Throughout his 40-year career, Nathan Bostock has seen the financial services industry change in big ways—and has used these changes to his advantage to usher in the next era of banking. He has led multiple full-scale transformations across several companies, including during his tenure as CFO and CEO of Santander UK and during his time as chief risk officer and CFO of the Royal Bank of Scotland. In this episode of Talking Banking Matters, McKinsey partner Basab Mitra sits down with Bostock to discuss transformations in banking and how digitalization plays a part in these changes, and what C-suite leaders should consider when approaching these initiatives. An edited version of their conversation follows.
Basab Mitra: Based on your decades of experience, how has banking transformed over the years? What are the trends that will shape the future of banking?
Nathan Bostock: It’s a long period to summarize, but I’ll pick some of the major items that have influenced banking. First is the influence of technology. CIOs [chief information officers] today will say technology is moving at the fastest rate they’ve ever seen. When I started my career, the center of retail was a branch. Today, you’re most likely getting served using mobile connectivity or a digital backbone, and most of your interactions will be driven by data.
Regulation has had a significant impact, particularly in the United Kingdom but also across the world. Regulation has influenced consolidation and cross-border acquisitions. Both of those have slowed significantly over several years. In the future, consolidation and cross-border consolidation will make a comeback. Regulation has localized banks, but to grow, they’ll need scale, so consolidation naturally has to come back.
Fintechs have also become more abundant, and they’ve driven new tech, which has forced banks to develop a transformation mindset to acquire new customers. Fintechs are here to stay. I expect them to grow. The ability to code is becoming much easier. The ability to access power processing remains available. The cost of entry, combined with AI, means companies can do more today than they could five years ago and can do significantly more than today in three or four years’ time.
There has also been a rise in other forms of corporate and institutional financing via capital markets, securitizations, and private credit, which diversifies funding and creates new forms of competition.
In the future, retail banks will need to focus on five principles to drive their transformation goals: speed, simplicity, reliability, personalization, and value. How fast do you respond to customers? How simple are you to deal with? Are you always there when I need you? Banks’ mindsets need to be centered on competing with everyone else’s ability to interact with customers.
Basab Mitra: How do you see CEOs and other C-suite leaders approach transformations, knowing this context?
Nathan Bostock: Banks that have customers have a fundamentally strong starting position, and so they need to strengthen the organization’s ability to adapt, be more agile, move at speed, leverage partners, and integrate technologies quicker. The designs of technology architecture and operating models have never been more important, which is something banks have historically deprioritized because often organizations are either siloed or come about by putting multiple acquisitions together.
Right now, there is competition for talent, which organizations need to think about. How do you make yourself attractive? Technical engineers and data analysts—people with new skills—are in high demand. Also, AI has become commonplace, and generative AI [gen AI] is something that people are looking to use more. Some people are now more advanced in their use of it. So companies will have to consider how they can use gen AI while reducing costs. It will become more important to balance these investments with growth related to the customer and regulatory risk and control.
Banks also have to think about how to make their customers succeed. SMEs [small and medium-size enterprises] and commercial banks will have to move their focus from the product to helping customers grow. For example, if I’m working in international trade finance, how can I help companies find new markets to take their product and match them with customers in those countries? Or how can I find them new suppliers? Finding things that are valuable to those entities will help you grow as they grow.
Finally, coming off the back of higher interest rates, there is a huge dependency on net-interest income. It is vital to think about a business model that has the whole of your cost base covered by other operating income; then you can flex on the net-interest income.
Basab Mitra: You have led some remarkable transformations, including at Santander. You shifted the cost-to-income ratio from 64–65 to 47. What are some of the lessons you’ve learned or patterns you’ve noticed from these transformations that you’d want to highlight for leaders as they shift into a transformation mindset?
Nathan Bostock: Generally, when people talk about transformations, they’re talking about relatively minor incremental change that adds up over time. Paying close attention to small details is important, but it’s not transformation. Now there is a growing understanding that banks have to consider how to boost their customers’ experiences in the context of other industries, such as streaming services or online retailers.
Over the years, I’ve learned you need to be bold, which means taking risks two or three steps further than your initial thinking. Of course, you’ll need help accomplishing that. Leaders have to decide what kinds of skills they need to realize the potential and execute on their goals. But first they have to set the right framework for achieving these goals, knowing the context of the market. That can be hard. For example, inflation can change targets, which can hinder progress. So you might save a bit of money, but you haven’t transformed.
It’s important to also consider how to get people in the organization to come with you on the journey, keep the regulators comfortable with growth that is well managed through operational risk management, and manage risks to fully achieve a transformation.
Basab Mitra: What did it take for you to create that transformation? If you were to create “The Hitchhiker’s Guide to Transformations,” what allows transformation to happen? What challenges did you encounter?
Nathan Bostock: As we discussed, you need to be bold. One problem could be hiring good people who are good at their jobs—a business head, a head of retail, a head of corporate, or a head of CIB [corporate and investment banking]—but that doesn’t necessarily mean they understand scale transformation and how to do it.
It’s important to recognize that sometimes what appears to be reluctance in an organization is more about someone being busy, trying to meet budgets, day-to-day operations, and complying with regulations. So leaders have to be able to show employees “the art of what’s possible” and make them more comfortable with that vision and show them the bigger potential or different ways of doing things. And then you also have to work to show them the “how.”
The number one thing to do is dedicate top talent to the transformation effort. If I’m the head of corporate, I would identify real talent on my management team and put that person 100 percent on the transformation workstream. It’s easier to backfill that person into the management team than it is to get a fantastic person into a workstream. Leaders can help them develop skills and knowledge, and the person can bring the rest of the management team with them. It also means the head of the business can carry on concentrating on business matters.
It’s also critical to know how to access the skills you need when you need them. Hiring is difficult, and it takes time. It’s sequential in nature, whereas to conduct a transformation, you need to parallel process. The reality is, leaders enter these transformations without all the answers; it’s hard to know exactly what you need immediately. Eventually, you’ll realize you need, for example, more contact center skills or agile skills, so finding a way of accessing those is fundamental. Then you have to assimilate those people with management to build a team. That’s where the workstream lead can also be helpful—they can integrate new people into a broader vision.
Having a vision is important. You have to engage the organization toward an endgame. At Santander, we created the concept of a “digital bank with a human touch.” We wanted the cost-income ratios to be in the low 40s—a pure digital concept would probably be 5 percent or 10 percent lower, but it wouldn’t have the human touch. That’s a cost, but it’s a valuable differentiation. So to create that vision, we had to make sure everybody in the organization was engaged.
Culture is a critical part. You can’t go through these transformations without ultimately defining the culture you’re trying to achieve or the elements of culture you want to improve. For example, collaboration is important. If you don’t have collaboration, how do you identify the cross-functional aspects that are working and measure that improvement? You can’t end a transformation without the culture fitting into the company you’ve built. Establishing purpose, values, and behaviors is important, but improving the capability to drive change is also important to instill in a culture.
You have to bring the whole organization with you, including unions and other staff members. Reskilling provides a much better journey for people. Remote working has increased that ability. Now, a branch person can have completely different career opportunities.
Basab Mitra: Talk a bit about your “Debate, debate, decide” approach and the cadence around it.
Nathan Bostock: You need to empower workstream leads to be accountable and responsible and instill a cadence for decision making.
For our transformation, once a week we would determine two or three main decisions that we needed to make in the next week to ensure that we kept the pace going. The rhythm for the more complex decisions was “Debate, debate, decide.” The logic behind that approach was that the first time you debate, you find information you didn’t have. People come up with good points that need further investigation. The second time you debate, you’ll have as much information as you probably need or is available. Then you can make the decision.
That needs to become a mantra of the organization. It enables you to continue to rethink because decisions can stall. We went well over 900 initiatives over that period. We probably canceled 20 percent of those during the initiation phase or as we got further down the road because they weren’t going to deliver or they didn’t meet the risk hurdle. But we also refilled that well. You’ll find that somewhere between 60 percent and 70 percent of these initiatives reap less than $250,000. However, you need to have quick wins, which don’t necessarily have to be monetary, such as reducing the number of calls coming into the call center. These smaller goals are proof points to help the organization believe the journey is possible. That type of momentum enables a transformation to go from the starting line to being in the race.
Basab Mitra: How does the introduction of AI change how leaders might approach a transformation?
Nathan Bostock: Your ambition should be much greater than it was previously. AI builds into all of the principles I discussed before, such as AI as a “process enabler” to improve processes such as fielding contact center transcripts or analyzing inbound calls. Where it’s probably of the greatest benefit, in my view, is in high-cost manual and human processes. AI can revolutionize expensive areas, such as finance, risk, and compliance.
Basab Mitra: That’s been apparent in our experience as we do transformations. We used to talk about a 27 percent opportunity gain, but now it’s more like a 35 percent to 40 percent gain. But it’s not just a cost piece. To your point, you should be looking at customer experience, employee experience, reliability, control, and all the holistic dimensions where transformation can come through.
Nathan Bostock: If you used it to look at where your performance is against your budget, for example, the predictive capability of the analytics would help you take that process to the next level. As a result, management time should become more focused on how to manage the organization and move at speed or enter markets. I’m very positive. If you compared where we are today to where we were back then, I would have said the opportunity gain would be 45 percent to 50 percent, not at 27 percent.
Basab Mitra: What are some considerations C-suite leaders need to have as they set out on this journey?
Nathan Bostock: It’s a combination of having a bold ambition and bringing your team along with you. One of the first things I did was employ a set of trainings to show what the new business models and the marketplace looked like. That started to lift people out of their day-to-day. Doing that helped because people could change their mindset about transformation and visualize what was possible. And then you need to give them some encouragement. Even if the vision looks much better, it will also look different than what they’re used to. The ability to lift every stone, take everything apart, and compare it to the best will help them believe in it.
For example, we saw that our people were aiming too low with their goals, so we took them to a management off-site, and at the end of that period, management came away feeling like they could do more. So you have to help them with the “how,” and that’s why the dedication of the management is a critical factor—because employees get encouragement from that. People need to be able to relate much better to management.