DXC Technology on delivering iterative and incremental systemic change within banking
Small and mid-sized financial services institutions are under threat of being squeezed from all sides unless they adopt a more flexible and scalable digital transformation strategy. This was among some of the key findings in “Digital Services and Platformization in Banking”, a recently study by iValley Innovation Center looking at the megatrends reshaping the banking industry.
“We estimate that banks will spend about $2.3B in 2020 just in new core banking platforms” said Paddy Ramanathan, iValley Founder and CEO “with a similar investment in digital technologies. Smaller banks are leaning more into core platform spend while larger banks have the latitude to focus more on digital upgrades.”
Industry megatrends the study identified showcase the need for small to mid-sized banks to plan effectively as they look ahead at their next decade >>
“Digital native” customers raised in a Google/Amazon-driven world will expect rich, delightful, omni-channel experiences from all of their service providers. They will be willing to provide more of their personal data as long as it’s used to improve and tailor their banking experience. And, they’ll consider using neo- and challenger banks versus staying with the traditional “bricks and clicks” banks.
Rigid legacy banking cores will need to make way for open architectures with core banking functions underlying a flexible application layer. Standard APIs will allow for improved information sharing both inside and outside the bank, and help banks rapidly adapt to emerging customer needs. Digital trends today are primarily aimed at client intimacy, with the traditional industry expectations of high touch replaced with personalized digital experiences that are high tech and high touch.
Fintechs and digital-only banks have the potential to continue taking over some (or all) of the services traditional banks have offered, from consumer payments to robo-advisors and balance sheet lenders. In response, banks of all sizes will have to increase diversification into more fee-based revenue products, with broad product offerings that meet the full financial needs of consumer, small business and corporate clients.
On premise servers are rapidly yielding to distributed cloud environments. Microservices, modular and containerized applications will make core computing dynamic and decomposable. Big data, blockchain and artificial intelligence will help push decision-making closer to the customer and allow bank staff to focus more on strategic and tactical priorities. But that also makes banks far more dependent on IT and Operations to continually deliver in the 24/7 environment.
Competition will come from larger banks with deep pockets who are farther down the digital transformation road, and nimble FinTechs who are operationally adaptable. It’s critical that small and medium banks be able to leverage economies of scale for profitability and sustainability, with platforms that enable iterative development and deployment, and that can scale securely and seamlessly as they grow their customers, accounts and loans. Banks also need to consider how their systems will be able to adapt the changing regulatory compliance environment as newer technologies like instant / faster payments come online.
What these trends suggest is that banks of all sizes will be faced with more sophisticated customers that demand improved experiences and offerings from banks in a more competitive environment where costs are increasing and margins are squeezed.
However, most of today’s banking systems are not organized to easily facilitate that experience. The strength of major legacy core banking platforms like Hogan are its stability, scalability and security. However, those systems are not easy to modify quickly. Digital-native bank platforms are fine at small scale but lack the ability to manage rapid growth.
1. Flexible, configurable platforms that can scale quickly to meet new product or volume demand
2. Rich, interactive digital channels that adapt to client needs, are highly secure, and integrate a substantial Fintech App Store
3. Solid relationships with Fintech partners who will help enable speed to market
4. Digital (and C-Suite!) alignment across all lines of business, from Retail to Wealth Management
5. Digital operating models keeping the business focused on investments in growth instead of technology
6. Limited tolerance for poor user experience. This goes from the customer to the back office
7. Responsive platforms to meet changing customer expectations
8. Teams focused more on design and solutioning, with run-the-bank needs partially or fully outsourced
Banks should consider using a variety of progressive modernization strategies as a de-risking vehicle for delivering iterative and incremental systemic change.
These can include standing up an all-digital parallel core to speed delivery of new ‘born in the cloud’ services while they look to update their legacy systems, or deploying a more multi-faceted and iterative approach that helps banks gradually modify core platforms from within while rapidly delivering on critical business needs.
To learn more about DXC Technology is helping clients solve these challenges, please visit dxc.technology
