What are the most compelling hurdles to digital transformation in banking?
Hans: When it comes to digital transformation in banking, the extensive use of legacy technology is a barrier to the speed at which established institutions can introduce new services and technologies. Our recent research with IBM found that banks with healthier financial performances are characterised by six key practices that can reimagine experiences and digitally transform the organisation. These include implementing end-to-end digitalisation, deploying AI factories and creating small, operationally focused teams. However, the lack of industry standards is holding banks back from realising these benefits.
Not having defined and widely used industry standards means banks are restricted by having to work with partners based on their propriety language and the way they operate alongside their existing ecosystem. This is instead of functionality and how they could potentially transform the bank to meet customer needs and deliver optimum services. Take hybrid-cloud as an example. Our research found that 79% of banks are still in the foundational stages of their hybrid cloud journey. This is at a time when half of the executives are citing interoperability across environments, and 65% of banks reporting data interoperability constraints as a hurdle to hybrid cloud.
The digital shift among consumers is compounding these issues for organisations. Banks are struggling to cater for all customers while future-proofing services, and a hesitation to innovate in line with these changes is stalling transformation. Focusing on interoperability by introducing standardisation which allows financial services institutions and technology providers to easily and freely communicate, so banks can implement the latest and best technology at ease will be key to overcoming this.
Shanker: The pervasive nature of legacy technology in financial institutions and the slow pace of industry standards adoption are major hurdles for digital transformation in banking. Beyond this, three other impediments come to mind. First, as the role of the ISV and partner ecosystem expands for the industry, gaps in both business and technology architectures to rapidly incorporate and adopt these capabilities are manifesting themselves. Second, as more banks move to build or acquire neo-banks some have generated significant technical interdependencies and redundancies which are proving highly costly. Finally, and perhaps most pressing, complexity, risk aversion and cultural resistance to operating model transformation is slowing the adoption of new workforce and workplace models. This is compounded in many cases by a misalignment of incentives between the line of business and IT units within financial institutions.
How can banks overcome these challenges?
Hans: A coreless banking model empowers banks to select the software vendors needed to obtain the best-of-breed for each application. This model needs to translate each proprietary message into one standard message model. BIAN just made a tool available for their members that will help to smoothen this translation effort. So, communication between each business function is, therefore, significantly enhanced and can seamlessly connect and exchange data. Not only will this help banks to digitally transform their business, but will enable them to bring new services to market far quicker than before. This is particularly important as the needs of the consumer and their relationship with their bank continues to evolve rapidly.
Shanker: To overcome these challenges, three imperatives come to the fore. Banks must adopt industry standards like BIAN to enable faster and more seamless collaboration with business partners and the ISV eco-system, they must implement modern reference architecture and supporting data models to ease the movement of information across the banking services landscape, and they must deploy value office and design authority mechanisms to advance alignment between business and IT for critical initiatives.
Other salient priorities include investing in talent transformation initiatives and truly embracing AI as a catalyst for change. With respect to AI adoption in banking, domains which should be strongly considered, include modernisation of customer care, credit risk evaluation, workforce engagement, and financial crime protection.
How are BIAN and IBM helping the banks to be future-ready and to adapt to the changing environment?
Hans: BIAN was created to establish, promote and provide a common framework to solve banking interoperability issues. The organisation consists of more than 80 banks, fintechs and technology vendors, which collaborate to boost innovation and lower the cost of banking.
Valued members from huge industry players, such as Shanker, bring a wealth of knowledge to our organisation. This helps us to define a banking framework that standardises and simplifies core banking architecture, while overcoming common obstacles to enable the future of our industry.
This approach to collaboration is the main contributor to the knowledge and services needed to facilitate and implement banking interoperability to develop and operate a community assisting user organisations with platforms and services.
Shanker: Many financial institutions look to BIAN as a starting point to help define and organise their IT and services needs in a standard rationalised way. As such, BIAN has long been a key partner for IBM. The architectural standards of BIAN, paired with IBM’s history of deep industry and technology expertise, is enhancing the ability of financial services clients to create a plug-and-play application landscape which improves the agility of their IT organisations to deliver on the needs of their business.
At SIBOS 2022, IBM and BIAN announced a multi-year research partnership with the publication of the results from our collaboration on primary research in a report entitled, Foundations of Banking Excellence. We surveyed c-suite executives and technology leaders at over 2,000 banks around the world to understand where they were on the hybrid cloud journey, how their progress impacted their financial performance, what the major challenges were and how they planned to proceed. While the industry is making progress, we learned that the vast majority of institutions are in the nascent stages of hybrid cloud adoption. This represents a real opportunity for growth and improvement as banks invest in talent and technology in the next few years. In our next research collaboration, we will certainly elaborate on this question of how banks can prepare for the future and adapt to an increasingly dynamic world. Stay tuned.
What does the future of banking look like? What can banks do to prepare for the future?
Hans: The world is facing a digital awakening, and banks are eager to jump on board. Financial institutions must be able to work together and communicate in a universally recognised language. Technology should not stand in the way but enable development and further encourage both digitisation and cooperation.
Additionally, ensuring that the rapidly evolving consumer has everything they need in one place has never been more essential, and the time to enhance the digital experience is now. By collaborating on a unified and common set of standards we can encourage development, deploy solutions at a faster pace and continue this maturation of banking services.
Shanker: The future of banking is the history of banking flipped on its head. Banks which used to compete on the basis of back-office efficiencies today compete on the basis of front-office customer experiences. The confluence of exponential technologies such as AI and hybrid cloud has dramatically reduced operational costs and unlocked the potential for future platform-based business models. The winners of tomorrow will leverage standards such as BIAN, exponential technologies and extreme automation to get the competing benefits of superior customer experience and efficiency while simultaneously and effectively addressing risk and regulatory exposures.
About the authours
Hans Tesselaar is Executive Director at Banking Industry Architecture Network (BIAN).
Shanker Ramamurthy is Global Managing Partner Banking & Financial Markets at IBM Consulting and BIAN Board Member.