By Chris Mills, Head of Global FMS Sales, Finastra
Banks yet to embark on a digital transformation can no longer put off the inevitable. To remain competitive in the long term and prepare for a world of open, contextual and embedded finance, each strategic line of business must urgently accelerate its journey to open systems.
Any banks that have stood still during the pandemic must now take action. Any that remain mired in complex, monolithic legacy architectures will struggle to attract and retain digital-savvy clients looking for the best possible service. Competition from digital challengers, fintechs (financial technology firms) and big techs is increasing across all areas of financial services. With new players aggressively targeting different parts of the banking ecosystem, no bank division is immune to change.
Think of the transformation journey as a road trip. The target destination: a business model that provides the ability to adapt and deliver new products and services to market quickly, serving client needs in the most competitive way. The bumps in the road: adding new customizations to an old car (or the bank’s monolithic core systems) to reach this destination. This approach isn’t the answer. In this scenario, any performance increases are likely to be temporary fixes that more agile competitors will soon overcome. The best response should be to stop and start anew—to upgrade to a new car that will get you there efficiently and safely.
Planning the route
A familiar challenge to many senior bankers given transformation mandates will be knowing where to begin. They want to solve the problem and become more agile, but in the meantime, they have to ensure they can continue to serve clients in a “business as usual” way. Transforming the mission-critical software they have in place can seem like a big challenge, and they want to know how best to move forward.
Over the years, bank divisions have spent time and money customizing their software, aiming to differentiate the services they offer clients. Today, these customizations have become unwieldy, difficult and time-consuming to update, and the profitability of maintaining them is shrinking. Customizations complicate software upgrades, making it difficult for banks to keep up with the rapid pace of change required.
A managed services approach offers a clear roadmap—allowing financial institutions to fast-track specific lines of business to a new way of operating that’s fit for the future. It’s a good way to evolve and compete in a challenging market without the need for an all-consuming Big Bang transformation program.
Navigating the journey
The managed services practice involves standardizing the bank’s core software and moving it from on-premise deployment to a cloud-based data center. By outsourcing business-process operations and technology infrastructure, banks benefit from fixed, predictable costs, resilient service and increased agility because the software is continually updated.
In the past, cyclical upgrades and releases often diverted huge amounts of human and financial resources as banks faced the constant struggle of keeping systems and products up to date. Moving to a standardized core dramatically streamlines that process. Differentiation will come not from changing the core but ensuring it is standardized and open so that value-added apps can be easily accessed and integrated, fostering innovation through a platform-based approach.
The managed services approach provides the building blocks to help make the transformation journey faster and better quality while allowing banks to focus on being more competitive. With a managed services partner to take care of a bank’s operational and technology burden, in-house teams can redirect their resources towards innovation-led programs focused on key competitive priorities, such as bringing new products to market faster. This way, they are enabled to move at the speed of digital banks.
Knowing where you are
As the old banking model struggles to adapt, most banks now recognize the importance of resetting and rebooting. A pragmatic approach means stopping to think about where you are in your journey across all business lines and adopting managed services to stabilize your systems. Only once banks stop layering additional complexities on top of existing systems will it be possible to reset and accelerate.
Each bank business unit—such as lending, payments, treasury—needs to be part of the transformation journey, deploying business functionality in a more agile way. To achieve this, banks should ask themselves: What services and skills provide a competitive advantage? What should be kept, and what should be outsourced to partners? And crucially: How can line-of-business (LOB) operations transition from being cost centers to profit centers?
Traditionally, banks have seen the value in outsourcing cost-intensive processes to drive efficiencies and reduce costs. They are now increasingly recognizing the value of also outsourcing key operations within their profit centers. The advantage is that they can benefit from fixed costs and eliminate the lumpiness associated with the old way of working, making it a much more efficient way to run the business.
Banks can become utilities in areas in which they excel—for example, in areas such as lending and payments, knowing that the underlying tech is provided at fixed costs. This gives them much more certainty and predictability.
Following a clear route map
Having a clear, step-by-step route to digital transformation is crucial for banks to stay on track. Typically, the transformation journey is broken down into five levels. At each stage of the process, banks will see returns on investment in increased efficiencies and improved customer service.
- Stabilize: The first step involves re-examining the software used, thinking about what’s necessary and what can be removed. The idea is to eliminate complexity so that banks can easily upgrade their software within a short timeframe and at a low cost to remain in sync with and fully benefit from upgrades included in the software roadmap.
- Simplify: The next step involves removing redundancy and getting rid of processes or software that are difficult to test and hard to upgrade, such as Excel spreadsheets. It’s also about moving to Application Programming Interface (API) sets, ensuring standard integrations and reporting.
- Standardize: Once the bank’s business unit is using a more simplified piece of technology, it’s much easier to move towards becoming more agile and more serviceable, knowing the edges of the application and costs associated with running it.
- Streamline: This is about increasing serviceability and agility, allowing for continuous modernization and fully automated testing.
- Serviceable: Once all the software is fully serviceable and open, banks are in a position where the service is evergreen and instantly scalable, allowing them to focus their attention on growth and innovation.
The most sensitive and mission-critical business services require careful transition to managed services—but the transformation is worth it. Banks can typically solve 80 percent of their challenges by addressing the first two steps, migrating their core systems through a well-structured process. Once a certain level of maturity is reached, banks can then refine and work on the other 20 percent.
It also becomes much easier to measure the effectiveness of the technology. Banks no longer need to be worried about ensuring uptime themselves, as it can all be managed on their behalf with strict service-level agreements (SLAs) in place, allowing them to see the use and output through the applications. Banks can also benefit from ‘Testing as a Service’ (TaaS), which is incredibly powerful across many business areas. It’s a good way of ensuring quality control, and banks can use it as a stepping stone before moving to live production processing.
It’s important to remember that the transformation journey won’t always be smooth or linear. There will always be unforeseen challenges encountered along the way, meaning the route is likely to meander from time to time.
Aiming for the winners’ podium
As the industry adapts to the fallout of the pandemic and a “new normal” way of working, now’s the perfect time to reassess where you are on the transformation journey. Adopting a managed services approach can help you accelerate your agility and performance, allowing you to rapidly deploy new capabilities in line with customer needs and triumph over competitors.
Upgrading yet simplifying your vehicle (or core architecture) and making it fit for the road ahead will help reduce the total cost of ownership; working with a partner will make the cost of the journey more predictable and manageable. Only then can you reach your target destination: gaining the ability to innovate at pace in preparation for a new world of Banking as a Service (BaaS) with embedded and contextual finance.