Digital transformation in banking

Sergei Anikin and Ove Kreison at Estonian core banking provider Tuum argue that the digital transformation of the banking industry has only just begun

 

Don’t let the shiny appearance of modern banking apps fool you. Despite several years of talking about digital transformation in banking, no bank has yet to complete their transformation.

 

Indeed the majority are far from being transformed: they’ve merely ‘put lipstick on a pig.’

 

From the outside, it seems as if the world of banking has arrived in the 21st century. Finances can be managed as quickly and conveniently as placing an order on Amazon, transactions can be made instantly via mobile phone, and even mortgage applications can be made and tracked online.

 

But while this all seems impressive, it’s really only a façade. In terms of banks’ digital transformation journeys, they have only just set off.

 

While more and more industries are transforming their infrastructures and starting to use data on a grand scale, there isn’t a single established bank that has fully arrived in the digital age.

 

This is partly because they are only digitising a relatively small part of their infrastructure in order to add new services quickly and more conveniently to customers. They have done this task well and banking has made huge progress in recent years, compared to what needs to be done. However, digital transformation projects have barely started.

 

Effectively, the architecture that underpins all banking apps and services, has hardly changed at all in decades. There have been advances in open banking, APIs and cloud computing and new trends have emerged such as embedded finance or the rise of cryptocurrencies.

 

But true innovation in banking is being held back by the inhibitors of the past - legacy banking technology. What is needed is a complete transformation from the core.

 

Transformation errors of the past

Of course, banks have tried to undergo complete and large-scale transformations in the past but without success. Common reasons for failure include treating the transition merely as an IT project and taking the wrong approach to overhauling their technology stack.

 

Digital transformation involves a lot more than merely implementing new or improved technologies. Instead it requires a complete rethink of how the business is run across the organisation as well as close collaboration between business and technology decision makers.

 

Traditionally, a bank’s IT functions have tended to be viewed separately from core business strategies. CIOs are typically not included in strategic decision making. This antiquated arrangement has been a key reason behind a failed transformation.

 

Another key flaw in banks’ digital transformation programmes has been their approach from the outset. In addition, many banks simply haven’t undertaken a transformation from the core. They set out to digitise themselves though ‘superficial’ apps and online services, without fundamentally changing their core tech stack or completely remodelling their business to reflect their digital strategies.

 

Banks have also made another error. Too many have regarded their transformation programme as a stand-alone project, that once implemented, would provide an upgraded digital platform capable of sustaining the needs of future digital banking services.

 

But banks need to stop thinking of digitization as something that has a clear beginning and end. Instead, they need to start seeing it as an ongoing process which will need constant enhancements, updates and amendments.

 

A further stumbling block for banks has been their implementation strategies. Ultimately banks have two options. They either rip out their existing system and switch to a new one; or they take a gradual approach to migration.

 

While the logical solution might seem to be to completely replace legacy systems with an entirely new platform, this is not an easy option. The process is extremely time-consuming, complex and expensive. The German bank Apobank, for example, invested a three-digit million sum in the switch and it took four years to launch the new system. 

 

And aside from the expense, while transformation takes place, banks remain at a technological standstill. Innovations are impossible until the changeover is complete. This can lead to banks compromising themselves and losing market share.

 

A gradual approach removes the risk of downtime in banking systems. By migrating operations over to the new platform one service at a time, banks gain confidence in using the new system and are motivated to continue migrating all other services and operations over.

 

In the past, one of the key inhibitors of digital transformation in banking was the lack of banking technology that allowed for a gradual migration. But now that modular core banking platforms are widely available, banks have a less risky, more accessible means of digitising their systems and aligning them with customer needs of today and tomorrow.

 

In our view, what banks have done so far is roll out fancy new apps and services, but like applying lipstick to a pig, their ‘transformations’ to date have been superficial. They need to get right down to the basics and fundamentally change the core banking infrastructure upon which all the banking apps and services sit.

 

Only by doing this can we hope to see true digital transformation in banking and witness real innovation in the way we access and consume banking services.

 

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Sergei Anikin and Ove Kreison are CEO and CTO at Estonian core banking provider Tuum

 

Main image courtesy of iStockPhoto.com