Accelerating Banking Innovation with Speed and Agility

Photo by Marc-Olivier Jodoin on Unsplash

Why Speed is Important

Technology changes constantly, and yet that is the least of the factors driving the urgency of digital transformation.

To start with, Cornerstone Advisors reports that by the end of 2022, just 11% of mid-sized banks and 4% of credit unions in the U.S. will not have launched a digital transformation strategy. Competition from other banks, then, can be seen as a burning concern.

Still, it’s hardly the only driver. While technology itself isn’t the immediate cause of concern, it has yielded at least two others: fintech firms and neo-banks. While these are often lumped together into a single category, savvy banking executives see some important distinctions. Fintech firms are companies that apply digital technology to processes that legacy financial services firms had overlooked. These legacy firms are not necessarily banks; they are more commonly payment processors, credit card issuers or back-office administrators. Examples are Stripe, Klarna, and Plaid. (We’ll leave fintech’s whole cryptocurrency segment off to the side for now.)

Neo-banks, or challenger banks, deliver their services primarily through phone apps that claim to do everything that a bank can do, including lending money and accepting deposits. Think Chime, Current, or Varo.

Fintech firms and neo-banks do have a lot in common, though. They both launched as categories at a time when most banks had digitized their data and were already digitalizing their processes. They are both starting from blank sheets of paper, and don’t have to spend time, money, and organizational capital to transform into something new. And they both claim convenience as their prime value proposition.

The question then becomes: To whom is convenience the most critical selling point? Everybody wants convenience in the abstract, but many see banking as a high-touch service and, if their bank -- or, let’s face it, their bank branch -- has survived decades of consolidation and has served a family for generations, familiarity can be a bigger draw than convenience. Such is not the case with those born after 1981. While demographers like to talk about “Millennials” and “Generation Z” as a shorthand for these individuals, the generalizations are not always helpful. Not everyone aged 40 or younger thinks the same way. What they do have in common, though, is that they are digital natives accustomed to technological solutions. They will follow GPS directions rather than read a map. Many have never mailed a physical letter and consider email to be old-fashioned. And they’d prefer to pay with an app on their phone than with a card in their wallet.

The COVID-19 pandemic and the world’s economic response to it has only accelerated the trend. Regardless of our generation, we have learned to work from home. With the money our employers deposit into our bank accounts, we auto-pay our bills and buy our physical goods as well as our entertainment and services via ecommerce. Groceries, restaurant meals and even cocktails arrive at our doorsteps within the hour; furniture or exercise equipment will get there the next day. If we can live without supermarkets, restaurants, bars, and shopping malls, then we can live without bank branches.

Of course, no country exists in a vacuum, and every business in every sector is under increasing pressure as globalization becomes more prevalent. Again, technology might have spread the gasoline, but it didn’t light the match. Consumer preference did that. That’s why the health care sector is now obsessed with tele-health. That’s also why the consumer discretionary sector has recognized the fragility of the global supply chain. And yet we don’t talk about decentralized health care and call it DeCare. Nor is there such a thing as DeCyclicals. But there is most definitely Decentralized Finance (DeFi).

The good news for American banks is the U.S. is the leading country for banking innovation, according to Fintech Weekly. The U.K. comes in second and Singapore third, which should come as no surprise. But fourth place belongs to Lithuania, not known historically as a financial center.

While none of the countries on that list are lower-income countries, there is no reason to assume that such will always be the case. In the wake of the pandemic, national governments are rethinking the relationship between the financial sector and the public sector. Government ownership in banks as well as uncomfortably close government supervision of banks is on the table. And, just as developing nations have leapfrogged over G20 nations in cell phone adoption, it is quite credible that they will quickly adopt mobile-native banking or fintech services. Their local banks would certainly find ways to offer these services domestically and, given the rise of DeFi, they might soon set their sights across national borders. And it no doubt costs less to run a neo-bank out of Tanzania or Chile than one with marble floors and doric pillars in New York or London.

Parallel Implementation: The Key to Catching Up

As we discussed earlier, digital transformation is the last of three stages in an enterprise’s emergence as a future-ready institution. It generally comes after digitalization, which comes after digitization.

Most established banks have already begun implementing a digital transformation or are at least on the cusp of it. Still, there is a way forward for banks even if they’re still in the digitization or digitalization process. That’s to address all three challenges simultaneously.

This would be an ambitious undertaking, and it will be difficult to amass all the resources necessary.

Even so, “the sequential approach won’t work because you’re running out of time,” according to Asanka Abeysinghe, WSO2’s Chief Technology Evangelist. “Time to deliver is the main problem.”

Asanka recommends selecting one straightforward, non-core operation for a pilot, then performing all three stages simultaneously. Once that operation has been transformed, an enterprise can then take the lessons learned and confidence gained and roll it out more broadly as needed.

“But be sure that security, reliability, and high availability are all part of the design and implementation, and not bolted on later,” he cautions, adding that teams working on the project ought to expect to push out releases frequently, at least every three months and possibly every week.

To know more about procedures for setting the foundation for a new digital target state, please download our e-book as a first step.

Photo by Marc-Olivier Jodoin.