Insights

The future of banking lies in continuous digital transformation

Alvaro Ruiz, UST General Manager - Banking & Payments, Europe

In the last decade, growth in the digital economy, new technologies, and the ability to ingest, digest and analyze large amounts of data have boosted a new wave of innovation by financial players. And that wave of innovation will intensify in the coming years.

New players and business models are entering the financial services market. They are increasing competition, helping meet unfulfilled customer needs and creating new ones. They are also reducing inefficiencies and changing the way institutions provide – and consumers and businesses use – financial services. It could transform the structure of the financial sector, with implications for customers, firms and regulators.

These emerging business models are unbundling, decoupling and de-layering traditional financial services activities into individual core functions. FinTech, digital banks and big techs are taking positions in the traditional value chain, decreasing traditional players' share and revenue and hiding banking services from the end customer.

The disruptive explosion of blockchain-enabled, decentralized environments, instruments, currencies and payments has begun to take effect. The corresponding enablement of new business models in new virtual realities and their coexistence with traditional financial markets could change the current context in the coming decade.

It is indeed a game of digital transformation (yesterday is late); moreover, it is a game of innovation in every aspect. It is a game of reviewing traditional business models, challenging existing paradigms and opening the door to the ecosystem (sometimes strange fellow travelers) to participate in your value chain and collaborate with other players' value chains.

The pandemic has had a strong acceleration influence in this context, spurring main drivers of transformation in banks and boosting clients' digital habits, imposing more pressure on incumbent players' costs, and forcing re-invention and innovation as the only way to survive.

Common gaps and challenges faced by financial services institutions:

During the last decade, most financial institutions started their transformation journey but often dealt with immature technology, lack of capabilities, and reluctant cultures and organizations. High investments with unclear objectives, returns, and regulation burdens frequently impact their clients.

We have partnered with several financial services institutions, helping them in this journey. Our experience has shown us that the main challenges are:

1. Deploying CX/UX oriented-IT products and features

In the current challenging situation, technology is not only the "how," enabling financial services players' transformation strategy but, in many cases, is the "what" to remain relevant for end clients. Finding new ways to interact with clients, increasing engagement, and gaining clients' loyalty by providing relevant value where and when the clients need them is key.

2. Speed to market To enable competitive advantages, technology must support, in a reasonable time, the new functionalities, products, and features required by the business to enhance existing business models and create new ones. For most financial institutions, bringing a new product/complex feature into production takes 4-8 months in just one market. Agile ways of working, cloud adoption, DevOps, pervasive automation, data platforms and AI are the foundations for the required big shift in business models and time to market. It involves:

A) Choosing the right next-gen architectures for your business needs, finding the right combination of market products, platforms, and custom-built developments

B) Having an E2E DevOps platform, including speed-oriented coexistence with legacy development (when required)

C) Killing legacy bottlenecks as soon as possible

D) Investing in a healthy optimized lasting legacy (the legacy that will take longer to kill)

E) Adopting agile ways of working aligned with investment prioritization

3. Reliability Whether it's a next-gen, legacy, hybrid, software, or hardware supporting system, business services require always-on models. They should be able to digest processing demands without service outages and perform. Additionally, innovation requires technology to support hot changes with the lowest service disruption.

Increasing processing volumes, higher peaks, and next-gen technologies combined with slow legacy decommissioning create highly complex technical environments. New coexistences multiply potential points of failure, make failure root cause analysis difficult, and increase recovery times. Reliability involves:

A) Having a Business service view. Business service is agnostic from technology towers and applications involved. This view is key E2E to mapping the architectures, platforms, software applications, and infrastructures that support them. These help impact analysis and monitoring, incident and problem solving

B) Finding your right availability model. This means high availability for mission-critical services and the best balance for the rest

C) DevOps. DevOps is crucial since many incidents usually stem from changes

4. Efficiency and Productivity In this context of increasing processing volumes, , and higher peak processing requirements, that I just mentioned, Next generation technologies promise higher productivity, capacity, availability and flexibility at a lower and consumption-based unitary cost, but in order to fulfill this promise it is crucial to keep a close focus on:

A) development productivity (doing more with less and faster, this is again devops)

B) Strong focus on Legacy decommissioning (which means savings but is also means moving from fix to variable costs)

C) Focus on cloud consumption control (avoid free bar perception usually linked with cloud) together with evolution to consumption-based models and internal cost allocation based on consumption and

D) Right sourcing models, that means what to insource, what to outsource, what knowledge is strategic and needs to be retain and what can be externalized or contracted to vendors, etc.

5. Open the bank to the ecosystem In the current context of new and specialized players championing the provision of digital experiences built on decoupled banking services, it is vital to implement a platform that enables participation in the ecosystem. This integration platform is your portal to the ecosystem. It will allow your client value proposition by integrating other players' pieces, and your pieces to be integrated into other players' clients' value proposition.

A) Open banking platform. This platform will be, by definition, your door to open banking

B) It Should be Cloud-native, Low code, and built on reusable microservices

C) Ready to integrate any new Fintech/player in weeks

D) Ready to integrate with any Front-end in weeks

E) Ready to connect with one or multiple core banking look for the best of breed under the new "Coreless" banking concept

6. Measurement and meaningful KPIs Most organizations struggle to find comprehensive, tangible, and meaningful KPIs to measure and follow up evolution in all the previously mentioned areas. Not having the right KPIs often hides malfunctions and avoids correction actions.

7. Getting the most from data Despite the mantra that data is the gold mine for business, we cannot fully exploit it. Organization, governance, cost control, and speed to market are just part of the main challenges most institutions face. I would emphasize two things to get the most out of cloud-native capabilities and maintain data preparation and curation at the source point (data mesh concepts).

8. Regulatory inhibitors Regulation has imposed some restrictions (data is the main bone of contention) that inhibit or increase relevant adoption, complexity, performance and reliability.

9. Business service view The main challenge underlying all these challenges is the disconnection of IT components and organizations from the business services they support. Technology is infiltrating and getting to the core of every line of business. At the same time, technology is becoming more complex, increasingly atomized in components, and the technical knowledge more specialized. This generates a disconnection between the business service and the technologies supporting them. LOBs find it challenging to understand technology issues, and technology teams don’t always have a clear purpose-based view. To reconnect the two visions is important to map business services with the architectural components, platforms, application software and hardware supporting them. As previously explained, this will open the door to new frontiers in efficiency, cost control, security, resilience and business continuity.

Partnering with experts who extensive domain and technical knowledge will help banks address their customers’ needs, distill agility in business, and generate insights from data to increase business value.

Watch the on-demand webcast to learn more about the most critical factors to address when embarking on the technology transparency mission.

To learn more about technology transformation in financial services, visit Financial Consulting Services and Transformation Solutions | UST.