How banks are getting the digitisation of core banking wrong

By Alex Hammond | 23 August 2017

Madhur Jain, Global Head, Pre-Sales at SunTec Business Solutions, is one of the fintech industry’s most insightful analysts on the subject of digitalization of banks and the shift to omnichannel retail banking solutions.

Madhur sat down with bobsguide last month to speak about the need for banks to look closely at whether their core banking processes are fit for purpose, why rip and replace IT solutions are destined to fail, and the need to look for partners rather than internal development in order to keep up with the pace of change the industry is currently experiencing.

What is the main message you are trying to convey when you speak to technology purchasers in financial services?

The main message I am trying to get across is that digitalisation does not stop at the channels. While a number of banks are earning huge amounts of money through making their channels better and by bringing in new channels and beginning to implement an omnichannel experience, it is still not enough.

Digitalisation means the fundamental shift in your thinking, and a fundamental shift in the way you approach your customer relationships.

Everything needs to change fundamentally, real digitalisation comes from ultimately being customer centric in its true sense, with the support of technology. Currently if you look at how financial services are measured or how they are organized, it is not with the customer at the centre; they are new product centric. Rethinking that strategy is one part of the message.

The second part of the message is that while banks have been investing in these new channels to expand core banking systems over the years, in order to bring more capability and more functionality they have added “bolt-on” software to the core system which is now not strong enough to meet what I would call the new rules of engagement we see today.

The way banks engage the customer has changed, from pure branch-based banking systems to digital, through the benefits of customer data. The way banks want to engage with customers has forced them to add capabilities by laying complex technology on top of their core systems to try and meet these new customers’ demands, in terms of time to market, in terms of personalization etc, whatever those financials are.

We clearly believe that you need to bring in a digital core while your core systems continue to be critical, because they have an important place in the scheme of things. But it is very important that banks bring in a middle layer of engagement and use data to completely drive the way banks engage, including the way they design products, or the way customers can personalize those products or contextualize them for an engaged customer through the lifecycle so that it remains contextual. That is dependent on the system being agile enough to adapt the entire process, the back office, and the way banks interact with customers.

Do banks have a fundamental disagreement of what the future of core banking should look like, or is there an agreement on what the future model is, but banks just don’t know how to implement it?

I think it’s the latter. At a broad level I think there is an agreement that core systems in the way we would call them core systems are not yet agile towards the market. I think that’s very clear.

I think the other angle that banks are understanding is that the rate of change in the space of channels and the customer demands are rapidly accelerating. So, having something which affords you the agility and allows you to be responsive or even able to anticipate customer needs or demands is critical.

Today banks are being beaten by fintechs or similar organisations simply because of their agility and their focus to solving specific problems.

There are a number of progressive banks, even larger banks such as Deutsche Bank for example, who are clearly thinking of fintechs as partners, because engagement with the customers and customer experience is much more difficult for them to manage and that system of engagement orchestration is critical.

Clearly there is a data and technology challenge, and the larger the bank the greater the data and technology challenge is. Data spills out, data is not in sync, data is dated. Huge sums have been spent on different technologies, different systems which don’t talk to each other. It’s very obviously a problem but I do believe there is a technical solution.

The other dimension I clearly see is the mind-set struggles of some organisations. Banks have been focused on product centric strategies they have been comfortable with for so long that it has become a barrier.

So there are challenges, but the question is how banks will meet them. Because the banks that can’t, who knows five years down the line whether they’ll exist or not, because they’re just going to be outgunned by smarter banks or the newer incumbents.

Do you really thing that the situation is that grave? We could legitimately see established Tier 1 banks actually struggle and maybe even go out of business within the next five years?

MJ: I wouldn’t be surprised, to be frank. Let’s take the example of what PSD2 will mean. Again today many banks are focusing on PSD2 as if it was a regulation they have to meet. I agree with the people that are saying that there is going to be a fundamental shift in the model of banking because PSD2 is making access to data democratic.

Banks who were kings of having all the customers are now not necessarily the kings of customers’ data. They won’t own the customers journey necessarily anymore, and a major source of revenue [transaction banking] for many banks will take a huge hit because a bulk of revenue will be displaced to third parties.

Unless banks are willing to change through digitalisation to engage their customers, but also fundamentally change the way they are doing businesses, I wouldn’t be surprised if we see a few banks which see a significant hit in their businesses, even to the extent of having to close their doors.

Is the need to evolve overdue, or have the demands of user experience and customisation accelerated the pace of change incredibly quickly in the last couple of years?

Clearly the pace of change in the customer experience has forced banks to change, and we very clearly see a number of larger banks who have started, and maybe not completed the journey, but have spent a lot of money and time in completely changing the way they are managing and engaging with their customers with a significant focus on the end-to-end customer experience and not just the channels.

All of these banks are playing it smartly, because they are not trying to replace their legacy systems. Changing the current legacy of the core systems of all processes is too risky, too expensive, and more critically is not needed.

As long as legacy banking systems continue to be used for what they were designed to do i.e. account keeping, balance management, transaction processing etc, then they remain extremely good at that. They are extremely resilient, and can scale up. And then forward-thinking banks are very clearly supplementing these legacy systems by bringing in a more agile layering for other functions. They are incrementally changing that layer of engagement and how they would interact with their customers.

Deutsche Bank is changing not only the systems and the processes. But also its business models. The bank wants to closely concierge with customers. It wants to know the customers journey entirely. That is because banks see the risk not coming from the current challenger banks, but from digital giants such as Google or Apple.

Could the banks could have identified the issues sooner, or have they responded to the change in the industry as quickly as they could have done?

There have been banks which have been quicker out of the blocks that are now in a position to take advantage of that. And there are some larger Tier 1 banks who have not necessarily moved that fast and they will clearly have to catch up.

Is it possible for a bank to overhaul its system internally, or is that process so complicated that it requires partnering with a provider?

I think from a skills perspective, banks do have sufficient resources within their organisations. And many banks are now bringing in young gifted chief digital officers. These chief digital officers are in charge of the customer engagement journey, they’ve seen the trends develop, some of them have worked for other entities, others have learned from other industries, so they are aware of how they want to move forward to a certain extent.

But due to the pace of change in the technology in the customer journey space, it would be ideal for banks to partner with one of more vendors. There are a number of good tools in the market which would help manage processing end-to-end, and orchestrate that eco system, and importantly the time to market of the new scheme would be much faster. If banks have to build systems internally, with the priorities they have in terms of spend it could be years before the technology is ready to market.

How would you sum up the state of the banking industry? Do you think that the direction that banks are currently travelling in is a positive one?

Yes, definitely today I am far more positive than a year ago, because I’ve seen the momentum for digitisation build in quite a few banks now, and they will drive the industry to where it will continue to succeed.

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