Digitization in banking has been much talked about, even before the outbreak of the pandemic. But the industry’s fundamental transformation is yet to come. What should it start with? “A closer look” at the business, says Andra Sonea, FintechOS’s Head of Solution Architecture.
In July this year, Deutsche Bank’s CEO Christian Sewing wrote in a letter to employees that the bank would be investing €13 billion in technology by 2022 as part of an effort “to increase both innovation and efficiency”. The bank’s ambition is to become a technology company and a digital leader.
“Technology is more important than ever – a fact that the coronavirus crisis is serving to highlight very well. Digital business models are the big winners, and this trend won’t suddenly reverse once the pandemic subsides”, Sewing said.
Deutsche Bank had gone public with its mission to embark on such a “radical transformation” one year earlier. The expected outcome? To become more profitable, improve shareholder returns and drive long-term growth.
Many banks have accelerated their digital transformation in response to the Covid-19 crisis – like Deutsche Bank. Others have increased the use of digital abilities to boost customer engagement – China’s Ping An Bank launched its Do It At Home service to help customers during the pandemic. Some have even managed to rethink traditional operating models – in Singapore, UOB Bank now offers digital applications that help SMEs run their business more efficiently.
In short, “technology has become more embedded in the business model more than ever before”, said Andra Sonea, FintechOS’s Head of Solution Architecture, during a recent virtual debate, “4 x 4 Virtual Salon – Digital Age Banking Systems and Architectures”, hosted by Aperture.co.
Globally, initiatives like those of Deutsche Bank, Ping An Bank or UOB Bank, mentioned above, reflect that face-to-face-only banking customers are becoming the exception. According to J.D. Power, quoted by The Financial Brand, only 46% of consumers will go back to “banking as usual” once the pandemic wanes, while there’ll be a 20% increase in mobile and 17% rise in online banking.
“We have been talking about new banking platforms for a long time. But this crisis forced people to make decisions”, said Paul Taylor, CEO and founder at Thought Machine during the same virtual debate, “4 x 4 Virtual Salon – Digital Age Banking Systems and Architectures”.
“Every bank has been engaged with some level of digitization of the customer experience, but the pandemic shows where the cracks lie or appear much bigger”, Taylor continued.
What cracks could Taylor mean? What could go wrong with both big thinking and investment supporting it?
Two major areas are worth exploring in the search for answers.
The first is related to one of today’s hottest topics: the pandemic-induced crisis. The World Bank thinks restructuring in the banking sector will accelerate because banks will have to deal with the fact that the crisis “will dramatically increase non-performing loans”.
“An open question”, according to World Bank, “is whether surviving incumbents will move ahead or if powerful new players – such as Big Tech – will enter the sector with force, transforming the incumbents”.
The second major cause of disruption is linked to the “powerful new players” that the World Bank is referring to. The technologies that emerged in the past decades have turned entire businesses, industries and markets upside down. Banking is no exception. The €13 billion that Deutsche Bank committed to investing in technology by 2022 is no small amount.
But what solutions do banks and insurers need to be able to react much faster to the new digital reality?
First of all, it is a matter of size. Andra Sonea, FintechOS’s Head of Solution Architecture, has analysed many new banks – both small and medium– over the past two years. “Their decisions are very different”, she says. ”Banks are living organisms. They evolve in a way that is incomprehensible.”
“But if you discuss tech solutions with a larger bank, you rarely make decisions for the entire organization. You are looking at components and objectives for a particular business purpose”.
Andra Sonea believes that, before attempting fundamental transformations, we should look closer in order to understand what sort of “beast” a certain bank is. “For sure, there is no recipe” when it comes to transformation.
Sonea is pointing to the legacy thinking in the industry; thinking that is in part a result of the systems that underpin it. Banking’s crumbling infrastructure makes nimble thinking difficult. And excitement for change often disappears when teams get bogged down in the complexities of working with their organisation’s IT estate. “You can’t create a new digital bank using building blocks from the past”, Sonea warns.
The challenges of establishing a new digital bank are very different from those of a large bank attempting yet another transformation programme. Many new banks assume that they should have the same components as a large bank but somehow smaller. This is not necessarily true. Building a new bank with new technology is in fact very different. Traditional banking software, especially if older, is a reflection of the limitations and constraints of the time – whether they were hardware, software or a specific business model.
That said, no new bank wants to venture into developing treasury or risk systems and find none that is suitable for their scale or works in a PaaS model.
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“We’ve managed to build thousands of applications over decades and they’re all tied together now in a Gordian knot that’s almost impossible to untangle”
“Transforming/modernising legacy infrastructure while running a bank would be like upgrading airplane engines during a flight”, commented a participant at “4 x 4 Virtual Salon – Digital Age Banking Systems and Architectures”.
Andra Sonea shared her thoughts on this for this blog post:
ON LEGACY: “Legacy infrastructure as such has been consistently modernised over the decades. This is not something new. However, the topic has only entered into the wider discourse outside the specialist world of banking technologists relatively recently.
RENEWED: While the software of certain core banking systems might have originated fifty years ago, the infrastructure was renewed regularly over time, and without much fuss or noise at conferences.
THE GORDIAN KNOT: In truth, the problem is more nuanced. We’ve managed to build thousands of applications over decades and they’re all tied together now in a Gordian knot that’s almost impossible to untangle. The problem is interesting and important because these institutions are not neutral to us – they provide essential services to millions of people.
A BELIEVER: The assumption here is that we need to replace something, and it is fashionable now to say that it’s core banking that needs to be replaced. I am a believer in this too, and have been for many years. However, these are not the only “legacy systems” in a bank which impose functionality limitations or high costs.
NO RECIPE: We should look closer in order to understand what sort of “beast” a certain bank is before attempting fundamental transformations. For sure, there is no recipe when it comes to transformation.
