealth. But what you do find is somewhere between 60 and 70% are probably less than 250,000. Yes. Yeah. Dollars in impact. Yes. However, coming to also things, you need to have quick wins. And quick wins don't necessarily have to be monetary. They can be, I've reduced the number of calls coming into the call center, but they're proof points for the organization to actually believe that they're on a journey, that the journey is possible, etc. And so I think giving that type of momentum really enables transformation to sort of go from the starting line to being in the race. As we started transformation today, where's the one we started five years ago? Yeah. And the implication of the, yeah, it's me. Yeah. And you know, what do you think it does to how you think of a drasmer? Yeah. It is that killer question. And I, I truly believe that your ambition should be way more than it was previously. And I don't mean just ambition in efficiency. I mean ambition. So if I go back to my principles of speed, simplicity and all these things, reliability, etc. You can just see the way that AI builds into it. I think, of course, there's a lot of talk about generative AI. You know, if you just think of AI as a process enabler, and actually the ability to take process, I mean, whether it's transcripts from contact centers, whether it's analyzing call inbound calls, and how do I need to flex the organization to be able to reduce those up point of need? I mean, all sorts of things. Well, actually, where it's probably of the greatest benefit in my view is in the high cost, what do I mean by high cost? Well, your branch network actually individuals are relatively inexpensive in finance, in risk, in these areas, they're expensive in compliance in AML, etc. AI can revolutionize. Yes. So it's kind of coming through in our experience now as we can have due transformations. I think you talked about a 27% activity game. I think you would say now you shouldn't be looking at 3540, but it's not just a cost piece to your point. You shouldn't be looking at customer experience, employee experience, reliability, control, all these holistic dimensions of transformation can come through. So I give you a perfect example as well of where it's not nothing to do with efficiency, but if you used it in order to actually look at where your performance is against budget, etc., etc. The predictive capability of the analytics that come out of that, that's using it to the next level. So I think you'll find that management time should become much more focused around how are we going to manage the organization and really move at speed and be able to enter markets, do things. So actually I'm very positive. And I think, yeah, I think your numbers, if you started in history today where we were back then, today I would have said that would have been a 45 to 50% not at 27. This has been very helpful, but of course you need to get started. So what are some of the considerations that CEO CXOs need to have as this set out on this journey? So what are the things that you do in the first three months before you start thinking about first three years? Yeah, so it's one thing to have a bold ambition. It's another to bring your team with you. So I think the whole bit really to start with is how do I really try and get us on the same page and get people to believe? And so I think this comes back to this combination of the first thing one of the things that I employed was I actually utilized a set of sort of training and discussion with MIT with my leadership. And I did it on a basis of showing what are the new business models? What's a platform business? What's a marketplace? So that you started to lift people out of a day today. And actually doing it really helped because suddenly people became quite different in their mindset about transformation and what was possible. And then the issue is you need to start to give them some belief. Because they start from a point of view that even that vision now looks much better. I think I like it. I think I can get engaged with it. It's that ability to be able to truly lift every stone, take everything apart and compare it to the best. When I looked at our people, we got to about a hundred. They were probably going to go to about 150 million in their mindsets. Yes. We ended up 650. And in that first three month piece of work, we got to about 538. And what that enabled me to do was then to take the management, take them off site and actually start to really kick the tires of that. So but what I found was at the end of that period, the management came away, still feeling like it would be really tough. But no longer saying what we can do 150. And it may be that they only thought they could do 350 out of the five that it didn't matter. Right. You were on the journey. Fundamentally, I think you've got to help them with the how. And that's why the dedication of the management of taking their top talent is a critical factor. Because they get a belief from that. I know it's end. Those people spread belief back into their management team very rapidly. It's not me saying it. It's not the business head or the functional head saying it. It's people at a level where actually they can relate much better. So senior managers managers, yeah, but they also relate upwards. Thank you. That's a very helpful summary at the end. I think CXOs can take inspiration on the journey I've had. So Nathan, thank you very much. I think you're very welcome. You know, our clients will get to hear from this and learn from this. Thank you Nathan. Thanks very much.