Reprogramming the Bank – Shifting Gears on Digital Disruption

Photo by Ricardo L on Unsplash

First published on FinExtra.

New technology can only be as good as its implementation. Digital platforms can position banks so that they are able to immediately respond to consumer needs. However, financial institutions must approach this ‘digital reprogramming’ in a manner that is consciously designed to proactively exploit technology to its full potential. 

Developing and designing scalable digital platforms for innovation is no mean feat, and a successful shift to highly flexible infrastructure demands a team that understands the power of available technology.

Teams that successfully capitalise on the advantages offered by these new platforms will find themselves ahead of the curve. They will do so through expediting innovation through testing, iteration, and scaling, helping to streamline deployment and fast-tracking new business propositions to expand market share. 

High performing, agile DevOps teams that deploy automation efficiently and exploit the value of continuous delivery are better positioned to align technology necessities with business objectives.

For Eric Newcomer, chief technology officer of WSO2, a leader in digital transformation, there is a cultural shift around the approach to technology that banks must confront before any true progress is achieved. 

“A lot of banks talk about technology as being strategic and talk about themselves as a technology company – but they haven’t really made the step into letting technology be strategic for them instead of just being an expense item. There is a core dynamic around how strategic new technology can be, and whether it has a seat at the table for planning products. Is there clear understanding across teams around how to attract more customers and to increase the business using technology?”

Newcomer observes that many banks have been focused on cost-cutting as a means to achieve profitability, which makes it challenging to invest in technology. Cost cutting started as a reaction to both the 2009 crisis and to competition from fintechs, who have been attracting customers.

“This isn’t necessarily a long-term winning strategy. There must be a way to invest and to bring the customers back in through the introduction of new products and customer experiences. Banks must transition from creating systems for bank employees to creating systems for bank customers. That means figuring out how customers want to use APIs and applications, not how the tellers at the branches want to use them, for example.”

Evolving this mentality is a challenging task, requiring a healthy dose of self-disruptive innovation, kept in check by a framework of highly skilled and agile talent.

What Quantifies Self-disruption in the Banking Context?

Craig Bright, chief information officer at Barclays explains that anything that changes the status quo can be considered as self-disruption.

“Whether it be getting out of a technology rut, delivering leading-edge products or challenging market complacency. Over time, organisations can lose sight of the actual risk taking or disruptive investment upon which they were founded and become risk averse. To spur innovation, we must move away from the ‘this is how we have always done it’ mindset which is the antithesis of disruption.” 

Barclays leverages a broad ecosystem to identify opportunities to improve its services, products, processes, and technologies. Leveraging a broad ecosystem featuring internal innovation initiatives, partnering with third parties such as fintechs, and collaborating in industry transformations, Barclays can identify opportunities to improve its services, products, processes, and technologies.

According to Catherine Zhou, HSBC’s global head of ventures, digital innovation and partnerships, self-disruption is about reinventing part of your existing business. Sometimes this is done incrementally by improving existing processes, sometimes this is through radically challenging the status quo and doing things completely differently.

HSBC started with the concept that the bank could make peer-to-peer payments better for customers in Hong Kong, challenging existing banking payment models. Zhou explains: “In house, while maintaining our existing digital payments channels, we built a new social payments app called PayMe which is faster and more engaging. It now has the largest market share, with more than 2.5 million users, and we have expanded it to merchants through PayMe for Business.”

Zhou adds “We need to be always thinking ‘how can I do this better?’, reimagining what customers will want next, or how we can improve the way the bank runs, and then prototyping and testing new solutions. Without this mindset businesses risk becoming irrelevant.”

This continuous push to stay relevant means companies must push boundaries to self-disrupt, Bright adds. “The world is constantly moving and if established institutions don’t shift the dial in a controlled way, other parties will do it anyway. Call it a controlled evolution. Although sometimes a shock is needed to shake off stagnation.”

Bright elaborates that disruption in financial services often originates in non-banks, such as small, innovative fintechs, and they can provide compelling visions for novel or redesigned services and products. “By partnering with those companies via initiatives such as Barclays Rise innovation hubs, we obtain fresh views that may address our existing business challenges and also constructively disrupt our services. Through partnerships with established banks, fintechs can often scale their ideas and business at pace, so it’s beneficial to both parties.”

Newcomer sees self-disruption as a big-picture concept that includes recognising the need for IT to have a seat at the table in order to plan business strategies and capabilities. This factor is vital when rolling out a variation or entirely new banking product, as the decision-making body will be able to assess implementation feasibility from the point of view of technology.

“Technology teams should be involved as soon as possible in order to create an innovative and secure delivery of that product, especially when time to market is an issue.”

Furthering on Bright’s point, Newcomer highlights the role often played by innovation centers within banks to try out new things and bring them into established product lines. Capital One’s recent launch of an early pay access feature is a clear example of this, where the bank was able to beat other institutions to launch likely as a result of having prioritised and shifted toward a technology-focused structure earlier in the piece. 

Additionally, partnerships such as those Citi nurtures with universities including Cornell and NYU presents a valuable way for technologists to meet with banking staff, introducing them to new technology and concepts.

The Relationship Between Technological Talent and Effective Transformation

Nurturing effective technological talent in-house has become more essential than ever, and there are certain strategies that banks should develop to formalise natural disruption and build a resilient structure around innovation.

Zhou explains that HSBC is building a culture of innovation through upskilling and developing innovation communities throughout the bank. “By establishing one globally unifying idea generation and start-up incubation platform, connecting various ideas into proofs of concepts, and creating a safe space for experiments, we are driving structured self-disruption. Energising colleagues and partners in this way brings the best ideas forward for incubation and investment.”

Newcomer refers again to Capital One’s digital transformation efforts, which last year saw the bank commit to hiring 3,000 additional technologists by the end of 2021.

However, he argues that this approach requires a cultural shift, moving away from traditional thinking about technology as an expense that deserves as little budget as possible. Such an approach should be avoided as it can easily translate into offshoring technology and data centers. Instead, it should be viewed as an investment for the future.

“As you get the people who understand the value of technology and pay them for their skills, part of their skillset is the perspective they bring on unlocking the strategic value of technology for the business.”

This has long been a problem between business and IT departments, and has always been fraught with errors, misunderstandings, and unpredictable results. What banks need, Newcomer argues, are teams which can bridge this gap because they understand both sides of the situation — both the business value of the technology and the technology itself.

“You don't get that from less expensive offshore teams with a lower skillset.”

“If you think about it as a strategic investment, banks can set up a new equation of understanding the value of the technology and the value of highly technical staff to contribute. From here it is possible to cycle through these innovations much more quickly, because now you have this skilled staff, who can take advantage of the technologies and bring the best of the technologies to bear.”

Channelling Creative Talent into Productive Outcomes

As is natural in highly regulated industries like banking, there are limits as to how far concepts such as self-disruption can be pushed.

Bright believes that there is a balance that must be struck, and while not all areas warrant disruption, this balance can be found through a system of controls and regulation with innovation – “This is real state of the art innovation in action.”

“When it comes to highly-regulated environments, it is better to ask permission beforehand than beg forgiveness afterwards. We therefore work closely and collaboratively with official institutions, including central banks and regulators, when exploring potentially disruptive innovations,” states Bright.

Examples of this more cautious approach can include bilateral discussions, providing feedback to consultation requests, and contributing via official institutions’ advisory groups and forums. We’ve seen strong instances of this in relation to distributed ledger technologies and central bank digital currencies, as many design options must be considered when developing novel disruptive solutions. 

“What is good enough today may not be tomorrow,” observes Bright. “It’s a cliché, but learning to fail and pivot is essential. It is also not natural for a financial services organisation. Complex structures and systems can be hurdles to innovation, but they don’t need to be barriers. Learning to adapt to disruption and adopt an entrepreneurial mindset creates the environment of supporting structures that is tuned to celebration of exploration.”

Providing a slightly different perspective on the matter, Zhou argues that self-disruption and regulation are not in conflict. Rather, “we self-disrupt to serve our customers better, more efficiently and securely. We must comply with our regulatory requirements and ensure the resilience of our operations for customers. Innovation requires working in collaboration with our regulators and keeping them updated. Safe test environments, like the FCA’s sandbox, can help to facilitate this.”

While a measured approach to concepts that drive innovation like self-disruption should be taken, inevitably there will be circumstances where unplanned internal disruption occurs.

The key in such circumstances is to capitalise on these unplanned opportunities that accompany new technology strategies, by experimenting and iterating new products and services for customers.

Zhou believes that such natural or unplanned disruptions can drive systematic ways of innovation. “Unplanned disruptions (both internal and external), can drastically accelerate innovation and force us to quickly adapt. For example, we have all seen the rapid adoption of remote productivity technologies, like cloud, during Covid. Turning crises into opportunities is something we consistently strive for.”

Using Platforms to Build a Framework for Experimentation

Building elastic, experimentation-ready platforms can prove valuable for translating self-disruption into a culture of innovation.

To test and learn, elastic platforms are the tools, notes Zhou, “as they enable the skills to experiment, consistently learning and pivoting, finding a path to sustainable growth that further nurtures the culture of innovation – which is about failing fast safely, learning fast, moving at the pace of the market and customer.”

For Newcomer, platforms hold the key to breaking up the change process into smaller, more manageable units.

The biggest cause of incidents, he believes, is change management and the lack of understanding and unanticipated consequences of change in a very large deployment. 

“If this is broken up, as Amazon very famously has done, it’s possible to constantly roll out changes and updates. If banks are able to deconstruct their own monolithic structure, allowing changes to be made as discreet and independent updates, while delegating the responsibility for that change to independent teams, it’s possible to cycle through changes much more quickly.” 

“This is how we can break the main problem that banks face in modernising technology.”

However, to do this, not only the development process must be changed, but the introduction of automated testing, changes to production support, and operations processes must be made.

Automating and building the deployment process can be particularly challenging, says Newcomer, because while the testing may progress smoothly, the production stage presents a real last mile issue.

“All of the processes at that stage tend to be structured around large-scale deployments that are designed to move slowly and carefully in efforts to prevent errors. So, it becomes a challenge of somehow breaking through this structure to automate the production of smaller units. These processes are very difficult to change,” Newcomer acknowledges.

Certain technologies tend to be conducive to this type of self-disruption, assisting the smooth delivery of new products inspired by effective innovation. Zhou cites co-creation and collaboration platforms such as Confluence, Jira, Slack, and Microsoft Teams as the “must-have platforms” for enabling internal innovation.

“Design thinking is also a big part of our discipline – we ask, ‘what if we start the customer journey afresh, on a blank piece of paper, what would we do’? And use that to re-imagine capabilities and processes required to deliver these experiences, rather than incrementally improve our existing processes.”

Bright raises the integral role of APIs in a world where “connectivity and agility is important to our customers.”

This expectation of 24/7 connectivity is a realm where fintechs can flourish, as they’re nimble in their delivery of new capabilities. For banks trying to compete, Newcomer notes that much of their success can come down to foundational APIs.

“Banks are investing quite a bit in APIs which will continue to help them compete with fintechs. However, they still have the challenge of ensuring those APIs are at the right level of granularity so that they can be implemented and re-implemented individually without breaking anything that goes across them. This requires governance.”

A core pillar of a platform’s efficacy is its ability to leverage the full potential of the cloud. While the advantages of the cloud such as improved resilience, improved reliability, and improved scale, are clear, the investment required to reap these benefits is sizable.

This investment, Newcomer explains, is not just financial. There is also the associated investment in talent, which holds the necessary skill sets of cloud literacy.

“Banks cannot just pick up what already exists within their system, move it directly to the cloud, and expect to get the benefits of resilience. The same challenges that exist externally also exist internally, unless of course you re-engineer the app and APIs.”

Zhou concurs, noting that cloud offers financial services institutions the ability to architect for resilience in a way that is not possible for on-premises technology. For example, the ability to use cutting-edge data science and machine learning, delivering improved functionality, and increased automation.

What’s more, Newcomer argues, is that it is possible to achieve a stronger security posture in the cloud than on-premises. One reason for this is that when migrating to the cloud banks ensure that every control mechanism is meticulously put in place.

“These mechanisms simply don’t exist on prem, because the on prem systems grew up over 10-20 years before security was such a challenge. On prem systems are not as well secured as they will be in the cloud.”

You can read more about these themes in our e-book, 'Five Banking API Use Cases Helping Banks Meet The Digital Adoption Boom.'