Innovation is a business tool

The last thing you would expect South Africa's most talked-about CEO to admit is that he is terrified. However, Michael Jordaan of FNB has a reputation for straight talk. As the young, tech-savvy torchbearer of a bank that prides itself on its innovation and technology, Jordaan is not your garden-variety captain of industry. He hates hierarchy. His twitter account icon is of the cartoon character Tintin and wants to be the go-to employer for South Africa's hottest young talent. Lûizet Ruzow, Head of FeverTreeConsulting's Financial Services Practice met him to understand the strategy behind FNB's hugely successful reinvention.

The first salvo in what some analysts have referred to as "the banking wars" was the launch of FNB's aggressive "Hello Steve" radio advertising campaign in May last year.

The spots featured imagined telephone conversations between a hapless telesales agent from another bank and a satisfied new FNB client. The ads outline the perks of moving to FNB and showcase South Africa's first banking app as well as a raft of non-traditional value-adds like fuel rebates, free data, cheap telephone calls and discounted iPads.

The approach is clearly working. FNB has had a 1,3 million new accounts opened in the past year and 220 000 active users of its banking app.

"We realised the key issue is the customer's propensity to switch," says Jordaan. They complain about fees but the perceived hassle factor holds them back. One of the strange things about the recession however is that it has increased price elasticity. Whereas in the past someone would have said the hassle is not worth saving R2400 a year, now people will.

"Our strategic debates are not informed by other banks, rather we ask ourselves: 'if you were to start a new generation bank, how would you present it to your customers'?

"What would Apple or Google or Facebook do if they were to go into banking? The thought terrifies us because they would do it so differently.

"The cheque market is dying and technology has a major part to play in providing customers with cheaper and more convenient banking channels."

Online banking is likely to continue to grow in the SA market, but it will be important for banks to balance functionality with security and grow customer confidence in the online banking technology, he says. "To be the 'go-to' bank in Africa, technology will need to be part of a bank's value offering."

For him, the "underlying thrust" is a drive for innovation the bank started in 2004.

"One way we encourage this is to make heroes out of people who innovate and help change the culture of our organisation. One example is our hugely successful internal competition whereby any employee, at any level, who comes up with a great idea and implements it, can win a million rand. I sit for a week and judge the entries and last year there were so many great entries that we actually awarded three million-rand prizes."

Some of the innovations to come from the staff competition include the 'iPad plan', the banking app, the 15% rebate on fuel and ebucks. Others, he says, the market will never see but have allowed the bank to deliver "much better customer service".

"Our journey is in fact far more chaotic than it would seem from the outside. It is not a deliberate strategy. Its about changing the culture of a bank and relying on the wisdom of the 30 000 people who work for us to come up with cool things for customers that will also make their lives easier."

Key to this is encouraging an environment that allows for a "meritocracy of ideas" to emerge and for that, Jordaan insists, you have to break down traditional hierarchies.

"It is the one area in which we really try to be different. I often imagine an outsider coming into one of our Exco meetings... I would want them to only see a debate that allows the best idea to emerge and not be able to identify who is from IT, or HR or who is the CEO...

"If you frame yourself this way its very different because there is no pressure on me to come up with the best idea because I happen to be the CEO... and there is no one who would not raise something because they think I might find it stupid.

"The biggest mistake you can make is to think that I am responsible for any of these innovations. I am not. I see myself as a nerd who is incredibly fortunate to have been put in the position I have and I surround myself with people who are better than me. I really, really believe that.

"My job is to facilitate a culture where people can be empowered and come up with great ideas and feel that they are part of creating something bigger. "

Changing the culture of the bank is also calculated to help FNB attract the necessary talent to continue driving its technology solutions. For Jordaan, it is ultimately a way of achieving business success.

"We are in a war for skills and in SA particularly so. While we have incredible unemployment, I can tell you that we have vacancies for skilled people, particularly in technology, particularly in areas like Java development, but also in Cobol, which is considered old language although much of the world's big mainframe computers still run on it.

"When you are recruiting against everybody else out there then being 'cool' can become really important because those youngsters don't want to work for a traditional bank. They want to come in wearing T-shirts, earrings, pony tails and sometimes they want to work late into the night, cappuccino-induced, until 10 in the morning.

"It all comes back to substance. You cannot have HR policies that say you are measured by the time you are at work. You need to have an environment where you are judged by your output, not on how you dress or how you look, but by what you do. In a way, you need to have the flexibility of a start-up company and that is what we are looking to have."

Jordaan's drive for innovation is linked to a long-term vision. "We live in a strange new world", he says.

"I think the best description is by Stephen Elsop, the new CEO of Nokia. He says its no longer a competition between devices but a war between ecosystems. We ask ourselves that all the time: 'What ecosystem we can create for our customers?'

"It is meant to be a win-win situation. Take our annual cheque account fee of R98. If a customer uses the free data we offer, the 15% fuel rebate, or the Slow Lounge once a month, or buys a tablet through FNB, then they already are getting more value than what they pay in banking fees.

"We want people to say, for this monthly fee, I am getting all these unlimited transactions, but I am also a member of a club. Then, we think, it is going to become a little more difficult for Amazon, Google or Apple to give the same amount of value for a fee of R98 a month.

"We are not in a cost-cutting mode. If anything, we are expanding. The consideration is not so much the cost of doing what we do but the opportunity cost of not doing it.

"We have more people working for us than we had last year and we have more branches than we had last year. Typically, however, those branches are smaller, have less people and are far more IT-enabled. We don't think branches are going to disappear, we just think things are changing. "

Nowhere are these changing times more visible than in the way Jordaan uses the tools of a modern, technologically plugged-in world to position himself and the bank he heads. As one of the most high profile CEO's in South Africa, his candid and often funny tweets have garnered him a following of almost 20 000 followers.

"My personal involvement is just for fun. There is no grandiose strategy. I like to try new things. At first, I thought this Twitter thing was crazy, then I tried it and I got hooked.

"However, the business itself does have a strategy with regard to social media. Initially it was a way to interact with customers and at first people were surprised that we would respond, now they expect it. Social media has become a full business channel for us. You have branches, online and social media.

"People often ask me where all Steve's issues come from. They come from our customers. We take all the things they say about us on Twitter and use those real stories and real experiences."

This responsiveness lies at the core of what has made "Hello Steve" one of the must successful campaigns in SA advertising history. So successful in fact, that Jordaan says "Steve" has almost become the FNB brand and the storyline has developed into a "soap opera".

"Steve is doing so well for us... so much so that some people get irritated by him and ask why we don't do something else. We have to remember however that the core role of advertising is to increase sales. There are many ads out there that people like but that don't change behaviour.

"Every time we have another record sales month thanks to Steve, its validation that the soap opera must continue. "

The effect is not limited to customers. One of the added positive spinoffs of FNB's rebirth relates to employees. By repositioning itself as the bank with smart solutions designed to make life easier and cheaper for customers, employee attitudes are also shifting.

"In the surveys we have done about staff engagement – these are anonymous surveys and the last one we did was filled in by 23 000 people – our customer engagement reached the highest level yet. Our staff anonymously scored us 80% engaged. Now that is a top, world-class standard for any company including financial services. "

Despite his denial that he is personally responsible, the fresh breeze blowing through South African banking must have at least something to do with the visionary leadership of this self-confessed "nerd" who believes that part of staying ahead of the curve, is a healthy dose of fear.

Innovation, he says is an ongoing process of imagining the future.

Other Insights

On South Africa's resilience in the face of the global economic downturn ...

The SA banking industry is known to be one of the most robust in the world, particularly after it survived the global economic crisis, and was ranked second globally for soundness of banks according to the Global Competitiveness Report 2011/12.

Interestingly this has allowed banks in SA to spend time and money on innovating, rather than on fixing industry-wide problems as we have seen in Europe.

On FNB's plans to bank the "unbanked" ...

Given the outlook on the economy and the low growth expectations, there are few ways to grow one's customer base besides through switching customers and gaining more customers.

The unbanked market is key to growth in market share, and all SA banks have been eyeing this opportunity for some time. Capitec in particular is playing in this space and represents formidable competition for the larger banks.

FNB is certainly in the game of banking the "unbanked", but there are a number of implications and prerequisites for this to happen. Regulations are unlikely to change to promote banking expansion into the unbanked market, and therefore accessibility to branches in order to "FICA" people wanting to open bank accounts, is very important.

On FNB's expansion plans ...

As a South African bank, there is both a right and responsibility to provide a service to customers in sub-Saharan Africa. FNB and FirstRand are in seven countries currently: Namibia, Zambia, Botswana, Lesotho, Mozambique, Tanzania and Swaziland. We are looking at expanding into Nigeria and Ghana.

On Basel III and how it will affect South Africa's banking sector ...

Basel III will have a material impact on banks for the following reasons.

Banks will be required to hold more capital reserves than before. There will now be liquidity requirements where banks will need to hold high quality and highly liquid assets that can easily be converted into cash if the bank needs to settle its liabilities quickly.

Banks will also be required to match the duration of assets and liabilities on their balance sheets – this is designed to encourage banks to use longer-term deposits as a source of funding (but clearly deposits are typically shorter in duration than advances, which presents a duration gap).

Basel III is likely to affect the SA banking market through pricing of loans and deposits to compensate for the additional capital that banks are required to hold on Balance Sheet and for the funding gap between longer dated advances and shorter dated deposits.