Photo : Courtesy
Given the challenges and opportunities of the digital transformation and its inevitable impact on the business model of banks, it is natural that it also impacts their governance. This impact can be based on the two dimensions of governance mentioned above. Firstly, a cognitive dimension, which concerns all the actors of the governance system: the board of directors, the management and also all the employees who must adhere to the new strategic digital vision of the bank and the new business model that results from it. Then, a disciplinary dimension dictated by the radical transformation of the relationship of trust (Board of Directors / Management) introduced by the "block chain" technology which could call into question the notion of opportunism advocated by the agency system as the basis of the disciplinary approach to governance. Directors provide leaders with cognitive resources while supporting them in decision making, particularly in difficult times. The ultimate goal is to create value for the company and its stakeholders.
Indeed, the "Cognitive" model is based on "knowledge-based" cognitive concepts which replace the notion of "information" by that of "knowledge", by reducing, in its conception of efficiency, the asymmetries of "knowledge" and not of "information". According to this model, governance should promote value creation through cognitive leverage, including organizational learning, skills and innovation. The disciplinary approach has been limited to reducing agency costs between the different stakeholders, leaving aside the productive dimension of value creation. Contrary to contractual and disciplinary theories focusing exclusively on the resolution of conflicts of interest and thus omitting the productive dimension of value creation, cognitive concepts approach the process of value creation in a radically different logic by focusing on the development of knowledge, the construction of skills, the capacity for innovation and the creation of investment opportunities.
Two mechanisms can be mobilized in the cognitive model: either the reduction of the costs of cognitive conflicts through better coordination between actors, or the creation of new productive opportunities. By considering the cognitive dimension, the system of governance must encourage the creation of "cognitive" value, a source of competitive advantage, though, for example, the construction of certain distinctive skills, the development of new know-how via organizational learning, the institutionalization of innovation, monitoring of investment and growth opportunities, cognitive coordination, etc. Moreover, the cognitive model is not intended to replace, but rather to complement, the financial and disciplinary model.
The impact of the digital transformation on banking governance. The digital transformation in the banking sector. The democratization of the Internet and mobile terminals in the early 2000s has profoundly changed the business ecosystem and consumer habits. Banks, like other industries, have been considerably impacted and have found themselves forced to adapt quickly in order to survive and remain competitive and to adopt a new business model in the face of this digital revolution. Indeed, fintech is gradually occupying a field, hitherto reserved for banks, using new technologies to rethink financial and banking services.
Digital transformation and banking model: The digital transformation has opened a breach for new entrants (Fintech) on the one hand and has forced the bank to meet new customer expectations and reduce costs to improve profitability on the other. Indeed, digital technology, which is both a threat and
an opportunity, has led to the emergence of a new banking model: connected, intelligent, agile and social, in which the traditional branch and the adviser play a different role in the relationship with the customer. Even if they visit their advisor less regularly, customers remain attached to their local branch. Indeed, they want the best of both worlds, physical and digital, with less frequent agency contacts, but with higher added value. This has certainly encouraged the resistance of the classic "brick and mortar" model, but at the same time, it has also helped the new "click and mortar" model to survive. Banks must therefore adapt and integrate digital into their strategy, or risk disappearing in favour of new players such as Fintech, which are more aggressive and reactive and in tune with the digital revolution. All these factors are pushing banks to change their business model through various mechanisms such as the rationalization of the banking network, the digitalization of the service offer, the modernization of information systems, and the search for new sources of income, particularly by exploiting Big Data.
Impact of digital technology on the Bank's business lines: As part of the digital transformation that has pushed the bank to adapt and transform its business model, processes and organisation, it is clear that the banking business is being impacted. Several business lines are being created on the basis of the existing business model but integrating the digital component. Firstly, the appearance of a new function, the Chief Digital Officer, whose role is to steer the digital transformation. Next, the Marketing department will be impregnated with the data flows collected by big data through the new job of data-scientist. In the same way, the "HR" department is deploying change management consultants to better support the impact of digital technology on the organization of employee work, particularly with the launch of robotization projects. Similarly, the risk management businesses will have to adapt to comply with new regulatory constraints and manage the risks inherent in digital technology (cyber-attacks, e-reputation). The communications sector will also undergo a revolution, with multi-channel operation possibilities making any action highly visible. The stakes of the digital banking transformation In the future, banks will have to meet several challenges related to Fintech (Block chain, Bitcoin virtual currency, cybersecurity, artificial intelligence, etc.). On the other hand, there are three major constraints that could hinder their progress: Regulatory constraints: their weight will increase further, Human constraints, Constraints on "information" management.
Digital technology on banking governance-cognitive and disciplinary: The crucial role of banks in the collection of savings, the financing and development of enterprises and economic growth, the issue of governance is crucial for the soundness and development of banking institutions and, consequently, for the financial stability and health of the economy of a country as a whole. Given the challenges and opportunities of the digital transformation and its inevitable impact on a bank's business model, it is natural that it also impacts its governance. This impact can be evaluated based on the two dimensions of governance. Firstly, a cognitive dimension that concerns all the players in the governance system: the board of directors, the management and also all the employees who must adhere to the bank's new digital strategic vision and the new business model that results from it. Then, a disciplinary dimension dictated by the radical transformation of the relationship of trust.
Digital banking transformation and: cognitive governance: Digital technology now covers the entire value chain and all banking activities. As a result, the bank is forced to adapt by being more agile, more flexible and to interact differently with all its stakeholders. This digital transformation is certainly a source of opportunities that must be seized, but also a source of new risks that must be controlled. It is a new challenge for the bank, its management and its Board of Directors to seize these opportunities and manage these risks with a view to creating value. Thus, digital transformation, which brings with it challenges in terms of performance, organization, cultural evolution and risks, is a strategic issue. It must therefore be dealt with at the highest level of the bank, discussed and debated. The digital transition currently at work in the economic and social ecosystem seems to mark a paradigm shift. Administrators must therefore become aware of the importance of what is at stake in this transition. The board of directors, being the main governance mechanism, is directly concerned. First of all, the board must understand how this major transformation affects the bank itself. It is a question of understanding its business model, without which the board cannot exercise its primary function of determining strategy. It is also its other function, which is to assess the risks associated with cyber-attacks, the protection of the bank's data, and the risks associated with the adaptation of employees. Even the nature of the information that is given to the board to feed into its decisions is changing, and it is necessary to know how to interpret and sort it, especially with the use of big data. A second impact of the digital transformation on cognitive governance concerns.
Digital and new risks associated: One of the roles of the banks management to monitor the effectiveness of internal control and risk management systems. New digital challenges are redrawing the bank's boundaries in a context of increased competitiveness, globalization and openness. The Bank must understand the new risks involved, particularly in terms of information systems. The Board of Directors must therefore ensure that, considering this changing environment, the bank adapts its internal systems to promote awareness of the new digital risks in order to adapt its risk management system accordingly and to take on board the evolving regulatory framework. IT are, in themselves, carriers of "classic" risks inherent in their operation, availability, control and mastery (theft, data alteration by employees or malicious programs, denial of service due to network saturation, etc.).
Digital transformation and the levers to be adopted to succeed: All the banks have to be unanimous as to the elements that are essential to carry out the digital transformation. It is about having a relevant strategic vision, clear plans in terms of actions, and common and shared objectives. The commitment of the teams is essential. The latter requires a "global" movement that will only happen if the company has the means both in terms of human resources (recruitment of suitable profiles and skills development and training of employees) and in terms of strong financial mobilization. All this will be accompanied by change management, clear governance approaches and the deployment of agile methods. Finally, digital transformation only makes sense if it is felt as a win-win situation between customers and the bank. Thus, all banks agree that the customer and especially the customer experience must remain the focus of attention. At all the levels questioned, it is accepted that the evolution and transformation approach can only be effective if it is collective. Therefore, this collective approach also includes the involvement of the customer in the thinking process. This will guarantee the anticipation of customer needs in all reactivity and innovation.
Digital Bank and Governance: It has changed consumers’ digital behavior and forced customers, who once resisted online banking, to adopt digital banking apps as their new default. These behavioral changes have accelerated for digital-first banking while prioritizing a strategy to derisk and encourage innovation. This firmly shines a spotlight on the importance of Corporate Governance in Digital Banks, from their inception. Digital Banks need to get the governance framework right from the start. A strong governance team will build the right foundation for establishing a Digital Bank that ensures key regulatory obligations and risk management frameworks are fully understood and robust set-ups are in place. Risk management, Cybersecurity and Compliance will be a major focus, levelling the playing field between potential Digital Banks and the incumbents. An understanding of the surplus of risks these banks will be exposed to is essential, and a robust risk framework needs to be established. Analytics in risk management will be essential in the data-driven environment, and inevitably cybersecurity will be a critical risk area in Digital Banks because of the rise in the rate of cybercrimes in the banking sector. Risk management has evolved over the years and many are leveraging the latest technology to protect their data and customer base while reducing friction. Digital Banks must adopt zero-trust infrastructure and ensure multi-level security procedures are in place. Managing risk on the second line across InfoSec and cybersecurity will have even greater importance.
From a compliance perspective, finding the balance between regulations and technological innovations will be vital in sustaining growth in the industry. The key regulatory pillars and obligations in establishing a Digital Bank would be no different from that of a traditional bank. Functions like ethics, conduct, product compliance, AML, transaction monitoring and fraud risk/operations management are the essentials. Digital Banks need to adapt to the evolving landscape and adopt modern electronic Know Your Customer (eKYC), anti-money laundering (AML) and identity verification technologies. The adoption of such solutions will not only allow them to respond to the new risks arising from digital solutions, such as online identity fraud and account takeovers but will also allow them to meet customers’ demands for a seamless onboarding experience. Additionally, the need to adopt smart and efficient eKYC solutions is even more critical for Digital Banks which operate solely digitally.
TDM/FMT
