There have been many terms weaving in and out of headlines to define a new form of digital-banking innovation in incumbent banks—parallel bank or flanker bank as well as “build and migrate” implementation approaches. The basic premise is the same: set up a new digital brand from the ground up that is not afraid to cannibalize the existing bank. In the past few years, we have seen this trend emerge all over the world with the likes of Bank Leumi’s Pepper and Equitable Bank’s EQ Bank.
This trend is, in fact, gaining momentum. According to a recent report published by Temenos and the Economist Intelligence Unit (EIU), “A whole new world: How technology is driving the evolution of intelligent banking”, 36 percent of respondents selected launching a digital bank as their preferred innovation strategy.
What is intelligent banking?
Before discussing the challenges that traditional banks face on their digital-banking journeys today, let us consider the destination itself: intelligent banking. Looking into the future, say five years from now, an intelligent bank will be a bank that will seamlessly and digitally offer a whole range of services to its customers, with payments as the glue to hold it all together—services that are personalized, proactive, relevant, convenient and safe; services that fully exploit data, analytics and intelligence. To get there, a bank needs to create a culture and digital ecosystem of innovation, openness, agility and growth. It is also imperative that it has technology that is cloud-native, cloud-agnostic, API (application programming interface)-first and digital end-to-end, with embedded, explainable artificial intelligence (AI) and machine learning (ML)—to not only automate processes and offer insights but also explain how decisions are made. Only with the right technology platform can a bank provide the seamless journeys, the “bank of me” experiences, for which today’s consumers are looking.
Challenge #1: New technologies
In this year’s report, we see a clear shift in priorities, with respondents to the annual survey now ranking new technologies as having the biggest impact on retail banks in both the shorter-term (36 percent) and longer-term (42 percent). Until now, changing customer behaviour and demands, along with regulation, led the key drivers for strategic change. This year, technologies such as artificial intelligence, machine learning and blockchain have replaced the previous top trends as the key drivers of strategic thinking at banks around the world. Regulators are increasing their focus on digital technologies, while banks themselves are cementing their digital investments in cybersecurity, cloud and AI ahead of modernizing their front and back systems. From the growing view of technology’s impact by 2025 (up to 42 percent), it is clear that bankers are highly aware of the need for innovation.
These technologies enable banks to add new features quickly as new ideas take hold and allow for scale when the bank’s services attract the public’s attention. However, a bank needs to be digitally ready in order to exploit them.
Challenge #2: New entrants
Banks are also competing with new entrants such as fintechs, neobanks and e-commerce-platform players. These players are technology-driven, customer-centric organizations that successfully exploit disruptive technologies to develop compelling financial-services propositions for their customers, all at a cost and order of magnitude lower than that of incumbent banks.
Neobanks such as Volt Bank, Judo Bank, Monzo Bank and Grasshopper Bank have been built from the ground up to be digital end-to-end. Meanwhile, the technology and e-commerce disruptors, the GAFA (Google, Apple, Facebook and Amazon), of the world are testing the boundaries of the different verticals and coming in with a technology-first perspective. This begs the question: How does an incumbent bank compete with the fast, agile and digital-native entrants into the market? How does it transfer from a culture in which the business and products drive strategic decisions to one in which technology empowers the business, without overpowering it?
Challenge #3: Legacy
Finally, many incumbent banks have complex legacy-system-based IT (information technology) architectures that predate the digital era. These have often been built on frameworks of product silos with product-based banking services that are hard-wired into channels. This makes them inflexible and difficult to change, expensive to run and risky to dismantle. Many banks are choosing to progressively renovate their legacy systems, slowly rolling out new technology across their businesses. However, these progressive-transformation approaches to modernizing core banking infrastructures tend to be complex, multi-year projects based on a series of sequential implementations, with high initial investments and later-accruing benefits.
Built on top of the legacy technology are the legacy processes, organizational structures, mindsets and cultures that pervade many incumbent banks.The question becomes: How do you break the mould and travel quickly on the road to becoming a digital-first bank?
Breaking the mould: A fresh start on the road to digital
The desire to break down the barriers that these challenges present has long motivated banks to re-evaluate and redefine what a traditional bank looks like. While previously we saw banks primarily being driven to digitally transform themselves, banks are now increasingly considering the alternative: launching a new bank under a new brand, while leveraging the expertise and compliance of the incumbent.
More and more, this need to break the mould at speed is driving incumbents toward creating new standalone entities that emulate fintechs, in terms of both agility and innovation. Incumbent banks have a competitive edge over neobanks and fintech disruptors here—they have the opportunity to build a new bank upon an existing foundation and history of compliance and regulatory expertise that inevitably comes with years of owning a banking licence.
Building a greenfield digital bank is a development that we are seeing taking hold worldwide. For example, Openbank, the digital bank of Santander in Spain, Bank Leumi’s Pepper in Israel and Equitable Bank’s EQ Bank in Canada are all examples of this approach. RBS (Royal Bank of Scotland) in the United Kingdom and Standard Chartered in Hong Kong and Africa have also been building digital banks.
By setting up a new entity on a modern end-to-end technology stack using cloud-native and cloud-agnostic technologies, banks are finding a viable way to implement their digital transformations. Implementing in the cloud not only offers security and scalability but also the ability to continuously deploy updates and launch products at will—coding in the morning and deploying in the afternoon. This frees banks from the complexities and subsequent high costs and risks of progressive renovations, massively reducing time-to-value. Digital banks such as Judo Bank have become operational in just 12 weeks in contrast to traditional approaches.
With 3,000 banks running on Temenos software, and active conversations with prospective customers around the world, we regularly engage with banking leaders who are grappling with defining the best strategies for their organizations. In our conversations, we are seeing many executives, especially at Tier 1 or 2 banks, actively contemplating setting up greenfield digital-only banks to compete with the new players at speed. Some are also considering this as a viable means to transform, by subsequently migrating their existing businesses onto their new digital bank—such a strategy can sharply accelerate digital transformation.
By launching a standalone digital bank with a new brand, a traditional bank can take full advantage of new technology and design a new culture that has technology at its core—creating a bank that is digital-first.