Opinion By, Roy Zakka, CEO and Founder of Layer – “Digital and online-first competitors present many challenges to traditional banks but by taking a wide-angle view of their own abilities, they can keep the pace“.
Despite there being countless reports out there urging the banking sector to prioritise digital transformation, traditional banks are reluctant to embark on a full-scale transformation journey.
This apprehension is natural. Most are hampered by sluggish legacy core systems, while investors and executive leadership are wary of multi-year digitization initiatives. The upfront investment, which may be as much as 10% of yearly spending, combined with a lack of IT personnel and compliance requirements, might lead to a situation where digital transformation is merely a buzzword rather than a strategy.
This is not a justification for mobile apps to completely replace traditional branch banking. When done effectively, digital transformation can help physical banking regain its sense of purpose. This is a critical solution to the physical banking downturn that has occurred since the epidemic, with even the largest banks failing to find a use for their branches and attempting to compete with neobanks by turning digital. This ignores the fact that up to 22% of clients still prefer in-person banking, but it does explain why one US study predicts that bank branches will be obsolete by 2034.
True digital transformation, in my opinion, is about future-proofing a business rather than simply digitizing old operations. For banks already constrained by a risk-averse culture, this means venturing into the unknown, but it doesn’t have to be that way.
The options for upgrading the core
Any transformation initiative faces the challenge of digitizing fundamental systems. When the back end is going to be a one-of-a-kind, substantially customized system written in a different era’s language, the hazards are already too great. COBOL is utilized in up to 43% of traditional bank systems, and it was widely used before the internet.
Such fundamental legacy platforms were not built to provide an end-to-end view of data, or a Single Customer View, as digital-first banks do. Data is siloed, making it harder to gain insight and unlock value. When it comes to adapting to a mobile, digital market, core systems are incredibly reliable at what they were built to accomplish. However, this becomes a problem when it comes to adapting to a mobile, digital market.
That leaves banks with the following options, involving various degrees of risk and disruption:
- Migrate code but not functionality, essentially upgrading to a newer, more robust version of a database
- Integrate middleware without changing the backend configuration, patching over the shortfall in backend functionality using APIs.
- Modernise the codebase, eg. translating COBOL to Java without changing essential functionality. This at least opens up the potential for cloud-ready functions. However, this is merely dressing up the front end for a smoother user experience, without addressing any key issues through backend or middleware changes.
- Replace the core banking system – this ‘rip and replace’ approach calls for the highest degree of investment and exposes the bank to maximum potential disruption.
- Augment the core banking system to address the priority needs not covered by the legacy core. This solution offers quick transformation without disrupting essential processes.
Overcoming the obstacles and embracing digital transformation
Returning to the point about digital transformation and digitisation, simply put a bank could implement any one of these strategies and it still not reach digital transformation.
True digital transformation transforms a bank’s identity. It affects what a branch, a mobile app, or even a phone is for. Each channel must be transformed from a service channel to a sales, support, and advise channel, and the transformation must ensure that all of those different parts can be accomplished and integrated on digital services.
To put it another way, putting existing functionality into a mobile app isn’t enough. Instead, you’ll be tasked with assisting clients in adopting new digital services, upskilling personnel on what they do on a daily basis, and eventually changing how you do business as a financial institution. This is not a short-term endeavor, but rather a long-term effort.
Getting ready for the future
A new era of digital banking is coming, and it will be much more than just an online or app service, thanks to events, circumstances, and evolving customer demands. From the ground up, it’s a thorough rethinking of what banking entails.
There’s no need to be concerned. Small tactical adjustments, which avoid substantial capital expenditure and disruption, are the answer, with a focus on cloud-native, open-banking compatible digital platforms that provide an excellent client experience without disrupting core transaction processing.
Roy Zakka is CEO and Founder of Layer, which helps traditional financial institutions to rapidly digitally transform their core legacy systems. To learn more, please visit www.wearelayer.com.