When we first engage with traditional banks we often hear about the same challenges. Banks today are expected to compete against small, nimble fintechs on the one hand, while also fending off the growing competition from the megatech companies like Alibaba,
Amazon and Google who are all rolling out their own financial service offerings. While they know they have to take drastic action, so many traditional banks are struggling under the burden of years, and sometimes decades, of patchwork additions built on top
of legacy architecture. For most, the only way to tackle this is to turn to cloud-based Banking as a Service (BaaS) platform models.
Before we look at the solution, let’s properly understand the challenges.
Traditional banks are dealing with serious legacy issues. Most of them will have a ledger that was built 20 or even 40 years ago. Over time, banks kept the original ledger for its regulatory and reporting requirements, building new products on top of it.
The result is that they are left with a coughing and spluttering banking engine, which impedes them from quickly and easily rolling out the services demanded by their digitally savvy customers.
The pain of building solutions around monolithic infrastructure becomes particularly acute when banks try to access the information they need in order to deliver new digital products - or even just to understand who their customers are.
The painful reality is that traditional banking has slipped into the background, becoming a simple utility around which banks build their digital offerings. Today’s IT leaders understand that it’s their core banking systems that are holding them back, and
to overcome this they will often build API layers around the old systems, hoping that one day they will be able to simply switch the old systems off. Unfortunately, it’s seldom that simple.
Modernisation has become more urgent
Increasingly banks are being disintermediated by brands. Younger generations would rather trust a person they have connected with - even if that connection is over social media - than a big corporation that their parents may have supported.
In an effort to address this, some of the older banks have simply digitised their existing products (and even their old processes), without giving a moment’s thought to designing an offering that their customers really want.
Now, let’s look at a potential solution for this challenge and see how banks can face up to their competitors, without putting their existing customers at risk.
When your favourite brand is also your bank
Brand banking, or embedded finance, is growing rapidly. Non-banks offering financial services, such as bank accounts, wallets, payments, and lending are the next evolution of companies looking for new ways to derive more lifetime value from their extensive
We have seen brand banking taking off at a significant pace, with many traditional banks getting caught on the back foot.
Big brands - especially those in the retail space - interact with customers on a much more frequent basis than banks and this makes them ideally placed to offer financial services. They have all the insight they need on what their customers want, how they
behave, and how best to reach them. It really is the perfect untapped opportunity.
In fact, the Capgemini’s
World Retail Banking Report 2021 shows that 70% of customers opt for non-traditional banking for lower fees, 68% for a superior user experience, and 54% because of speed.
Platforms tap into the strength of the old and deliver the power of the new
Another challenge facing traditional banks is that they are being forced to move at two different speeds. One at which the market moves, and the other at which their old systems allow them.
To overcome this, banks need to partner with companies which are able to help them design and deliver products which are in high demand. These partners have moved away from big clunky blocks of code, and focus on micro services or functional programming.
Banks are now ringfencing these partnerships and building individual business models around each partnership to great effect. This new way of circumventing legacy challenges has saved many traditional banks.
And it is here that the power of platforms shows its worth.
Platforms make it really easy for banks to wrap up their old legacy sets. Banks only need a very narrow functionality from their ledgers such as transaction history, the initiation of a payment, or a transfer and beneficiary management. Platforms also enable
new partner services and, through these two key activities, they can significantly accelerate the modernisation process.
BaaS platform models allow banks to access new value through open ecosystems while leveraging their existing strengths and extensive data.
To sum up, we have seen that the speed at which new banking offerings are being delivered is certainly shaking up the market. But traditional banks still have a sizable advantage if they adopt a bold modernisation strategy.
But the first step must be leaving behind the legacy mindset.