Breaking digital gridlock

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Breaking Digital Gridlock

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Breaking Digital Gridlock

IM P R OVI N G Y O U R BA NK’S DI GI TA L F U T U RE

BY MAKING TECHNOLOGY CHANGES NOW

John Best

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Copyright © 2018 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Names: Best, John, 1970– author.

Title: Breaking digital gridlock : improving your bank’s digital future by

making technology changes now / by John Best.

Description: Hoboken, New Jersey : John Wiley & Sons, Inc., [2018] | Includes

bibliographical references and index. |

Identifiers: LCCN 2017060722 (print) | LCCN 2018000084 (ebook) | ISBN

9781119421993 (pdf) | ISBN 9781119421924 (epub) | ISBN 9781119421955

(cloth)

Subjects: LCSH: Banks and banking—Technological innovations. | Banks and

banking—Information technology. | Bank management. | Information

technology—Management.

Classification: LCC HG1709 (ebook) | LCC HG1709 .B48 2018 (print) | DDC

332.10285—dc23

LC record available at https://lccn.loc.gov/2017060722

Cover Design: Wiley

Cover Image: © 45RPM/iStockphoto

Printed in the United States of America.

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Contents

Foreword xi

Preface xv

Acknowledgments xxi

Introduction xxiii

Five Myths about Going Digital xxiii

John’s Story xxvi

Part I Processes 1

Chapter 1 How to Improve Internal Processes 3

Regulatory Gridlock 3

Regulatory Gridlock in Action 4

The Risk Spectrum 5

Flawed Bank Processes 7

Continual Improvement 9

Project Management 10

Waterfall 10

Agile 11

When to Use Agile versus Waterfall 13

In-house Staff and Outside Vendors 13

Process Management 16

Team Organization: Centers of Excellence 17

Cultural Considerations 18

Part II Technology 21

Chapter 2 Tech Evolution versus Tech Revolution 23

Evolutionary Technology 23

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vi Contents

Evolution in Banking 25

True Revolution 27

The Financial Revolution 29

Chapter 3 The Cloud 35

The Financial Cloud 36

What Are You Afraid Of? 39

It Is Hard to Control 39

It Is Insecure 40

Data Will Be Shared with Others 40

It’s Unreliable 41

It’s Super Expensive 41

There Will Be Staff Cuts 42

The Internet Could Go Down 43

It Is a Direct Expense 43

What about Our Data Center? 44

The Cloud Won’t Conform to Regulatory Needs 44

The Cloud Kills Baby Seals 44

Types of Cloud Services 45

Infrastructure as a Service (IaaS) 45

Software as a Service (SaaS) 46

Platform as a Service (PaaS) 46

Major Players in the Cloud 47

Amazon Web Services 47

Microsoft Azure 48

Google Compute Engine 48

Commonalities between Each of These Platforms 48

How to Choose? 49

Capital One in the Cloud 49

Strategies for Moving to the Cloud 49

Note 52

Chapter 4 Artificial Intelligence 53

Computers Will Be Trainable 53

Machine Learning: Familiar Names 54

Artificial Intelligence versus Intelligent Augmentation 56

The AI Threat 67

Notes 70

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Contents vii

Chapter 5 Application Programming Interface (API) 71

Why Create an API? 71

Getting Started 83

For the Technology Organization 83

For the Services Organization 83

The Second Step 84

The Third Step 84

Chapter 6 Blockchain and Cryptocurrency 87

Bitcoin: A Brief History 87

Decentralization 88

Security 90

Blockchain 91

Permissioned Networks 97

How to Use a Distributed Ledger 99

Part III Security 103

Chapter 7 Sovereign Identity 105

Trust Frameworks 110

Encryption and Data Security 111

Sovereign Identity in Practice 113

Weaknesses in the Current Identity System 115

Phishing 115

EMV 115

Consumer Privacy Concerns 116

An Opportunity for Financial Institutions 116

Note 123

Chapter 8 The Hacker Threat 125

The Artificial Intelligence Threat 127

Planning for the Worst 128

Operation Ababil 132

DDoS Attacks 133

Be Afraid When Things Are Down. Be Very Afraid When Things Are Going Well 134

Security as a Process of Innovation 136

The Equifax Breach 137

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viii Contents

Scenario Planning 141

Scenario 1: NSA Backdoor 141

Scenario 2: Ransomware 143

Scenario 3: Cyber Infrastructure Attack 144

Scenario 4: Internet of Things Breach 145

Notes 147

Part IV People 149

Chapter 9 The Digital Change Is for Everyone 151

Human Resources 151

Remote Employees 151

Evaluations 153

Career Paths 153

Incentives and Compensation 154

Recruiting 154

Training 155

Dress Code 157

Facilities 157

Workspaces 158

Wi-Fi 159

Equipment 159

Meet-ups 160

Accounting: Software Depreciating 160

Chapter 10 Who Can Break Gridlock? 165

Common Symptoms of People Problems 168

Lack of Consistency 168

Cost and Time Overruns 168

Human Solutions 169

Chief Digital Officer (CDO) 169

Chief Analytic Officer (CAO) 170

Data Is Money 171

Part V Culture 175

Chapter 11 Culture and Innovation 177

Where Does Culture Start? 178

Culture Breakdowns 180

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Contents ix

Culture and Talent 181

Steps to an Innovative Culture 185

Collaboration 186

Communications 188

Rewards and Evaluations 191

Achievement versus Alignment 191

Notes 194

Chapter 12 Culture and Technology 195

A Tale of Two Cultures 195

Having It Your Way—BYOP 200

Part VI Strategy 205

Chapter 13 The Long View 207

The Problem: Banking and Financial Competitors 208

Threats: The –tions 209

Interchange Compression 209

Cannibalization 211

Digitization 212

Mobilization 212

Disintermediation 213

The Reality of Change 213

Changing Features or Services 215

Cost 217

Service 217

Security 217

Features 217

How Solutions Can Fail 218

Note 224

Chapter 14 Digital Governance 225

Review Proposed Products and Integration 228

Change Control 229

Review Security 229

Accountability 229

Business Continuity 230

Schedule Approval 231

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x Contents

Build versus Buy 231

Final Approval on Recommended Vendors 232

Data Governance 233

Data Quality 236

Data Security 238

Data Duplication 238

Data Engineering 239

Chapter 15 Using Data Analytics 243

Look Ahead 244

Credit Card Usage 246

Usage Monitoring 249

Digital “Why” 101 250

Digital Marketing 252

Chapter 16 Big Data and the Zombie Apocalypse 259

Apocalyptic Risk 261

Staffing in an Apocalypse 261

Creating Value 264

Digital Insight and Intuition 265

Data Is Valuable 266

Data Is a Discipline 269

Types of Analytics 273

Note 278

Conclusion 279

Cultural Issues 281

People Strategy 282

Process Changes 283

Technology 284

Security 286

About the Companion Website 289

Index 291

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Foreword

Brett King

International Bestselling Author of Augmented: Life in the Smart Lane and Bank 4.0

Whenever you have a book that rounds out with a chapter entitled

“Big Data and the Zombie Apocalypse,” you know you’re in for an

unconventional ride, and yet I have to say the conclusions behind

John Best’s debut tome are undeniable and sound.

In a world where almost every industry on the planet is being

transformed in some way by digital technologies, the question always

seems to be can the incumbents do enough to survive? In the case of

music, books, retail, transportation and video, we’ve seen enormous

disruption through the emergence of pure-play digital competitors.

Initially, this was through so-called e-commerce players during the

dot com, and in 2007 it started all over again with the emergence of

the iPhone and its App ecosystem. Today we’re talking blockchain,

artificial intelligence, robotics, energy transformation and gene ther￾apy, but the pattern is the same. It’s been the same since the luddites

smashed up the steam machines, the first US transcontinental tele￾graph line killed off the pony express, and automobiles disrupted

horses.

Faced with potential disruption many organizations delay a

response, hoping upon hope that they’ll be “different”, and when

the inevitability of change is evident, the organization is simply

unable to adapt fast enough. Best tackles this from a practitioner’s

point of view, of someone who has been in the trenches trying to

enable such transformation. He starts with the classic psychological

myths that inhibit a reasoned response in the early days of the digital

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threat, and then details the building blocks of resistance and how to

circumvent those processes, legacy behavior, thinking and systems.

I’ve seen many of the organizational symptoms Best identifies

over and over again. Even today when we’re seeing the emergence

of so called “unicorns” in financial services such as Ant Finan￾cial, Stripe, Klarna, Credit Karma, Transfer Wise, Ripple, SoFi,

LuFax and many more that could end up dominating in their

categories, and where they’ve mostly already overtaken incumbent

contemporaries – there’s still uniform denial that there’s any

“threat”.

Breaking Digital Gridlock, however, is about just that. It’s about how

you truly transform your organization. We hear a lot about digital

transformation in the current day and age, but if you were to ask

me (and I get asked this constantly) which banks or financial insti￾tutions were the best examples of true transformation, I’d struggle

to identify a handful. Why? Because if you want to compete against

the FinTechs and Technology (or TechFin) companies gunning for

you, competing as a traditional player is like having both hands tied

behind your back and your shoelaces tied together in a 100-meter

world championship sprint final. If you’re going to try to win or just

survive in the digital world – you have to think and act differently.

From simple innovations like remote check deposit, through to

cloud, AI, Blockchain and Crypto, Best meticulously explains what

the evolutionary or revolutionary technology impact is, why you

should be worried as an incumbent player, and what your options

are. Later in the book when explaining API banking and PSD2,

Best uses the analogy of the McDonald’s brothers faced with the

possibility of the franchising model and dismissing it as impossible

or potentially that it would undermine their core business. Banks

and FIs have some choices in this disruptive landscape, but culture,

leadership, skill sets and approaches must all be revamped. It takes

enormous will to embark on such a transformation.

In the final section around strategy, Best asks the fundamental

question that all incumbents will need to ask themselves over the next

5–7 years in order to survive. Are you a Technology Company that delivers

Financial Services? Or are you a Financial Services Company that delivers

via Technology? Best argues that many FIs in the midst of digital trans￾formation get stuck in the middle. They’re certainly not technology

companies because they don’t have the experience, pedigree, people

and technology to honestly stake that claim. But if you’re going to

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compete against Unicorns who are born of tech, you can’t do it as a

part-time, conflicted technology wannabee. You need to step up your

game – bigly.

The conclusions of Breaking Digital Gridlock are pretty clear.

If you want to survive you’re going to have to break as many of the

typical gridlock barriers as possible, and you’re only going to be

able to do that through strong leadership, culture and capabilities

that don’t exist in your organization today. Best probably made the

case for me that most organizations talking about transformation

today are only just starting on a very long journey, and many of

them simply are not capable of making enough changes quickly

enough to be ultimately successful. However, what Best shows in his

book, is that success is possible if you’re willing to commit to a truly

transformational approach.

As a teen that started his career essentially coding on a VIC-20,

Best has seen the revolution of the internet, mobile, AI, cloud and

blockchain through the eyes of a technologist. Today he represents a

guild of experts and specialists that you will need to rely on every￾day if you’re financial institution is going to make it. It’s for that

reason alone that at the boardroom Breaking Digital Gridlock should be

required reading. It will give you a nice, neat shopping list of projects

you need to embark on to survive. If you don’t, you’ll miss the party.

My guess is if you’re a CxO reading this you’ll say, of course we

want to survive the fintech revolution. Ok, then. Time to get started.

Read on . . . .

Brett King

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Preface

grid⋅lock

grid läk

noun

noun: gridlock; plural noun: gridlocks

1. a traffic jam affecting a whole network of intersecting

streets.

Have you ever been in serious gridlock? When I was working in

California, I would often have to drive from Pasadena to Yorba Linda.

The 40-mile trip often took me three to four hours. Many days I would

find myself on a freeway at a dead stop, sometimes for hours. It’s a

helpless feeling to sit there in your car, not moving. You are stuck

and have no idea when it will clear up. Perhaps most unnerving is

that you don’t always know what is causing the gridlock.

While you settle in for the long wait, you start to look around.

You get familiar with the people in other cars. Sometimes there is a

weird moment where you catch them looking at you, and then you

quickly look away (after all, it’s not good gridlock etiquette to stare).

The smell of the exhaust forces you to recirculate the air in your

car. As you inch along the route, you suddenly find yourself reading

every street sign and examining all of the details of the freeway that

you wouldn’t normally notice. Every now and then, you get just a

glimpse of hope because the brake lights in front of you disappear

and you move forward 10 or 15 feet and you think, “This is it! We

are moving again!” Sometimes you even get up to 15 or 20 miles an

hour and you begin to celebrate with your gridlock mates, remote

high-fiving and smiling, mouthing the words, “We’re moving!”—only

xv

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xvi Preface

to have the brake lights ahead glow red. You’re stuck again. The small

celebration you were just having with the guy in the BMW two lanes

away is suddenly over. Meanwhile, someone somewhere is waiting for

you to arrive, and there is nothing you can do to get there any faster.

To me, that’s the same feeling as working in an environment

where you can’t seem to move forward. Every time you get enough

steam to move ahead, something or someone thwarts it and you are

back to being stuck in traffic.

What Is Digital Gridlock?

Digital gridlock is made up of several different kinds of paralysis that,

when combined, cause a slowdown or a dead stop in your organiza￾tion. There are six organizational areas where paralysis can emerge:

1. Processes: Systems and workflows must keep up with techno￾logical advances to prevent digital gridlock.

2. Technology: As technology advances, it does more than affect

processes; it also fundamentally changes the way people do

business.

3. Security: A lack of preparation for security breaches can leave

an organization vulnerable to attacks. This can not only put

customers at risk but also lead to legal and financial liability

and a damaged reputation.

4. People: The right people must be in the right positions for an

organization to succeed.

5. Culture: Poor communication and lack of trust are two major

symptoms of cultural paralysis. This prevents organizations

from making the changes they need to.

6. Strategy: Governance, planning, and execution are at the

heart of strategy. They will keep your organization moving

forward.

This book is broken into six parts, each one corresponding to a

particular area where organizational troubles can arise.

Riskphobia

Riskphobic leaders have a default response to every new idea put on

the table: No! This is interesting because measuring and deducing