As the dust begins to settle on the worst of the COVID-19 shutdowns and the Paycheck Protection Program, many financial institutions are rethinking their digital strategies. Fintechs observe this reset of strategies. And they either see their business imploding or exploding, since financial institutions continue to look at digital and digital transformations as a set of capabilities, offerings or products that help them compete.
During my many visits to financial institutions, one thing has become clear in my talks with executives: Financial institutions would rather copy proven offerings than innovate.
Digital Transformation: A Beginning, Not a Destination
While the institutions’ IT teams are trying hard to modernize their way of working, old-fashioned mahogany still rules the boardrooms. This difference in attitude causes a disconnect when it comes to digital transformation.
Neal Cross, former Chief Innovation Officer at DBS, couldn’t have said it any better: “Everything we didn’t get around to, was tossed in a bucket and now that we are forced to address the bucket, we call it digital transformation.”
On the opposite side, no fintech in the world uses the term “digital transformation.” This leads one to wonder, when is a “transformation” ever complete? Are we there yet?
Of course we all know that no transformation has an ending. Having your IT teams switch to agile, thinking “customer-first” and bringing solid business cases to the board are part of a digital transformation, but can still be done on the basis of capabilities, offerings or products.
Once you have found support and funding and your digital transformation is in progress, you need to establish a path to what is next.
In my opinion, institutions need to look at the cost-income ratio first. If anything, neobanks already offer a glimpse into how to effectively select a technology stack and deploy it successfully, all while keeping cost in check.
Many will argue that this is a fairly easy process for neobanks. They don’t have to deal with any legacy systems. They are built on modern architecture. And above all, they attract the industry’s finest tech talent. Additionally, neobanks continue to focus on their niche so their cost-income ratio remains stable.
However, remember that their ambition is to expand and become full-service. Combine this ambition with Father Time and they too will face monolithic legacy systems and a less-optimized cost-income ratio.
So, what is exponentially driving the costs? Next to keeping legacy systems compliant, there are many different tech stacks — per Line Of Businesses. Retail, Mobile, Wholesale, Commercial, Wealth, Branch, Call-Center, Advisory — each has its own. Not to mention that the majority of financial institutions still have different technologies per individual channel (web, mobile, branches, call-center, advisory, ATM, kiosk, voice, etc.).
Digital Optimization is Where You Really Want to Head
What everyone wants is control. Enter “Digital Optimization.”
There are truly only a handful of visionary Chief Intelligence Officers among us. Visionaries understand that normalizing these tech stacks will not only help keep costs under control (licenses, training, IT staff, deployments), but also that running on open technologies:
Avoids being locked to monolith vendors.
Proves to be the architecture needed to truly leverage AI, Big Data and Customer 360° projects.
As one of our customers put it:
“We have started a journey to tilt the silos with x-% per year, ending up in an architecture that will be horizontal to the institution. That will allow us to have a human-centric approach, not one focused on product or line of business. This strategy will allow us to save costs, create compelling frictionless experiences and enable a much more sophisticated digital sales effort, and in turn also contributes to the top-line.”
To summarize, in order to make Digital Optimization actionable, one needs to understand that a top-down approach (a mandate) to simplification of the tech, should lead business units to adopt the strategy. To ensure this buy-in, the chosen technology vendors need to provide all the capabilities needed to give the business unites ample control over their own P&L.
We at Backbase are glad to assist in this discussion as many of our customers are already deploying Digital Optimization strategies.