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Digital transformation insights for legacy financial institutions.

By Michael Baresich, CIO, Ally Financial Inc.

Financial services companies today are shape-shifting into technology companies. Their success increasingly depends as much on enterprise software and mobile app development as on finance.

But the monumental journey of this digital transformation typically begins with small steps, even for an online-only bank like ours, whose steps can be traced back to the financial crisis.

Cost Cutting: A Balancing Act

When I joined Ally Financial four years ago, we were still digging our way out of the after-effects of the economic downturn. Ally has its roots in the former GMAC, the General Motors subsidiary that for more than 80 years provided car buyers with financing through GM dealers. GMAC started a banking business in 2000, and in 2010 both the banking and financing businesses were rebranded as Ally Financial. In 2014, Ally became a publicly traded company. Along the way, the business was battered by the 2008 economic downturn, which forced us to cut costs and become more efficient in order to survive.

But this test also provided us a tremendous opportunity to review our business model and find new sources of competitive advantage. While we continued our historical business of auto financing, we also reinvented ourselves as a digital, branchless bank. Even with bare-boned budgets focused on cost cutting and reducing corporate overhead, we continued to reimagine our business technologies to make the company nimbler and lighter.

As we increased efficiency, we made sure that a sizeable portion of the cost savings were invested in digital technologies to create innovative offerings and user experiences. We hired mobile and web developers to ensure our client-facing apps were world-class and invested in a flexible architecture to position ourselves for future growth.

As an online-only bank, we needed to be in the forefront of digital interfaces and were early adopters of biometric fingerprint recognition technologies like Touch ID and mobile payment solutions like Apple Pay and Samsung Pay.

Seek Innovation Where It Is

Our unrelenting focus on digital innovation continues as we experiment with emerging technologies, including voice assist, blockchain, cloud, and data analytics. We have set up in-house lab to build new digital products, and we also scout for partners across a range of strategic areas.

Our recent acquisition of TradeKing is a good example. We had been evaluating  the rapidly evolving digital wealth management space for a while via an informal cross-functional study group. People from Ally’s core banking, corporate strategy, and technology functions went to the whiteboard to identify what kind of digital offerings would work best for our customers. In our evaluation of promising solutions, we were also considering whether we wanted to build in-house, partner with someone, or acquire.

The learning of our cross-functional team came in handy when the TradeKing opportunity appeared on our radar. We were already prepared with our research, moved quickly into due diligence and closed the deal swiftly. And this is typical of how we partner with our businesses. Our IT team is involved in every deal, right from research to due diligence to implementation and integration.

And it’s not just acquisitions. We are also working on building strong and long-term relationships with several venture capital companies, to get a sense of new and emerging technologies as well as innovative financial models in lending, investment management, and the client services space. We are partners with one of the largest accelerators in Silicon Valley and also participate actively in fin-tech accelerator labs in New York and Charlotte, where we have sizable operations. We seek digital innovation wherever we can find it and then act as an evaluator and catalyst for the rest of the organization.

Look Before You Invest

As we seek opportunities for innovative digital solutions, though, we try to avoid getting lost in a maze of the latest shiny technologies. It’s just as dangerous to invest lots of time, energy, money, and other resources chasing something that’s not really relevant to your firm as it is to miss out on an opportunity altogether. 

I think the best way to avoid this is to examine each technology on two parameters. The first is how it will create value for our customers. The second is where it is in the hype cycle, in terms of maturity, business value, security, and readiness for adoption.

Consider blockchain, for example. We believe that it holds great promise for control and distribution of digital assets.

But we also realize that it is difficult for a single organization to reap benefit from it. Blockchain will take off only when a consortium of companies, regulators, and other organizations adopt it. Otherwise, it’s like buying a fax machine and not having anyone to fax to. So, we are seriously studying and investing time and effort in blockchain, but we’re likely to wait until some practical use cases come into focus and we see early signs of an ecosystem developing around it.

Another area of interest is the human-machine interface. We are keenly watching new ways our customers might interact with smart devices. We’ve already seen people move from desktop browsers to downloadable apps on mobile phones and tablets. And now we are wondering if our customer will continue to interact with us via websites and apps or whether customers will want to access our products and services using chatbots and/or voice interfaces Will devices like Amazon Echo and digital assistants like Alexa, Siri and Cortana become the dominant interfaces?  We are exploring several such questions to redefine how our customers interact with us.

In assessing new technologies, we try to follow the money. Our relationships with venture firms are important is because the capital flows show us where Silicon Valley is investing. In turn, their dialogue with us shows them what we’re willing to  invest in and adopt. The bi-directional information flow helps create a market discipline that dampens the hype cycle a bit. 

Having been born in the digital space, we believe we have an advantage over legacy banks. But that’s not enough. To stay ahead in the game, we need to work on the right technologies that offer the right customer experience at the right time and place.

 

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Start with the Basics

As CIOs and their organizations scout for innovations to survive and thrive in the digital revolution, it’s easy to lose sight of the fundamentals.

The first step in any digital transformation is to ensure that automation and digital capabilities are delivering efficiency and controlling costs. It sounds very basic, but we always looked at that as the foundation — if it’s not in place, there is nothing to build on.

You need to demonstrate to your board that you are driving efficiency hard enough to meet industry best practices and standards. It’s equally important to show them that the company’s information and infrastructure is secure.

Once the Board is convinced that the IT house is in order and that the windows and doors are locked, it’s time to start measuring and describing IT costs in terms of investments, not expense items.  Once IT gets measured, it’s easier to show how it is managed and how all IT investments are driven by business needs. It’s essential that these investments have business sponsors, who can advocate for the programs. Finally, having distinguished between costs and investments, you have to show what the returns are on the investments, while honestly sharing what went right, what didn’t, and what you’ve learned.

Only when these basics are in place is it time to pursue innovation.