Smart orchestration of apis paves the way to success for the it organization in the banking industry.
One step forward and one step back
We have, throughout our careers, seen many digital banking strategies being visualized in colorful management presentations. All of them have had great illustrations and optimistic expectations on how easy it is to implement these strategies and how much value it would generate if an organization were to follow the recommendations which are often provided in typical consulting terms (pay attention to the words synergy and leverage here).
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These great vision documents illustrate the nirvana state, often 5 years down the line, when hopefully nobody will remember that strategy anyway. Alas, when looking back and reviewing some of these “Digital Banking Strategies 2020” written in in the early 2010s we hardly see any significant progress having been made in the digital space across several – hasten to add not all – banks.
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The challenge
The challenge is that it is expensive – very expensive – to replace existing legacy banking platforms with completely new ones that are digitally mature. That is why it seems the natural focus of senior management of banks has been to see what can be done to fix the existing platforms instead. “Why spend Billions if we can settle with Millions?” seems to have been the rationale.
The low level of interest rates until 2022, impacting the ability to generate satisfactory profits for the owners of banks, likely also minimized the appetite to go to the boards to ask for extra investment funds to allow the bank to become digitally mature five to ten years later.
At the same time there is no guarantee that the new system will be appropriate several years years down the line. Hence the investment to be made involves the risk of not meeting the expected returns. Let’s leave the headache to the future senior executive generations is an obvious suspicion one can have. Probably also a bit more job security attached to a more conservative approach.
IT budget split in the bank
The legacy banking systems and platforms were originally developed and built when the world was more analogue, which is why it is tempting to say that it is almost impossible to achieve a successful upgrade of existing legacy systems to become digitally mature and competitive. Observing trends, the last couple of years and the low visible speed of actual transformation confirm this speculation.
It is like trying to make a bicycle a car by giving it four wheels
Problem is that it does not really make you move much faster, and it does not adequately gear the banks to what it really means to be a digital bank offering a product effectively. We also need to remember that in the future, or in fact already today, it is minimum standard to support AI and ML as embedded operational tools to optimize operations and credit models as much as possible and not as ad-hoc theatre activities done in back offices. We have not even touched upon customer expectations or loyalty yet.
One of the reasons for this gap
Ultimately, one of the reasons for this gap in the vision was that the authors of the digital transformation strategies never really included (or maybe they were never asked to include) the fundamental impact of complex legacy IT systems and infrastructures. Most banks and financial institutions of all sizes rely heavily on systems that have been developed and maintained for up to 40 years (some for even longer), meaning that they are challenging to both maintain and to evolve.
To follow the previous metaphor, it is difficult to install an engine on the four-wheel bike while it is still moving with great pace to serve the needs of the rider. In many cases, the rider is not even interested in going faster – which in our view is best illustrated by observing that banks have had healthy P&L results the last decade(s) and to some degree been complacent around the maturity and invincibility of their bank service and operations.
The result of this situation is that it is sometimes a complex and lengthy activity to become a customer at a bank. It certainly requires patience and adequate time. As a new hopeful customer, you often still need to prepare a lot of documents beforehand. This is a paradox, as often the information in these documents is digitally available, but due to the challenge of implementing digital tools on top of analogue systems, the customer does not experience any benefit from the digitization of banking operations.
The reason is that it is still being developed, re-developed, re-scoped within banks (often due to the hunger of being 100% self-reliant) – this is a challenge as it seems the banks have engaged themselves on Sisyphus and urgent compliance projects that absorb time and resources away from core banking activities. Even now, up to ten years after the colorful digital banking strategies were originally defined and agreed upon.
We are all great at something but not everything
Digital banking requires outside-in thinking. The digital banking mindset is based on customer expectations. The bank is never closed. For customer convenience, it is (or should be) always available in the app on any appropriate device, online, or physically if that need is present. I, as a customer, expect the bank to facilitate my financial needs, being liquidity or advice, nearly 24-7. Banking operations should be structured accordingly. Hence outside-in mindset is critical to successfully establish a mature digital bank. It was (or is) the opposite situation with the old main street bank, which instead follows the inside-out approach.
Here you can be an active customer when the bank is open (upon their convenience of course – why be open when your customers are mostly working is an uncomfortable question few HR and CFOs – and Unions – appreciate to answer). The queue to the bank better not be too long either. If your contact person at the bank is on a well-deserved long holiday (up to seven weeks in some countries!), then it is also better for you not to have any financial needs as that can potentially make your enquiry a painful, lengthy, and excruciating exercise. This means the customer facing activities are defined based on what the bank is locally capable of and willing to offer, hence the inside-out definition.
The problem is that many of the so-called digital strategies tried to make the old banking mindset and technical structure fit into a proper digital banking platform. Preferably with as little cost as possible, but with the abundant use of synergy and leverage jargon to convince any sceptic that issues will solve themselves in time. Our experience is that they seldom solve themselves. It is like squaring the circle. Our conclusion is that it is not possible to transform a legacy bank using legacy systems into a pure, mature digital bank. Period.
Then what? The fundamental question now remains what to do if you are a bank that urgently needs to digitize operations within the legacy system environment, either due to financial regulation or customer digital expectations?
To answer that question, it is important to highlight that legacy systems still manage crucial operational activities on a day-to-day basis. Despite the negative tonality in the word legacy, it is still relevant to remember that there is a reason why banks still subscribe to legacy systems. Legacy banking platforms still get the job done, ensuring the wheels go round on the banking bicycle to return to the previously mentioned metaphor. Albeit in the old analogue world.
The key question
It is as important as ever that management of banks start to raise the key question internally:
“What is the role of our IT organization in our transformation?”
If the answer is that local IT within the bank or IT service provider should be able to do everything and be experts on everything including digitizing inside-in platforms to outside-in mature digital banking environments, then by all means carry on. Our humble view, based on experience, is that this approach is doomed to fail or at least be multiple times more expensive than it needs to be.
The recommendation
Our recommendation is to change the historic focus away from being great at everything to rather being excellent at knowing who is great at what. The successful IT organization of the future must be the expert at orchestrating the right solutions – no matter whether these are internally or externally built or developed – into one digital banking offering that adheres to all requirements from risk, operations, compliance, business and not least, meets the customer expectations satisfactorily. Being able to identify the right solutions externally, particular among the fintech players, and influence these to make sure they live up to the local needs is what will make the difference between success and failure.
This means that any IT organization needs to redefine their role into being an orchestrator of smart APIs that use the available building blocks to create the best digital bank. The digital banking landscape and the fluid compliance requirements have become too complex in terms of being able to be great or even good at everything. Understanding this will make the difference for any bank with digital banking aspirations because, at the end of the day, we cannot all be great at everything.
Are you curious about how you can get the most out of your data, or do you want to hear more about our solutions? Please don’t hesitate to contact us.
Authored by
Jakob Færgeman, Principal Consultant, Experian
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Bo Rasmussen, Chief Commercial Officer, Experian
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Jennifer Rowe, Senior Pre-Sales Engineer, Experian
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