The end of transformation? Some popular misperceptions about digitalisation
APAC Head of Banking
Perhaps, with just a few changes to the customer experience (CX) and some modern fintech solutions integrated into the already complex architectures to optimise, update or automate certain processes creates the belief that digital transformation is done. Unfortunately this perceived completion is far from reality. So what’s next?
The right tech but too few customers
Neobanks have certainly shown the way ahead: banking services can be reimagined, banks can be reinvented, new viable business models are possible, continuous innovation is a reality.
But for many neobanks, the basic challenge is still customer acquisition, and their customer numbers remain too small to challenge the market domination by incumbents. This is partly because the level of customer trust in neobanks is still low and needs to increase to alter the market structure. People don’t switch bank eagerly and inertia is the norm. But this will change in the near future as new generations – particularly the tail-end of the millennial generation and GenY and GenZ – show little interest in joining conventional banks.
Migration does not equal digitalisation
Incumbent banks must be cautious before they claim ‘digitalisation completed’. While many have made some fundamental changes and adopted fintech solutions to optimise their current architectures, there’s a lot more work to do. Most current technology infrastructures and processes are a hybrid of digital and manual, and legacy core banking systems remain a hindrance to business process streamlining. Incumbent banks remain prone to systems outages, many are not yet in the cloud and are powered by mainframe solutions that are often decades old. The truth is that new products can take too long to deliver and continuous innovation remains out of reach as many incumbent banks still depend on outmoded business processes and traditional business models.
“At some point, every incumbent banks must replace its core banking system, but for most this also requires fresh thinking about how work gets done.”
In reality, replacing a core is often akin to ‘heart surgery’ where the existing core is benchmarked against a new generation then replaced, while the surrounding architecture is retained. However, this approach is not only risky but outdated and unnecessary. Why?
There are a few fundamental issues with this approach. First, with the focus on pure functionality as a benchmark, true digital transformation is addressed only by a modern architecture, tech stack and a complete rethink of the development processes. This requires a revamp of the status quo: teams need to be upgraded and up-skilled, investments need to be made, and the ownership must belong to the business leaders not technology. Incumbents also tend to upgrade the current Core Banking but in the cloud, this approach is indeed less risky but remains nothing but the same. No fundamental transformation or redesign, some even opt for an in-house built Core Banking, imagine that! Thousands of hours to build something that will never be better than a new modern core banking supported by a composable architecture.
A business roadmap is crucial – incumbent banks need to reinvent themselves and must be led by a revamped offering of current and new banking services.
Unfortunately, the traditional ‘build and migrate’ approach or just upgrade the current Core Banking remains commonplace among core replacement programs. And a transformation that follows the principle of ‘compare the core functionality, minimise customisation and continue the previous journey’ will fail to deliver true digitalisation. Without a complete redesign and rethinking of how a bank will innovate and deliver banking services, a transformation will never deliver on its promise.
The time is right for CxO and bank business leaders to rethink and reimagine their current operating models to deliver digitalisation that delivers on its promise of bank transformation.
In practice much of the banking industry has not reached the end of transformation, however most incumbents should endorse the END OF MIGRATION.
The best approach with minimal disruption to business as usual is to build ‘a bank within the bank’ to support the launch of new products and to minimise the integration points with legacy infrastructure. This adjacent approach empowers a bank to build a new bank with a composable architecture, microservices, event-driven, with a complete new tech stack and a new generation core banking. All this modern technology can – and should – be built in public cloud, because with private clouds the required CAPEX investments will usually be prohibitively high. After a period of reflection, most regulators have approved public cloud, and it seems inevitable that remaining ones will do so in the near future.
Next-generation core banking systems are fast, scalable, and extremely powerful and flexible product engines, with focus on product and client ledgers. This contrasts with building and packing all the functionalities in a single box as was the norm with the previous generation of core banking platforms. New solutions must be viewed continually in the context of a bank transformation, rather than simply improving what has gone before.
Digitalisation puts customers first
Bank leaders need to look at next-generation digital banking beyond the single core banking platform mindset. Traditionally this began with the functionality available in the core and ended with the customer. A modern core begins with customer and ends up with the ledgers within the core. In this way a modern core empowers a bank to become more agile and customer centric.
Step gradually into new technology
The end of migration doesn’t mean, clients, products and banking positions will remain entrapped legacy systems. In practice it means we stop ‘big bang’ migrations and the pursuit of ‘build, shift and lift’. Instead, we can build new alongside the old, and we embark on a digitalisation journey fuelled by business benefits. New products can be created, launched and managed on modern technology and legacy products progressively redesigned and reinvented. Once ready we move the clients and positions to the new, and step by step we move out of the legacy.
This approach gives incumbent banks time to upscale their IT teams and stagger investments while generating new revenues. It’s smooth, it’s definitely less risky and sets the incumbent banks on the path of continuous transformation and adaptation.
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