CTO and Banking Industry Technical Leader, Public Speaker & ARYZE Advisor Pål Krogdahl is a technologist at heart with a curious mind.

ARYZE spoke to CTO & Banking Industry Technical leader for IBM, a Public Speaker Key Speaker, Author, Racing Car driver and Podcaster, Pål Krogdahl. He shared his thoughts on technology, banking business models, digital transformations, Fintech, and the complexities they face when navigating a highly regulated industry such as finance. Pål has a background in Electronics Engineering from West Herts College in Hertfordshire, England and before starting his long career at IBM, he performed circuit board designs and repaired industrial printing machines.

When asked about what ignited his strong passion for technology, he responded:

Technology has always been a focus for me. When I was a kid, I annoyed my parents because I took everything apart. For instance, I recall the time when I got a remote control car as a present. Before even putting the batteries in, I just took the whole thing apart because I wanted to know how it worked, what all the pieces did, and how I could improve it. I also remember visiting my mom´s workplace once when I was a kid, and while I was running around the corridors, I found an old fax machine that fascinated me. I was lucky because it turned out to be broken, so they let me take it home to try to fix it, and once more, I took the whole thing apart to learn the technology behind it.

Pål is a father of 3 fantastic children and when he is off-work he devotes himself to spending quality time with his loved ones. One of his children shares his passion for technology and Pål gladly helps him with programming tasks. As a racing car driver, his innate enthusiasm for engineering is also present inside of him every time he gets to his garage and plays around with his car by discovering new ways of improving it.

When asked about how he deploys his knowledge in technology when upgrading his racing, he replied :

I spend a fair amount of my time on data acquisition via sensors and IoT devices. I am attempting to IoT enable my racing car as much as possible to improve both my car and my driving; not always successfully though, most of it is open-source and of course, I also utilise some of the relevant cloud capabilities that IBM has to offer in the area of IoT and edge computing.

Banking, technology and the notion of money

The modern banking industry as we know it today originated in Italy in the 11th Century. This is why most words that are used in banking today have their genesis in the Italian language. The word “bank” for example, also means bench in Italian and the reason why modern banks share their name with benches can be traced to the history of how the first banking transactions, namely money exchanges began. Money traders and customers did their business openly on the street sitting on benches, hence why the exchange of currencies and coins in Florence was called “small benches”.

The banking industry has been very stable and stagnated since its origins in early Renaissance. However, Pål believes that the emotional subject of money mixed with uncertainty and unpredictability, generates an exceptionally interesting psychological paradigm in most people, and for some time now there has been an underlying force that is working to disrupt the banking industry.

But what is exactly fuelling this engine for change that the banks need to deal with nowadays ? Pål responded:

This underlying force clearly manifests through the emergence of technology and the need for innovation, driven by customer demand. That is what I find fascinating. I love taking technology and disruptive business models and trying to use those to enable the banks to help us build better financial stability for the human race

The oldest banking institution dates back to the time in which banks originated. Monte de Paschi Di Siena, was founded in 1472 and still operates in the world. But how can a business manage to survive so long throughout history ? The answer to this question, is likely connected to the intrinsic nature of money and value for humanity, which transcends time, cultures and civilizations.

When asked about banking and money, Pål answered:

Banking is to me, currently the most fascinating and disrupted industry that we have and it cannot be understood alone without the notion of money and value. When you think about it, banking touches every human on the planet but at the same time, it is reserved for a minority of citizens on planet Earth. There is still a vast amount of unbanked individuals and this is something that we must change in one way or another, and why I am passionate about what ARYZE is trying to do.

The impact of COVID-19 on technology

The ongoing advances unleashed by technology have provoked a gradual but steady shift from an analogue world to a digital one, leaving banks with two kind of customers, the digital native and the digital immigrants. Essentially this means that on one side, there is an entire generation that was born in the era of omnipresent technology including computers and the internet. Yet, on the opposite side, there are those that were raised prior to the digital age and must now adapt.

In the same way in which the digital immigrants have had to adapt to the current technology, so has the banking industry been pushed to reshape itself by digital native customers demanding instant gratification. This natural process of progression has particularly been accelerated by the COVID crisis, because there is a fundamental liquidity issue facing most banks, and their customers, as they default on their loans and mortgages payments. Right now, banks are more compelled than ever to finding ways of engaging with their customers in a more digital manner, while at the same time finding uncovering novel ways to reduce costs, increase security and reliability.

When asked about how can the banks achieve this, Pål replied:

Cloud is a very good platform to enable that but at the same time, it also brings new challenges and risks with it, such as cyber-crime, and a growing list of regulations and compliance demands. This is why it is important for large corporations that operate in particularly regulated industries to work with a well-established Cloud vendor like IBM. For instance, last year in collaboration with Bank of America, IBM developed an industry-first platform which we have named “The IBM Cloud for Financial Services“. This public cloud platform leverages the highest levels of encryption certifications available today, essentially it is the worlds first Financial Services Ready public cloud. In addition to offering a secure cloud platform, we believe it is equally important to build a trusted ecosystem around it, and that is why we are exited to announce that we have a growing list of partners who have joined the ecosystem to date. Together we are working to create a secure financial services ecosystem where banks, ISV partners and SaaS providers can define, and monitor their security and compliance obligations and transact with confidence. We also provide a wide variety of co-creation opportunities for our partners that join this growing ecosystem.

Banks must navigate a complex space between digital native customers demanding instant gratification and the compliance requirements brought upon them by the intensifying amount of regulations. This heightened consumer expectation for ever-increasing faster response times, along with tailored solutions and secure instant transactions puts pressure on financial institutions.

Banks face a unique obstacle when it comes to balancing the necessity for this continued innovation and the growing focus on regulatory compliance. As the need for digitalisation continues to disrupt the banks, they are turning to the benefits of hybrid cloud. They need to have the flexibility and elasticity that a hybrid public cloud can offer to drive new innovations. Nonetheless, they need one that is tailored to their industry and helps them with their compliance. This matters a lot because financial institutions, as I see it, are one of the world´s most critical organizations if we consider the transactions they enable form the backbone of the world´s economy, and at the end of the day, the consumer needs confidence that the data that they hold and each digital transaction that they power, for you and my family are successful, secure and compliant.

The Data-Enabled Client

Both banks and fintechs are really good at just giving consumers tools and products, but they are not necessarily very good at advising and giving advisory capabilities, which increases uncertainty and distrust. A McKinsey study estimates that around 80% of transactional operations, as well as up to 40% of strategic tasks will be automated in time, which will leave the operations staff with a totally different set of activities, thus requiring different skills than the current ones.

Pål is convinced that In order for banks to enable the client into making well-educated decisions, they must first provide them with available data and available insights in a hybrid online-offline capability where future data-enabled clients of the banks are enabled by the bank through their digital channels and the data that the bank has on them. In this way the data-enabled client would be able to make well-informed decisions supported by the bank. When asked to elaborate further on the importance of this notion, he replied :

Bankers tend to rely on their cultural heritage and are generally not very adept at transforming. Therefore, if the banks are to survive, it is critical for them to understand that the data-enabled client is where the future of customer journey is heading towards

Technology and consumers are pushing banks today into finding new ways of reinventing their revenue-generating mechanisms. This makes the scales shift from products to advisory services and banks must adjust their business model in order to accurately reflect this tendency in the consumer. In a study performed by Accenture, it is noted that those banks that seize the opportunities digitization presents can grow up to 30% in revenue by 2022. The models of client centricity engage with the customer in agile customer journeys that are unique to every individual, instead of utilizing sales funnels to get people to purchase products, going from a push model to a pull model.

The Agile Customer Journey

Banks need to digitise knowledge to support their customer and their relationship. But, how can an organization so devoid of any incentivation for trailblaizing, meet this necessity ? The answer lies in transforming the current business model of the banks, from an approach of product-centricity to client-centricity.

When asked about what this new organization model meant for banking institutions, he responded:

The current model of product-centricity in banks does not incentivize anybody into really becoming a trailblazer. Firstly, product owners that sit in banks are still making money on their products, their revenue has not gone down substantially enough for them to want to take a risk. Secondly, they measure their KPI´s on quarterly figures, but large digital transformations require a longer focus.

Why would they risk or bet their bonuses and current situation on an unknown that is not even supported by their own metrics?

They will be driven by the consumers and this shift towards a more client-centric approach means that it is critical for the banks to transform their business models.

Banks & Fintech : match made in heaven

It is imperative for the banks to change their architecture data and achieve more operational resilience. Pål believes that legacy back-ends must undergo a focused digital transformation, and although we have seen improvements in the customer relationship aspect, for example in the form of new mobile apps or new web front-ends, the further one goes down the organization, the less has this transformation been mirrored or continued. An important number of banks today have back-office processes that are still manual. The gap between the front-end digital channels and the back-systems and processes has widened in the new normal (post-COVID-19), bringing them to a breaking point. Pål explained:

I believe that for banks, Digital Transformation needs to start from a core systems and legacy back-end. Manual systems and legacy systems must catch up with the digital front-end. We have reached the point where there is a fundamental need to refocus on digital transformation.

But what is actually blocking the path for transformation ? We asked Pål and he replied:

Let´s look at it holistically, Banks are for the most part old enterprises and with an aging technology landscape. Additionally, most banks understand that they need technology to run their business, but generally lack deep understanding of current and emerging technology trends. Along comes disruption by Fintech and startups, take ARYZE for example, their uniqueness lies in a deep understanding of technology, and from a technology perspective, they believe they can do better than banks but then they hit a point where, as technologists they struggle. This is based on the fact that they do not generally comprehend the complexity of working in a highly regulated industry and what it actually means to work with the regulators.

In this compliant heavy industry, if a banker makes a mistake they can go to jail. The fintech guys don´t always think much about this, but they are fantastic with technology. The bankers are risk-averse in their culture and choose safety, so we need to bind these two groups together to unlock an acceleration towards digital transformation.

Agile customer journeys can arise from the marriage of banks and fintechs. There is more benefit in collaboration rather than competition when it comes to achieving these goals, because consumers are also driving this path of the internet and the technology of the internet is driving forward platform businesses, which can be illustrated in the growth of platform business models, such as Netflix for example.

When asked what makes banks and fintech a match made in heaven, he answered:

They both bring unique characteristics to the table. The banks bring their customer base data and trust, Whereas the fintechs bring fantastic ideas, the ability to execute and to take risks. Unless innovation is founded at the core of the bank, in every line of business with every organizational unit, you are never going to be capable of integrating these ideas back into the bank.

Never start with the technology first

Although Pål is deeply passionate about technology, he does not believe in technology for technology´s sake and particularly not when it comes to business. The reason for this is that technology without a business focus is just an experiment and thus is not aiding in driving any business success or advantage in any way whatsoever. Pål illustrates this point with the hype around blockchain technology.

Many organizations have taken on blockchain as in, “Now I have this new fancy hammer, what can I do with it now?” kind of way. This sort of thinking is astounding to me because when setting the blueprints of a tech-business model, you should not focus on any particular technology and build from it. On the contrary, you should focus on the actual problem that you are trying to solve or improve and let the technology flow. Identify the business imperatives that you want to solve , your direction and strategy first, and then take the technology as a vehicle to help you achieve the transformation or disruption that you wish to drive.

To learn more about Pål Krogdahl, connect with him on LinkedIn, or check out the website of IBM. If you’d like to read more about crypto, blockchain, and tokenization, check out our blog or visit our website.

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