• Charlie Platt, Sales Director Financial Services UK and Ireland at Software AG


• 24.08.2016 08:45 am
undisclosed

The push for digital transformation is now coming right from the top in banking, as CEOs want their organisations to forge ahead of the competition.

The pressures are building up on all sides. On one flank, established banks are under attack from leaner Fintechs and challenger banks that are unencumbered by legacy systems and can use data and automation to interact with customers more snappily and imaginatively.

On the other side are the regulators who require ever greater complexity of data from banks to comply with the heavier burden of regulation following the financial crisis of 2008. Indeed the squeezed margins and reshaping of the banking sector in the wake of the crisis exert yet more pressure to innovate and search for value.

Institutional clients too, make more demands of banks, wanting more sophisticated information and more frequent real-time updates about the large amounts of capital they have entrusted for investment.

In addition to these challenges, banks are also facing potentially seismic new regulations like the European Union’s Payment Services Directive 2 (PSD2), which will require them to open up their APIs to third-party apps. The Competition and Markets Authority in the UK, meanwhile, is also proposing a similar shake-up with its Open Banking programme.

The realisation has dawned that unless established banks undergo their own digital transformation, they will succumb to these new market forces. In particular they will lose out to the combination of third-party aggregators, Fintechs and payment-enabling giants such as Apple, who threaten to stand between them and their customers, siphoning off all the profitable business.

Digital transformation not digitisation

However, as banks seek to reorient themselves, they are often uncertain about what they should do and frequently confuse digitisation with digital transformation.

Digital transformation is about much more than creating a phone app so that customers fill in the same forms with their fingertips instead of a pen inside a branch.  It is about redesigning processes right across a bank so it can employ entirely new ways of conducting business, attracting customers and boosting revenues. Rather than regarding digital as just another sales channel, it requires the removal of internal barriers so that channels do not compete with one another to the detriment of the customer experience.

In retail banking, this will involve mapping the customer journey across all touchpoints, so that the user-experience is fast, convenient and trouble-free for the consumer and more profitable for the bank.

The challenges of legacy systems

However, little is understood about the demands this will make on the notoriously disparate and compartmentalised legacy systems that banks use every day of the year.

Furthermore, if Fintechs are allowed access into a bank’s systems to make thousands of calls on customer data in accordance with the new regulations, how can the bank exert control or react effectively to sudden peaks in demand without affecting its own operations?

While some financial institutions have already made an effort to integrate new functionalities into their legacy systems as they embark on what they believe to be digital transformation, they are in danger of underestimating what is required. With that comes the repetition of past mistakes and ever more IT spaghetti being piled onto legacy systems that are already lumbering and tangled.

Innovating with data

Transforming the customer journey, for instance, cannot be achieved unless all the bank’s processes behind it are fully mapped and realigned in relation to the way customers use channels in different ways. Banks must understand this if they are to address the pain-points and offer the far more personalised level of service, regardless of channel, that customers increasingly expect.

Alongside this, banks need access to real-time data so that points of contact become sales opportunities based on a complete and up-to-date understanding of the customer and their requirements.

Without access to real-time data derived from the ability to analyse information as it is created, there is little chance of achieving true digital transformation. Relying on traditional batch-processing in a tangle of legacy systems will never bring a bank close.

In order to avoid the major pitfalls of malfunctioning systems unable to cope with digitalisation initiatives, financial institutions need a flexible and broad-based digital platform approach to link the old and the new in total harmony.

This will give a bank much greater control and visibility of its core system, and ensure that legacy systems, which cannot simply be ripped out, will support all new digital transformation projects. Each new process can be fully optimised and integrated, bringing higher levels of automation along with lower costs.

Preparing for the future

With millions of customers, banks know they must fundamentally redesign almost all their processes so that they can drive far greater value from the treasure store of data they possess.

It will require some hard thinking about which direction to follow and the building of a consensus within what have been highly compartmentalised institutions with competing internal demands.  It will also require recognition that piling more spaghetti onto legacy systems will never permit banks to stay competitive down the line. It will simply be impossible.

Yet once they have the digital platform that will bring all their systems together, banks will find few barriers to innovation because the future is going to be entirely about data, processes and access to data. With systems that have been transformed, a reborn bank will emerge, deploying its natural advantages of size and scale to beat off its competitors.