The Need to Change in the Banking World
- Seshika Fernando
- Vice President - Banking and Financial Services - WSO2
Every financial institution is unique. That general statement also applies to its digital transformation too - both its starting point and its end goal. As a result, each journey is one-of-a-kind.
That means there will be a breadth of practice toward pursuing digital initiatives, but fortunately, this is something other banks have done well. Let’s see what lessons we can glean from leading banks which have been cited for their successful achievements in creating new digital business models.
Why Change the Organization?
The old model of business organization served civilization well, but it may well have run its course.
Hierarchical, siloed structures gave rise to empires, but not open-border unions of states. They brought us billion-dollar companies, but not trillion-dollar companies. And they built bridges and skyscrapers, but not the internet or distributed ledgers. A company that focuses on how to deliver a product to its customers, has to keep the decision making as close as possible to them.
“Up till now, we have been running DBS as a business with technology supporting the business,” Bidyut Dumra, DBS’s innovation head, told researchers at the Massachusetts Institute of Technology. “But as we entered the digital era, there was a stark realization that from a customer perspective… we’re one organization.”
That led to reorganizing development teams away from the traditional project office model and toward what has come to be known as “platforms”. Instead of an app being envisioned in a business unit, designed in DevOps and deployed in service delivery, the individuals responsible for all these efforts join together as a collaborative team without organizational barriers to block their progress.
While this sounds reasonable enough as an organizational design strategy, be prepared for pushback. The bigger your institution, the harder this is likely to be.
“The problem is that many banks still believe that digital transformation is about systems and workflows rather than customers,” according to Finextra Research. “But if they want to achieve the desired results, it’s time they changed this attitude.”
“We weren’t going to create this little starter innovation unit as an aside that was to disrupt the bank, which you’ve seen many organizations do,” said Dumra’s colleague, CIO David Gledhill. “The whole bank was coming with us, and therefore we thought of ourselves as a 26,000-person start-up.”
But organizations that move to the platform model tend to be glad they did. The employees -- who, like the targeted customers, grew up around tech -- are already accustomed to flatter organizations and willing to accept the empowerment the model provides. Looking outside your institution, you’ll find that any potential partner in the fintech space was following this organizational structure from the time of its inception; synching up your data might go a lot smoother if your organization is already in sync.
Of course, not everyone outside your institution is a potential partner. Many of them are competitors. The neo-banks are, like the fintech firms, already organized by platforms. Other legacy banks and thrifts, though, could well get to that state before yours does. If so, they’ll be the one forging partnerships first.
Why Change Technology?
The processes that an enterprise pursued when it fell behind its competitors are not the ones that will move it ahead of them. While standard refreshes are the easiest asks during budget planning cycles, rip-and-replace simply isn’t the answer to everything, nor is it even a realistic possibility in all cases.
“I would caution [against] the belief that all the issues with a legacy system can be resolved with new software,” Ed Toner, CIO for the State of Nebraska, told GovDataDownload. “The same issues will reappear if they are not resolved prior to replacement. ... In some cases, the issues that already existed were not addressed before the replacement and the product had multiple defects upon release. In the worst-case scenario, the product did not function at all.”
The goal is to make the necessary processes easy to deliver once they’re put into a production environment. But which processes are necessary? That will change over time along with internal structures and external forces. Also, it is increasingly important to make those processes easier to deliver to customers in addition to employees. To the extent that they need to be accessible to employees, though, those might be employees of another firm. Fintech firms and other vendors will need access.
That in most instances is the main thrust of digital transformation. It is hard to conceive of a successful implementation that doesn’t include third parties accessing your institution’s data via the cloud. Leveraging readily available internal and third-party fintech services—e.g., new payment rails, utility bill payment services, and AI-supported loan decisioning—could all be facilitated by cloud technology helping the bank bundle new services rapidly enough for end customers to appreciate.
This transformation also hinges on application programming interfaces (APIs), which is the software that allows data to flow from one application to another. Without APIs bridging the gap between your institution and your partners via the cloud, building a competitive digital strategy today is almost unthinkable.
We won’t get at all technical here, but the ease and speed with which APIs can be crafted and implemented is a major challenge for banks and credit unions. Suffice to say, it is critical to ensure the seamless integration of:
- coding language to
- development platform to
- app server to
- digital customer identities.
Your preferred coding language is almost an arbitrary decision, although more and more financial services enterprises are settling on Ballerina by WSO2 for APIs. Similarly, Kubernetes, the open-source, cloud-native suite developed by Google, has become the standard tool to function as the app server. Vendors will have different approaches to integration platform-as-a-service, or IPaaS, and proprietary CIAM suites.
While it’s great to be close to your partners and especially to your customers, it’s vital that you protect the data - which is as much theirs as yours.
Institutions are constantly shifting emphasis between security and user experience. Such banks as Crédit Agricole have used these tools to set the standard for meeting customers where they are while securing their identities and data across these multiple channels of engagement. This French financial institution is hardly alone, although it is exemplary. According to Computer Weekly, the Big Four consultancies agree that the banking industry is taking the lead in CIAM.
Why Change the Architecture and Platform?
When banks empower their internal technical and business teams to be more agile, development cycles that once took months can take mere weeks.
Another way of posing the question “why change …” is “why not stay the same?” Not all banking customers are new to adulting! In fact, some of them - often the ones with the highest credit scores and funds on deposit - are newer to mobile technology. For their sake, it’s important to maintain the right degree of human touch and branch access. While we feel that the image of a person with graying hair fumbling futilely with their smartphone is an ugly and increasingly fictitious stereotype, it’s also true that people who have done things a certain way for decades might want to keep doing things that way. After all, they are the cash cows. It’s great to market to people who are striving for wealth, but let’s not forget those who have already achieved it.
However one looks at it though, financial institutions have reached an inflection point at which each needs to move immediately. Not only have digital-native neo-banks changed the game, more and more legacy banks are discovering new ways they can build their own capabilities. They might end up not only succeeding at taking market share away from their traditional rivals, but also from the neo-banks themselves.
Why Change Products?
Delivering seamless omnichannel banking is critical for banks operating in today’s sprawling and ever-expanding digital ecosystems. Digital channels continue to proliferate, and banks often find out that mobile-first processes are not only important to digital nomads, but to many people who don’t consider themselves particularly tech-savvy. We’ve had smartphones since 2007, so the broader population - including gen X - has had ample opportunity to get up to speed. As banal as Facebook Mobile or Candy Crush Saga might seem to younger adults, this kind of socialization and gamification has helped their parents get over the hump. The convenience of an app that can recognize your face, tells your account balances, send instant messages if any of those balances drops too low, autopay bills, and allow you to send cash to a friend or family member without the bother of writing a check - all for free - outweighs a single moment of confusion and uncertainty.
Once these channels are secure, banks are able to target, onboard, and delight more customers. These borrowers and depositors tend to be younger, so the bank’s continuing challenge will be to keep up with them. At the moment, they might just be interested in the app’s intuitive interface, ease of use, and convenience. But soon they’ll be taking out car loans, buying property, having children whose education must be funded and eventually enjoying a well-planned retirement.
The trick, then, is to minimize customer churn, thus maximizing lifetime customer value. Are your existing products, and the technology and partnerships that backs those products, ready to capture this opportunity?
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 Nadine Shaabana.