Digital transformation has dominated discussions among banking industry players for years, but few have shown they can walk the talk. Despite the shiny look of modern banking apps as well as faster and more convenient access to our finances than ever before, banks have only just begun to implement true digital transformation. The majority of them contented themselves with putting a bandage on a wooden leg.
Most industries are transforming their infrastructure and starting to use data on a much larger scale, but no established bank has yet fully entered this digital age. This is partly due to the fact that they digitize only a relatively small part of their customer-facing infrastructure. So while customers see and benefit from new services on the outside, the internal infrastructure that supports them remains dated, fragile, and an obstacle to true digital transformation.
The architecture that underpins all banking applications and services has remained largely unchanged for decades. Despite advances in open banking, APIs and cloud computing, as well as the emergence of new trends such as embedded finance or the rise of cryptocurrencies, true innovation in banking is still being held back by inhibitors of past: traditional banking technologies.
To truly transform, banks must take an inside-out approach, starting at the heart.
Failures of transformation: why is progress so slow?
Banks have tried to carry out comprehensive and large-scale transformations in the past, but without much success. Here are some common reasons:
Digital transformation is considered a purely technological project, not a commercial one
Far too many banks have ultimately failed because they viewed digital transformation solely as an “IT project”. While technology is obviously an important part of digital transformation, treating it in isolation without considering the changes needed at the business level is a barrier to success.
Digital transformation requires not only a complete rethinking of how business is run across the organization, but also close collaboration between business and technology decision makers. Traditionally, a bank’s IT functions are viewed separately from core business strategies and CIOs are typically not associated with strategic decision-making, when they should be at the negotiating table and have a say. on how this digital change will transform the bank as a whole.
Banks take the bodybuilder approach
Another major flaw of banks’ digital transformation programs has been their approach from the start. Like bodybuilders, Banks focused on the most impressive change on the outside, but one that doesn’t necessarily correlate with their inner health.
Digitizing through ‘superficial’ online apps and services without fundamentally changing your core tech stack or reshaping the business to reflect digital strategies means banks may look solid, but they won’t hold up as well in a fight. Superficial changes may seem nice, but are not synonymous with quality service. For example, you may have a new app that makes applying for a loan a breeze, but if the back-end is still outdated, customers may be waiting days for a response. Conversely, upgrading their core banking technology gives banks the internal strength they need to adapt and adapt to current and future demands. When times are tough and customer demand for a new service skyrockets, the strength of core technology will allow banks to quickly deploy those services or change tact – not a nice banking app!
“Pull out and replace” was seen as the only option
This point makes us think again about the strategy behind transformation projects and how banks go about updating this core technology stack. While it may seem logical to totally replace an existing system with an entirely new platform, this operation is extremely time-consuming, complex and costly. The German bank Apobank, for example, invested hundreds of millions of euros in this change, and it took four years to achieve its launch, which ended in failure. In addition to spending, banks remain technologically stalled during the transformation; innovations are impossible until the change is complete, which can cause banks to compromise themselves and lose market share.
A phased approach eliminates the risk of disruption to banking systems, and by migrating operations to the new platform one service at a time, banks gain confidence in using the new system and are motivated to continue migrating all other services and operations.
In the past, banks have struggled to do this, simply because the technology for a phased approach was not available. Today, however, there are no more excuses. Modular central banking platforms are widely available, which means banks have more options to digitize their systems and can better manage their risk levels.
Transformation is a process, not a project
Finally, we must emphasize the importance of the state of mind. Digital transformation is not a one-time project that banks can say is “done”. Upgrading to a modern central banking platform is key to giving banks the flexibility and agility to add and scale services as needed, which means their systems should never again be considered traditional – at all. risk of being qualified as obsolete. Service needs will evolve, new products will become faster and shinier – banks need to stay tuned to not get overwhelmed by all the digital transformation initiatives.
Functional fitness: the exercises banks need to start practicing
Like the bandage on a wooden leg, banks look better these days, but they still have a long way to go.
Banks need to go back to basics. By focusing on revamping their core technologies, they’ll get the functional form needed to be both aesthetically beautiful and have the stamina to keep going when times get tough. Only by making this fundamental infrastructure change can banks hope to achieve true digital transformation, innovating in the way they operate, innovate and serve their customers.