Decoding the New Banking Landscape: Balancing Agility and Resilience Goals
- By Winston Thomas
- March 09, 2023
The old ways of banking in the Asia Pacific are no longer sustainable.
The issue is that banks are facing new pressures from non-traditional sources that traditional models never considered. The most concerning is the rise of nonbanks entering the market, upending established norms in various core activities like payments. And customers like it.
Then you have fintechs coming to the fore. No longer seen as infant startups, some are maturing as they tie up with the slew of challenger and neo banks and other nonbank players sprouting across the APAC landscape.
Banks also can no longer rely on using trust as their primary currency. With ecosystems and banking-as-a-model taking root, the idea of trust has changed. Many banks are now forced to choose whether to go it alone or be part of an ecosystem.
Lastly, regulators and central banks are forcing banks to open up. They are lowering the competitive barriers from calls for open banking architectures to support for Open AI. Banks must build solid relationships where they are no longer in the driver’s seat. Yet, they face high-security risks if they open up too quickly without modernizing their data infrastructures.
“The distance between current business models and unexploited digital opportunities is reflected in weak price-to-book ratios,” says Rishi Aurora, senior partner and financial services sector leader at IBM.
“Growth and performance hinge upon business model innovation. As excessively high cost-to-income ratios continue, holistic digital strategies to transform core operations, rather than cost takeout in non-critical areas, can help,” Aurora explains.
The 2023 Global Outlook for Banking and Financial Market report, an IBM Institute for Business Value study, concurs.
“Only 43% of IT executives globally said they have visibility today into costs and consumption across their cloud environments,” Aurora observes.
So, if the current model does not work, where should banks start modernizing their model?
Linking business model performance to operations
The IBV study points to one area often overlooked: Operations. In particular, banks need to rethink how banks mitigate operational risks.
The IBV study even predicted that the next systemic risk would be not financial but operational. Why? One way to view this is how banks are now becoming part of an ecosystem (whether by choice or otherwise).
“Ecosystems are essential but bring increased operational risk. Although financial services are at the forefront of cybersecurity investments, their cost of data breaches was 37% higher than the global average in 2022, second only to healthcare,” says Aurora.
Even the traditional customer journey is being short-circuited. Banks are engaging customers earlier in their journeys “at the time and place where financial needs must be met.” This means banks need to modernize quicker, which “can mean the difference between responding and reacting,” says Aurora.
The IBV study distinguishes between business model innovation and bank growth and performance. Similarly, it sees good client experience tied closely to employee experience.
“We have heard CEOs say in our IBV interviews that business model recalibration goes hand in hand with operating model changes. There will be a need to rethink cost and efficiency to fund growth and innovation,” Aurora observes.
Banks are now focusing their investments on hybrid cloud and AI to recalibrate. “Banks are turning their business architecture on its head. As exponential technologies drive cost efficiencies in middle and back offices, the focus shifts,” says Aurora.
The ecosystem conundrum
Banks can no longer run their businesses as islands, relying solely on long-established relationships, referrals, brand power, and the currency of trust.
The entry of nonbanks, challenger, or neo-banks, with models running on core banking fintech innovations like payments and regtech, has made the industry more diluted and diverse. Regulators are also looking to encourage further competition by persuading (and in some countries mandating) banks to open up their APIs.
All these changes have given customers a choice. It also creates a conundrum for banks: when and how should they join an ecosystem?
The primary worry is that ecosystems may splay open their lucrative hold on customer relationships and dilute their brands. But at the same time, banks can get closer to the consumers’ lives by being part of an ecosystem.
There is no one answer for all banks, says Aurora. Nor should they be one since not all banks offer the same value proposition.
“Ecosystems will be driven by ‘where to play’ and ‘how to play’ strategic questions for each bank. In APAC, we are seeing beyond banking ecosystems becoming a norm,” explains Aurora.
One example Aurora cited is DBS. He notes that the dominant bank in Singapore is orchestrating segment-focused ecosystems like home buyers, students, etc.
“In India, we have SBI lead the way with YONO in orchestrating ecosystems around consumer’s daily needs & financial services. The financial superstore & marketplace are two most important pillars over & beyond the digital bank in YONO,” says Aurora.
No way around technical debt
Another challenge for banks looking to join new ecosystems is their vast technical debt. Banks have never shied away from technology. They have invested a lot to shore up automation, performance, security and connectivity.
All these past investments (and related software and processes) now run many of their core banking processes and created dependencies. The same investments are now making it difficult for banks to embrace open banking and agile architectures that their nimbler challenger banks have.
Aurora admits it will not be easy, but all banks need to face this technical debt question for the sake of agility. One way to address it is quickly adopting hybrid cloud techniques and practices — such as application programming interfaces (APIs), microservices, containers, DevOps, and site reliability engineering (SRE).
According to Aurora, such an adoption enables financial institutions to manage integrated operations and realize four distinctive levers of value:
- Simplify and accelerate application development.
- Deploy application components to any compatible platform in any connected data center, including on-premises, public cloud, and at the edge.
- Secure, govern and operate consistently across deployment locations with resilience.
- Standardize using open technologies and ecosystems, simplifying skill requirements.
“The result is that business ideas can be engineered at the speed of thought and operated automatically. The pivot is that the realization of value shifts from the cloud as infrastructure to hybrid cloud as an operating model,” says Aurora.
The future of banking collaboration will be different
It’s clear that banks need to become agile as they look to collaborate within an ecosystem. But this will not be an easy technological answer.
Aurora calls it “ambidextrous collaboration.” He believes this will happen between business and technology leaders when creating a business strategy.
It is also a critical conclusion that the IBV study made that “when the business strategy is set, technology leaders need to be active participants in the process.” In other words, business and technology leaders need to function as coequals.
How will this ambidextrous collaboration be carried out? Aurora has some pointers:
- Business needs to drive strategy, but technology is required to enable the business strategy.
- Build flex into your institution with a hybrid cloud mindset and ways of working. “That means digital infused throughout your operations for speed and innovation,” he adds.
- Reimagine workforce experiences with automation, data and AI. People are the lifeblood of any enterprise.
- Modernize for resilience. “Modern banking and financial markets require digital capabilities for the resilience that leads to sustained financial performance,” Aurora explains.
- Balance a “go-it-alone” approach with open innovation and partners’ contributions to unlock the scaling power of the ecosystem.
- Engage all stakeholders by aligning incentives to transform and innovate with a defined “value engine room”. Siloes are inhibitors to innovation and growth
Admittedly, driving ambidextrous collaboration will not be easy. While technology leaders will need to frame their tech speak in business language, business leaders will need to shore up their technical knowledge and give space for technology leaders to lead.
The reality is that driving agility and joining an ecosystem for banks is no longer a technology value proposition; it’s a business requirement. And they also need to realize that they cannot be everything to their customers and look at strengthening their vendor-partner relationships.
“Focus on what truly matters,” says Aurora.
Winston Thomas is the editor-in-chief of CDOTrends and DigitalWorkforceTrends. He’s a singularity believer, a blockchain enthusiast, and believes we already live in a metaverse. You can reach him at [email protected].
Image credit: iStockphoto/bluejayphoto