To keep up with customers’ demands and drastically changed lifestyle, as well as reducing competition pressure by new players entering the market, banks are looking to digitally transform their existing infrastructures, with some establishing new digital subsidiaries to avoid legacy traction.
Moving traditional banks online has been consumer led so far, as customers opt to carry out their day-to-day activities online. Organisations that are slow to adapt and undergo digital transformation will not survive as the cost difference between maintaining existing infrastructures versus embracing the digital transformation is stark.
The complex nature of existing systems, built over many years, acts as a significant barrier to this transformation – legacy infrastructures are typically assembled from an interdependent patchwork of applications which communicate with one another in complicated ways, whereas challenger banks are born on the cloud and don’t have to contend with such problems.
An example of recent efforts by incumbent banks is RBS, expected to launch its standalone digital bank, Bó, before the end of this year. The aim of the bank is to reduce costs from £150 - £200 a year per customer at RBS, to around £80 at the digital bank, Reuters reported.
And such is the increased interest in digital banking that regulators have begun to wade in. The Monetary Authority of Singapore in June announced it would issue up to five new digital banking licences – two digital full bank (DFB) licenses and three digital wholesale banking (DWB) licenses - extending the reach to non-bank players.
Challenges in the industry
While many traditional banks are in the process of transforming their legacy, siloed systems, this may not be happening fast enough to keep up with developments of the digital challenger banks. Champions of just how quickly new digital Banks can deliver on customers’ increasing expectations with faster, better and cheaper services, are N26 and Revolut, who recently reached 3.5 million customers in 26 countries (N26) and 8 million customers in 32 countries (Revolut) in less than four years from launch.
Approximately $1trn has been invested by global retail and commercial banks between 2015 and 2018 in transforming their technology infrastructure, according to Accenture. In a review of 161 banks, the consultancy firm found that digital maturity will continue to be a differentiating factor in the future.
Fundamental for incumbent banks in the development of digital banking has been in fostering partnerships with fintech vendors. In concrete terms, the industry has seen a move from digital disruption from fintech vendors to a more collaborative relationship. In a PwC survey of 248 financial services firms, 48 percent of respondents said they had embedded fintech fully into their strategic operating model.
But equally, bigtechs are increasingly realising the expertise that banks can provide with these partnerships, particularly around regulation. On November 13, Google announced it would launch its mobile banking app - codenamed Cache - in the US next year in partnership with Citigroup, while JP Morgan has announced it will give platform companies such as Amazon, Airbnb and Lyft the ability to provide millions of customers with virtual bank accounts and to offer perks such as car loans or discounts on home rentals.
Trade Finance – the next transformation
The growth of digital banks and new business models enabled by regulation, open banking and advanced digital technologies isn’t something that is unique to the retail banking space. A sector that is particularly reliant on paper and manual processes, trade finance, appears to be ripe for digital transformation due to the many friction points in the sector.
According to an ICC Global survey in 2018 of 251 banks from across 91 countries, 35 percent of respondents said that removing paper in the initial stage and settlement stage - the most automated parts of the transaction lifecycle - is incomplete. Of those surveyed, 49 percent said that they were at the development stage of digitising processes in trade finance, while 12 percent said they were at a mature level of digitisation.
To address these kinds of issues, AGTB Holdings and Mubadala Investment announced the launch of a new digital trade finance bank proposition - Anglo Gulf Trade Bank (AGTB) in July.
The need to deliver great customer experience was a key driver of AGTB’s digital strategy, together with the belief that those that will triumph in the new digital banking landscape will be able to efficiently collect, manage, and analyse data to increase personalised client services.
The Bank chose to be hosted on the Microsoft cloud and to adopt TAS Group’s enterprise software platforms: Network Gateway and Aquarius, plus Card 3.0 reserved for future scenarios, to create its digital payment hub interconnecting international correspondent banks and corporate customers.
By choosing the right partners and most advanced solutions and technology, AGTB was able to go live in a matter of months, from project launch to processing the first transactions.
The way forward
The convergence of open banking, data protection regulation, digitalisation of services and advancement of technology and artificial intelligence has caused profound and prolific changes to the financial services industry. Both for traditional banks looking to compete against agile digital-first banks and for new challengers there is a need to engage with the right fintech partners in a proper way, to enable quick and flexible scalability, modularity, and the seamless integration of services.
Firms like TAS Group with modern technology combined with deep payments domain experience, can help incumbents overcome legacy weakness and help challengers to streamline regulatory compliance and expedite time to market. One thing is certain: the banking and payments solutions of the future will be judged by how they benefit an ever more sophisticated customer and continue to meet their evolving needs.