When the ground is moving, banks need to shift to a smarter platform
The tectonic plates of the banking sector are shifting faster than ever. High street banks are under stress from the massive competitive threats generated by their leaner, technology-driven fintech rivals and challenger banks.
These fintech companies are finding success simply by being more efficient or by taking advantage of emerging and highly effective technologies such as blockchain which have immense, if as yet uncertain, potential. The challenge presented by these emerging companies is very real, as they are growing at an exponential rate.
A recent Accenture report suggested that banks fear they could lose as much as 25% of revenue to fintechs by the end of 2020. Being digitally single-minded, these fintechs have radically sleek, cost-effective processes. Already we can see how companies such as TransferWise have started to eat into the revenues of banks.
The most important factor for established banks going forward will be their mentality – their willingness to experiment and try different things. While the disruption caused by technology – and seized by fintechs – may be uncomfortable it has already begun. This disruption must be wholly embraced. Viewing technology as an enabler, as opposed to an inhibitor, will be instrumental in finding success moving forward.
Faced with this new reality, almost all established banks are rushing to adapt and, in some instances, forging new alliances with fintechs.
However, many banks are rushing to develop new point solutions at the front-end designed to improve user experience but it should be noted that this is not true digital transformation, it is simply digitising existing approaches. More worryingly, this is layering spaghetti on top of the legacy spaghetti they’ve built over the last 30 or 40 years. This leaves these banks unprepared to adapt to any technological or regulatory changes that will inevitably appear in the future.
To achieve optimal value from these changes and partnerships, banks must continue to enhance and simplify their notoriously complex and often unreliable back-end IT systems, while integrating them with the pared-down operations run by their new fintech friends.
True digital transformation on this scale requires remodelling of systems and processes horizontally, cutting across old departmental boundaries in order to match customer journeys in the digital age. The level of difficulty in accommodating all this for a big name bank increases as it seeks to integrate cutting-edge new applications, with the accompanying danger that it will be dragged down by ever greater complexity.
The digital platform approach
Meeting all these challenges of redesign and integration requires the most effective, broad-based digital platform possible. For example, fintechs are increasingly using robo-advisors and robo-traders to provide investment advice and services to customers. Any bank looking to follow suit or establish a partnership will need to be able to keep on top of these automated processes and provide better real-time data.
The insertion of a digital layer when integrating with a new partner allows a bank to manage all aspects far more effectively, right from the outset, granting much greater security and efficiency. Additionally, each process within the bank – which is part of its new partnership – can be optimised and integrated, bringing higher levels of automation along with lower costs.
Along with aiding banks in establishing partnerships, the digital platform approach also grants greater visibility and control should the bank need to quickly disassociate itself from a former fintech partner. This is an all-too-possible scenario, considering the fragility of the sector; one estimate places the likely rate of failure for fintechs at 50%. While alarmingly high, instances like those recently experienced by Lending Club, lend credence to the idea that fintech partnerships can turn toxic.
In order to protect their name, any bank involved with such a fintech will want to sever ties as quickly as possible. When systems and processes are tied together, however, this isn’t an easy task. By using a digital platform, banks can ensure they will have the visibility necessary to disassociate before any damage is done, turning a time-consuming and costly process into a comparatively simple one. Banks with digital spaghetti, however, have little chance of making it out unscathed.
Preparing for uncertainty
The future of banking is unclear; the only certainty being that competition, technology and regulation will change. There’s no way of knowing what blockchain will look like in five years, let alone what new technology will emerge to succeed it.
Additionally, new regulations like the European Union’s Payment Services Directive 2 (PSD2), which will require banks to open up their APIs to third-party apps, will have a tremendous impact on how banks must function in order to remain competitive.
With this in mind, any system built today will likely be unable to address the challenges of the future, even those that appear within this decade. Piling more spaghetti onto legacy systems and addressing these problems one by one will only make it more difficult for banks to stay competitive down the line.
By taking the digital platform approach, banks can ensure they’ll receive all the benefits of partnerships made today, without taking on the risks. Most importantly, they’ll be ready to adapt to whatever challenges may appear tomorrow.
By Charlie Platt, sales director, financial services UK and Ireland, Software AG