Eli Rosner, Chief Product and Technology Officer at Finastra, explains what banks must do to keep up with the blistering pace of technology transformation.
When arriving at a crucial moment, the analogy of a crossroads is often employed. The implication is that a decision must be made, a path decided upon. Today, organisations are becoming ever more used to these moments. Emerging technologies and the presence of disruptors in all industries means firms must adapt or be left behind. In the world of banking, incumbents must now contend with challenger banks and an ever-growing number of BigTechs and fintechs. Using new technologies and programming languages, and working with more modular architectures, these firms can develop new products and services that meet the needs of the banks’ customers with ease.
If incumbents are to level the playing field and compete in the digital age, they must seek to overcome the challenges that prevent them from delivering value at pace. Here’s three key tips for getting ahead of the game:
The first thing any bank must do to increase innovation is to acknowledge the challenge and implement a digital-first culture. By establishing a ‘big picture’ that shows how digital transformation aligns with business goals, buy-in from the board can be achieved. But in order to establish a new mindset, legacy structures and practices must be addressed.
Traditional culture within banks organizes teams into functional silos, with business staff operating separately from the technology experts. This system means there is a significant disconnect between business objectives and innovation. Take, for example, the broad business objective of improving customer engagement through digital assets. In the past, when a lack of competition from challenger banks and fintechs meant banks could take their existing customers for granted, the need to improve customer experience was not so pressing. If, for example, customer feedback indicated that web services needed improvement, this area would likely become the next job for developers, but there would be no immediate call to innovate. Banks were of a mindset that focused on customer acquisition, which they achieved through existing proprietary offerings, rather than retention.
Today, increased competition has altered the landscape. Banks now recognise that they must adopt a more customer-centric approach – and today’s customer demands innovation.
Overcoming legacy systems
Legacy core banking systems at the heart of banks’ IT infrastructures are responsible for stifling innovation. Built and gradually updated using now outdated technologies and languages, these cumbersome monoliths are made up of hundreds of interconnected applications. The result of this is that the majority of an in-house full stack developer’s time is taken up with maintenance of these systems – not building new applications for the customer facing environment. Digital transformation is a must to overcome the problem of legacy, but for banks this process must be a gradual evolution. Ripping and replacing these systems, many of which are mission critical, is not an option.
Consider the main systems a bank needs to operate effectively. They can be broken down into three areas:
These are the back-office core systems. Software here is typically developed using a linear, or ‘waterfall’ approach. It’s OK, as well as necessary, for developments and changes to these systems to move at a slower speed.
These include decision-making, pricing, analytics and risk management tools in the middle office. These will need updating more often to accommodate changing business practices or customer requirements.
These are the customer facing apps and must be updated frequently. It’s here where banks are struggling to innovate, and where they are most at risk of losing out to competitors.
It’s clear that legacy structures will require legacy development practices, but when it comes to innovation, banks must look beyond their own systems and workforce to operate with greater agility.
To deliver the products and services demanded by their digital-first customers, and achieve digital transformation themselves, banks must empower their developers, as well as collaborating with more agile technology specialists to overcome their infrastructure challenges. Fintechs may form a significant part of the competition in many of the markets banks traditionally owned, but they should not be viewed solely as poachers. Fintechs are first and foremost technology specialists, operating and engaging with the latest software development tools and practices, and are eager to have their technologies leveraged by financial institutions.
Cloud-based open development platforms that focus on providing access to banks’ core systems via open APIs are the most effective means of enabling this collaboration. These platforms offer a safe and secure environment in which agile third parties can build, test and run applications, without risk to the banks’ core systems. It’s a win-win scenario that allows banks to tap into the wealth of innovation going on outside of their walls. Further to this, a platform-based approach also gives in-house development teams the freedom to build, test and run new applications in the same, risk-free environment.
Innovation at banks that adopt this collaborative approach will consequently move on two different tracks, at very different speeds. Internally, core systems will be evolved slowly, while new applications created via platforms will reach the customer-facing environment at pace. Once a culture is in place to support this strategy, banks will achieve the agility needed to compete in the modern financial services landscape.