The traditional banking model is undergoing rapid and significant transformation fueled by heightened customer expectations, a raft of regulatory mandates, and the convergence of emerging technology with new business models that blurs lines between previously distinct industries.
As banks face ever-increasing disruption and fierce competition, they are confronted with the age-old debate – buy versus build – as they assess their traditional front- and back-end platform architecture.
Wait and see, or begin change?
Legacy platforms have reached their limits when it comes to delivering the personalization and speed expected by today’s bank customers, no matter how many production patches and make-shift bespoke platforms are added. Nimble FinTech firms are moving the needle in attracting customers (particularly millennials and the tech-savvy) with nearly one-third of banking customers already banking with at least one non-traditional provider, according to the World Retail Banking Report 2017 from Capgemini and Efma.
Incumbents’ continued success depends on fundamental changes within their internal cultures combined with the strategic development of a services-based model. Traditionalists might consider a build-and-adapt approach – a more fleshed out version of the patch-and-pray approach because:
- They know their bank’s core systems, with its limitations and customizations.
- They know how to work around the complexities of their legacy systems, they have done it for years.
- Integration of new applications, application programming interfaces (APIs), and services into the bank’s core systems may be too difficult.
Over the years, my financial services experience has shown, time and again, that stop-gap programs are costly and slow to market, and can limit a bank’s ability to respond to demand quickly.
Prepare for the future
The more ambitious and pragmatic among us are embracing a let’s buy approach that embraces innovation within the banking landscape as well as the adoption of new skills.
What’s required? An open cultural mindset that is prepared to evaluate and adopt newly-available services along with a willingness to work within the bank’s core system limits to:
- Develop an integration strategy that lays the foundation for an ecosystem of service providers, using microservices and APIs.
- Institute governance, service management and commercial models that will support the ecosystem of services.
- Adopt a digital approach that allows the bank to separate rapidly changing areas from stable operational platforms.
- Consider functionality impoverishment on the key banking systems by retaining the mainframe and associated banking core functions such as account maintenance but moving out other functionality to reduce the load on the mainframe; for instance, swap out statement production, with more suitable online technology.
This approach yields results, especially for banks that partner with FinTech firms to push traditional boundaries to enhance information flow across legacy and other systems.
Digital transformation in practice
Early movers are pursuing fruitful FinTech collaborations leveraging APIs. BBVA Compass, for example, uses APIs to offer customers a real-time payment service through a partnership with US tech startup Dwolla, eliminating the hassle and time of dealing with automated clearing house (ACH) or checking systems. JPMorgan Chase speeds up loan processing by collaborating with On Deck, a FinTech firm that uses a proprietary credit score to grant loans to small businesses in hours, rather than days or weeks.
UK startup Bud helps banks such as HSBC deliver solutions around the Revised Payment Service Directive (PSD2) and open banking. A potential threat from PSD2 is that FinTechs can disintermediate banks, relegating them to dumb pipes while shifting customers away. Bud’s white label solutions aim to reaffirm the bank’s role as the center of consumers’ finances.
Bud uses APIs to link multiple products and services such as bank accounts, investments, loan providers, mortgage brokers, insurance, and pensions in one place. Banks deploy Bud’s integrated marketplace within their existing customer channels, such as their apps and websites. Moreover, Bud offers service analytics so that bank customers get a full view of their financial standing.
Managing the ecosystem
Strong ecosystem management is required to implement and evolve digital transformation and to continuously add value for partners, both within the flexible outer shell and the agile digital layer.
In November 2017, French telecom Orange entered into financial services by launching Orange Bank, with 100% of operations and customer interactions carried out via mobile phone. The nimble Orange Bank digital platform allows users to:
- Pay with their bank card or mobile phone
- Send money by SMS
- Temporarily deactivate their card, and reactivate it if it is retrieved
- Check their balance in real time
- Interact 24/7 with an AI-based virtual advisor.
Orange Bank offers an account, bank card, authorized overdraft, free complementary insurance package, and a savings account remunerated at 1% interest. Moreover, plans are in the works to gradually add services such as personal loans or mortgages. Based on strong ecosystem management, each new feature is proven, measured, and improved based on customer feedback. Orange Bank currently serves customers in France with launches in Spain and Belgium scheduled. By 2027, the bank expects to have two million users.
What’s the best approach: buy versus build?
As incumbents assess their traditional front- and back-end platform architecture, each bank’s business vision and appetite for change will guide its digital transformation methods. Through experience, I suggest a hybrid approach that allows banks to both leverage existing valuable assets while taking advantage of new technologies.
Capgemini’s Connected Banking Reference Architecture (CBRA) helps refine and define a responsive approach that considers:
- The technology landscape
- Governance and operations
- Service management and commercial models
- Data federation that aggregates data from disparate sources so it can be used for analysis.
While ecosystem granularity will vary with the vision of each bank, all banks must embrace a service model and adopt new plug-and-play services and components to meet changing customer and regulatory demands.
Whether buy or build, the time is now for banks to commit to the ongoing process of managing their infrastructure architecture and to select a transformation model that supports its business. To learn more about CBRA visit https://www.capgemini.com/service/connected-banking, or email email@example.com
Leading up to the September 18 launch of the World Retail Banking Report 2018, we will publish a blog series that takes a close-up look at three pivotal banking topics: Customer Experience and Business Models, Technology and Operations, and Product Management. Stay tuned for insights and practical advice about transformation and the new normal for retail banking. Or to learn more about Capgemini banking solutions visit www.capgemini.com/service/retail-banking
 BBVA Compass website, “BBVA Compass, Dwolla begin rollout of real-time bank transfers,” April 8, 2015, http://newsroom.bbvacompass.com/2015-04-08-BBVA-Compass-Dwolla-begin-rollout-of-real-time-bank-transfers
 Bloomberg, “JPMorgan Working With On Deck to Speed Small-Business Loans,” Hugh Son, December 1, 2015, https://www.bloomberg.com/news/articles/2015-12-01/jpmorgan-working-with-on-deck-capital-for-small-business-loans
 TechCrunch, “Bud is a UK startup that wants to re-bundle all of your fintech apps into one fintech app,” Steve O’Hear, November 3, 2016, https://techcrunch.com/2016/11/03/this-is-bud/