The current trend of digital transformation in banks is significantly changing the banks’ IT domain with far-reaching impact. Signs of the coming-up wave of transformation are clearly visible, while the analysis of the future needs show why these fundamental changes simply cannot be avoided
There is probably not a single financial institution not being busy currently with digitalization: highly automated processes need to be implemented, the client management and relationship improved, new regulatory requirements integrated and cybersecurity significantly increased. These are only a few of the challenges which are creating headaches for COO’s, CPO’s, CIO’s and Product Managers.
This does not mean, though, that banks are adapting rapidly enough to the changes, nor is there an overwhelming belief that the changes can generate additional monetization to offset the investments in new technologies.
Flashback to 2005
In many ways, today’s challenges are reminding us of the problems from around 15 years ago, when many banks were either running on their own legacy systems or on outdated core banking platforms of third-party providers: neither the solutions nor the vendors were able to react fast enough to regulatory changes or new flexible product requirements. As a result, banks have developed a good amount of dissatisfaction over the years. «The architecture and the applications are not suited for the future». That was the main message shortly after the turn of the millennium.
Can Old Software Learn New Tricks?
Today, again, bank managers and board members are seriously doubting whether the current systems, developed mostly in the last century, can fulfill future requirements. Additionally, the vast amount of active applications and interfaces significantly increases the complexity and maintenance of the systems, when exactly the opposite is needed.
Moreover, nowadays banks are facing other disruptive factors: movers and shakers like Revolut, N26, Apple, Amazon, Google, and Walmart are demanding a piece of the global financial market cake. Aiming for specific niches like online payments, business rules, and robo-advisers, they are basically trying to win new clients with attractive front-end solutions, “best user experience” and lower costs. As a result, this is increasing the pressure on the existing traditional banks to reach the level of their new competitors in a timely manner. The majority of banks are aware of the situation and willing to react. Unfortunately, the limited capacity of the IT vendors and the high cost of the solutions they offer will make it impossible for many financial institutions to confront the competitors promptly and comprehensively. In other words, their hands are tied and the initiative to act is clearly with their rivals, who dispose of relevant tools, quickly adapt to their clients’ needs and present a fast time-to-market delivery of new products. Established banks don’t really have another choice other than to ask themselves how to prepare for the future so they can stay successful and survive in an ever-changing market.
Are Bank’s Facing Extinction?
Banks’ ability to react within weeks or even days to their clients’ new requirements for new products and services are a matter of survival. A bank’s technology unit should never be the bottleneck on the way to success. They must find and implement solutions allowing them to be fast and agile in a clearly more complex world.
I hear a lot of people saying that all products should be standardized first. In some cases, this argument can make sense, at least when the client is not affected by this. But overall, our world is pointing exactly in the other direction as the overwhelming majority of clients are asking for more and more adaptation to their very specific needs. In the area of asset management, for example, some clients will not purchase shares of companies manufacturing weapons or producing oil. Taking these clients seriously means that we need systems that can deal with the automated processing of these specific expectations in a fast and simple way – a requirement that can currently not be fulfilled by most banking systems.
In addition, banks demand that their IT infrastructure and systems reduce costs. Challengers provoke price wars which shrink the profit margins of banks even further. To survive, therefore, in a time of ever-increasing price competition, retail, private or investment banks are forced to implement a leaner cost base. The competition works with higher volumes but at the same time at a significantly lower cost.
So, what do banks need to do to meet the challenges of the 3rd decade?
- Face the wave of changes flooding the IT domain of financial institutions and its great impact on their profitability and make significant adjustments, accordingly
- Adopt IT solutions that enable ultimate flexibility
- React to changing individual needs with smooth automated processes
- Implement uncompromising data security solutions
- Avoid the depreciation of the existing system and the high cost of a migration
- Realize that the success stories of bank’s disruptors are right around the corner
- Adapt rapidly to changes, become much more flexible and create new values for their clients