Digital transformation for banks on a budget

By Ian Chisholm*

The challenge

Many banking organisations struggle to conduct digital transformation on a tight budget.

Competition in the banking sector is fierce, the pace of change relentless, and increasing regulatory compliance mandates continue to erode scarce capital resources.

Compliance is often a bank’s top capital expenditure, especially for smaller mutual banks, dwarfing innovative changes to products and services that are desperately needed to attract or retain younger, mobile customers.

Yet the need to become a contemporary, attractive bank with a significant digital presence has never been higher.

As the Covid-19 pandemic experience showed, if you’re not digital, your business model isn’t sustainable long term. You can’t attract millennials or gen Z, and your pool of ageing customers is shrinking. Bricks and mortar must be complemented by a substantial online presence.

So how can you achieve that on a tight budget?

Digital transformation needs a well-considered business model, the right skill sets and capabilities to safely transition the business to a future state, and a clear understanding of customers’ changing needs and preferences.

Getting those wrong can have devastating consequences. No one wants to suffer the brand damage that follows a painful transformation. But doing nothing is not an option.

So how do boards and senior management best develop and deliver business transformation to remain contemporary in the digital realm?

How do digital services transform current business processes to deliver better outcomes for customers and staff while concurrently reducing the cost of technology, which is often the biggest expense after human resources?

Here are some strategic options

1. Tried-and-tested pathways

After the first wave of digital transformation – which was generally only building a customer portal that was adaptable to mobile platforms and desktops – new approaches for banks have focused on several standard approaches:

• Wrap-around technology

Implementing wrap-around technologies means hiding old core banking technology behind new user experiences and better workflow capabilities, while also serving as a customer contact engine. This type of configuration can be either or all of a customer portal, a single customer view/CRM system, or a UX skin, enabling better staff and user experiences when processing transactions, serving loans and opening accounts.

• Hollow-out modernisation

This option progressively externalises functions from older monolithic core systems to best-of-breed standalone or cloud-based SaaS applications. The approach requires use of application programming interfaces (APIs), which are often not readily accessible in older technology. Alternatives include using open-source robotic process automation (RPA) to access secured and unsecured lending processes and products and automating them as much as possible at a lower cost than often costly API integration.

• Core replacement

A key strategy for digital transformation over the last 5-10 years, core replacement is a high-cost, high-risk, lengthy process that can deliver significant benefits but will almost certainly require specialist external expertise to achieve success. Whether organisational budgets, a board’s risk appetite, or the corporate capacity to absorb change can support this approach is always contentious. Many organisations are moving away from core replacement due to the risk factors and costs.

• The AMP Bank example

AMP Bank chose to pivot from a core banking replacement to a hollow-out modernisation approach. That meant shifting workflows, integration, customer correspondence and architecture changes to external systems, while redeveloping the remaining core code to be cloud friendly (AMP Bank used Amazon Web Services).

2. Newer approaches

The raft of fintech and banktech organisations operating on venture capital alone or as part of large banking providers’ outsourced R&D innovation engines is rapidly changing the marketplace for core banking technology.

The global tech research entity Gartner Group, in its latest retail core banking systems review, highlights new technology engines like Mambu as much as core systems like Temenos and Finacle. That was not the case several years ago.

More challengers in that space, like Thought Machine, continue the creep into traditional banking technology, putting pressure on the costs, features and services of incumbent banktech providers.

Composable technologies 

One feature of the newer approaches to banking systems is composable applications, where the end application (for example, retail banking, insurance or finance systems), is composed of smaller elements that can be assembled into the final product. That provides flexibility, given the Lego-style architecture it requires, using multiple APIs for data transfer.

Composable applications, as ready-made elements of software that can be brought together to compose a new application, such as a banking system, insurance policy or claims engine, provide inherent advantages, including easy integration, the ability to make rapid changes, and lower costs.

Composable elements include KYC (Know Your Customer – the mandatory process of identifying and verifying clients’ identities when opening accounts and over time), fraud detection, account origination and credit approval.

Composable technology is designed to be cloud first, API first. That approach can give innovative banks better platform changes than the tried and tested pathways to modernisation, often reaching quick value to customers at a lower cost.

However, the approach is new and can use technologies in the cloud that traditional banks are unfamiliar with, such as more flexible, nonrelational NoSQL databases. SQL (structured query language) databases have been the dominant database structure since the 1980s, so moving beyond SQL is leading edge.

Board options

Given the options, how best do organisations implement digital transformation on a budget?

The needs are:

• Remaining contemporary to a new generation of customers with product offerings, service channels, features and benefits.
• Keeping costs low, success high and staff engaged for whichever corporate approach is adopted.
• Aligning the technology approach to the future business model and the value drivers required.

Practical tips for the journey:

• Select the technology approach best suited to the organisation’s business strategy, value drivers, risk appetite and benefits to be delivered.
• Develop a sober assessment of the organisation’s capability to change and what needs to happen to increase transformational success.
• Select the right business partners that can stay the journey and be true value-adding partners before, during and after the transformation.
• Roadmap and meticulously plan the transformation journey, ensuring benefits are harvested along the way, phases and initiatives are manageable, and resources adequately allocated to each activity to increase the likelihood of success.

Tips for smaller banks and mutuals

Many smaller banking providers do not have the capital or appetite to risk an all-or-nothing core replacement approach. They are better suited to a hollow-out modernisation. Their risk appetite better aligns to a progressive transformation – picking specific and discrete elements of the transformation journey and running with those to gradually replace significant parts or the entire core system over time.

A raft of technologies can be valuable friends:

• Use open-source RPA instead of building bespoke APIs
• Use cloud-based SaaS and pay as you go/use systems to avoid heavy capex software
• Use out-of-the-box integration platforms (eg, iPaaS) rather than bespoke ‘build your own’ ways of integrating
• Chatbots, especially those that come with Microsoft tools or open-source alternatives, can help keep costs low
• Use point-by-point solutions from providers rather than building your own.

The progressive approach to modernising organisations’ technology assets can reduce the friction of the operating environment while introducing contemporary capabilities. Hollow-out modernisation can also increase staff morale as they see and feel the benefits of increased automation.

Innovation and technology committees

Staff running day-to-day operations already have their hands full. Adding to their workload by requiring them to keep pace with technological change and tasking them with the ability to identify and assess emerging tech trends is generally not feasible.

Organisations serious about innovation can, at the least, implement a board technology and innovation committee, often with one or more external advisers, to keep current with the opportunities and risks presented by tech trends.

Emerging considerations for boards

Be aware of what else is coming: the focus on cyber security will remain and should be intensified. Microsoft has ranked Australian businesses as lagging in cyber defences compared to other countries and the Federal Government has made cyber risk preparedness a key requirement for boards.

In summary

Plan and roadmap the transformation journey, first ensuring alignment to the organisation’s approved future business model and risk appetite.

Break the transformation journey into phases, ensuring business value and benefits are fully tracked and delivered for each phase of the transformation.

Consider quick-win elements to maintain staff engagement and satisfaction, while concurrently managing the longer term, less visible but more structural changes that deliver lasting high value over time. Think lending processes, settlement processes and omnichannel services.

To increase the chance of success, do one monster project at a time, even if you are implementing hollow-out modernisation. An organisation has only so much change capacity while concurrently keeping the lights on. Even large organisations have become unbalanced and suffered through not maintaining day-to-day business operations efficiently throughout transformation journeys.

If you have insufficient inhouse skills, access them through partnerships that will stay with you through the journey. Good partnerships are the key to successful transformations.

Ensure the board has the tools to succeed in their governance role, through using features like technology and innovation committees and external advisers.

Be prepared for more regulatory change that will impact on organisations’ digital transformation journeys as mega-trends land in 2023 and beyond.

*Ian Chisholm is a partner and co-owner of Frazer Walker. He has more than 25 years’ operational and technology leadership experience in the insurance, banking and wealth management sectors. He has proven expertise in forming practical business strategies and building technology capability within organisations. His strengths lie in strategy and planning, governance and risk management, business process improvement, and information management.

Contact: Ian.Chisholm@frazerwalker.com; LinkedIn