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This series of blogs looks at the future of banking in Growth Markets in a post-COVID-19 world.

We know digitally mature banks comprehensively outperform their peers, and that’s reason enough for those lagging on the digital curve to start transforming themselves. However, undertaking this digital journey is crucial in another way, too: it will help banks to survive and thrive in the platform-based economy.

In our experience, the urgent need to close the “innovation gap” is driving most banks’ digital journeys. This gap exists because of the “technology debt” imposed on banks by their legacy systems.

The solution is to transform to a more scalable, adaptable and nimble architecture that lives and grows with the new needs of the business – what we call “Living Systems”. In this way, banks can change how they operate, compete and win.

The dead hand of legacy tech

Regardless of which segment banks fall into on our DMI-CRI matrix – Disrupt for Growth, Digitise for Efficiency and Agility, or Restructure to Survive – all have legacy technology debt that they need to eliminate. The amount of work needed is a matter of degree.

Typically, we advise banks to focus on these five areas: strategy; organisation; practices; core technology (which affects all areas); and talent.

Banks need to reimagine their growth strategy powered by technology. The focus is on exploring how technology can make business strategy a reality, and identifying new greenfield opportunities in products, services and competitive positions. This requires a strategic mindset to help transform the legacy business while positioning for future growth.

The second area is organisation, with banks realigning their operating models to embed technology. This process sees IT align into vertical, cross-functional teams that are aligned by business processes, driven by a common vision, and measured by business KPIs linked to the business value released.

Accenture, for example, worked with a large regional bank in Southeast Asia to do just that. Its digital team, comprising hundreds of business and IT staffers, has shortened the time needed to get products to market from months to weeks. Its operating model can test, refine and launch new products and offerings at speed and with agility, ensuring it stays closer to its customers and delivers products that meet their needs.

Banks also need to leverage fresh ways of working by implementing new innovation practices that drive agility and foster innovation. This will see them match the pace and timely delivery of targeted outcomes, and meet customer expectations, which have changed rapidly in recent years. This requires focusing on:

• Hyper-automation, with end-to-end process connectivity, digitised processes and technology like robotic process automation and machine-learning to augment core processes
• Modern engineering that brings customer-focused design, reskills and upskills staff, and leverages automation to test and launch new products and services
• Data-driven insights. Data is a core asset, and banks need to use it to create value, enhance customer interactions and drive decision-making

The fourth area is technology. Banks must evolve their core-systems architecture so that it moves closer to a flexible, cloud-native architecture. Next-generation technology stacks are flexible, hyper-scalable, secure, intelligent and event-driven. With these in place, banks can leverage data, an agile core and intelligent IT to overcome existing challenges and become customer-centric, efficient, platform-driven businesses.

The final area is talent. Technology is key in training and upskilling existing staff and in recruiting staff to fulfil new roles in emerging “biztech” roles (something our regional banking client excels at with its digital team’s “start-up” approach). Banks must also empower staff to innovate confidently with technology. There are different models that can help banks find talent and improve staff skills (see diagram).

It’s alive!

The journey to Living Systems starts by unlocking trapped IT value to drive efficiencies, and that’s best achieved by using artificial intelligence and hyper-automation in IT operations. The savings realised can be reinvested to push ahead with the next phase in the transformation process: future IT enablement.

In this phase, banks accelerate the pace of change by: infusing future-ready talent; moving to an API-enabled architecture; enabling scalability in their architecture by deploying to the cloud; and modernising their underlying core systems, which is preferably done with a “decouple and hollow out” approach.

In “decoupling and hollowing out”, banks extract functions like balance requests from the core system, and use cloud-based microservices, which are scalable and resilient, to perform those tasks. That’s crucial because legacy core systems aren’t built for the digital era where customers, for example, check their account balances multiple times a day through a mobile app rather than, say, weekly online or when they withdraw cash from an ATM.

As our clients have found, extracting such functions brings several benefits. First, banks don’t need to adapt their core system by introducing a new balance-checking element, which would require extensive testing to ensure system integrity. Second, it brings scalability, resilience and efficiency. And third, banks don’t need to engage in the costly, risky process of completely replacing their core systems to meet the velocity and volume requirements of digital banking, and can instead extract piece by piece their systems’ key functionalities.

The final phase is to unleash the potential of this new environment and build new revenue streams. This can be done by encouraging and developing a culture of innovation across the organisation, with the bank leveraging new ideas and frontier technologies to exploit new opportunities.

In this blog, I’ve touched only briefly on the journey to the cloud. However, as I’ll explore in my next post, this is at the very heart of the transformation.