The banking and finance sector faces a range of challenges to keep up with customer expectations, the regulatory landscape and advances in technology.
These challenges mean that digital modernisation is a necessity, not a choice. Many legacy core banking systems and technologies simply will not allow financial and banking organisations to achieve their digital modernisation goals.
The question becomes about the right approach: full-scale digital transformation or strategic optimisation; doing it on your own, or getting expert advice.
What is digital transformation?
Digital transformation means different things depending on your sector and your business objectives.
In the financial sector, digital transformation refers to the holistic review and modernisation across various aspects of a business or organisation. Digital transformation will fundamentally change how you operate and deliver value to your customers. Beyond simply adopting new technologies; it involves a comprehensive revaluation of existing processes, strategies, and culture to leverage the full potential of digital advancements.
In 2024, experts are continuing to predict that AI, cybersecurity and data management will continue to be front-of-mind for the financial sector, while acknowledging that “There’s a tough balance between making the most of the systems that are in their current remit and investing in replacements that are much more in tune with modern processes” (FinTech magazine, January 2024).
Remember too, that digital transformation may not require changes to every core banking solution component, just as it may not require full replacement or significant redesign of cloud computing and infrastructure.
In this shifting landscape, expert advice from digital transformation consultants like the team at 9Yards will give you a structured approach with a clear roadmap that aligns with your business goals and can adapt to innovations in technology and process improvement.
Step 1. Understand core banking requirements and identify a target state
Before embarking on a digital transformation journey, it is essential to understand the unique requirements of your organisation. This will boil down to an analysis of the current core banking service provisioning, processes, and technology infrastructure and a defined target state that aligns with your strategic objectives.
A comprehensive analysis will include an assessment of the existing technology stack and processes. Identifying pain points and bottlenecks is key to creating a strategic plan and roadmap to the target state, ensuring digital transformation meets the strategic objectives of the business, and its vision for the delivery of services.
Step 2. Understand what is driving change
When you understand the drivers for digital modernisation it will be easier to align digital transformation strategies with organisational goals. This is the best way to achieve your target state.
For example, digital transformation will probably involve integration of platforms, systems, processes or products, for data management or analytics.
The need for integration may be driven by the opportunities provided by cloud computing, AI, cybersecurity or mobile technology. Integration becomes a key consideration for organisations embarking on a digital transformation journey.
External drivers of digital transformation will come from the broader financial and banking sector and include factors such as:
- changes and improvements in banking technologies
- the rise of neo and challenger banks
- regulatory compliance and open banking
- influence of big technology companies.
Internal drivers will be around the business’s objectives and can include:
- a need for simplification and efficiency
- modernisation for cost benefits
- mergers, acquisitions, and scalability
- advancing innovation and operational risk mitigation.
Step 3. Decide whether to transform or optimise
Achieving the target state for digital modernisation in your organisation will certainly require change. It’s important to get the right advice about which components of your core banking system need complete transformation, and which can instead be improved and optimised.
Gartner identifies 5 different ‘transformation identities’ of financial services organisations. They propose that “digital optimisation is about gradually improving and optimising current business models, products, processes and customer experience”. On the other hand, digital transformation “introduces new capabilities that are the strategic foundation for a new, competitively robust, digital business model”.
When to choose optimisation
Optimisation might be the best approach to digital modernisation if you have been able to identify opportunities to:
- improve the efficiency and cost effectiveness of existing technology and processes
- enhance scalability and flexibility
- make incremental improvements.
When to choose digital transformation
Some reasons to adopt a digital transformation approach that transitions to new technology or a new platform include:
- limitations of the current system that cannot be improved by simplification or consolidation
- advantages offered by modern technologies that are not available in existing technologies
- opportunities for a more seamless integration
- long-term benefits of a new platform.
Digital transformation example for core banking systems
9Yards digital transformation consultants regularly work with clients to achieve system improvements through digital optimisation and transformation strategies.
A common current state for banks sees a core banking system with multiple capabilities. This can lead to duplication, with functions such as customer servicing occurring in both the CRM and the core.
A complex core banking system with multiple capabilities can be tough to test and update. Access to data is difficult and integration becomes problematic. Most importantly, systems configured in this cannot easily be aligned with the requirements of the customer journey.
A transition to a modernised system will combine an open architecture with a ‘hollowed out’ core banking system that focuses on product, account and collateral management. Other capabilities are replatformed, with the CRM as the master of customer data. This approach of distributed capabilities also enables plug-and-play for additional product offerings and supports data-driven and contextualised experiences.
Summary and recommendations
Navigating the complex landscape of digital transformation requires careful consideration of the available options.
Before deciding the scope of digital modernisation to aim for, complete a thorough target state analysis and be clear about whether your approach will focus on optimisation or digital transformation.
Specialist digital transformation consultants can provide insights and mitigate risks before they become costly issues.
Not sure whether to focus on optimisation or embark on a digital transformation?
Now is the perfect time to talk to 9Yards digital transformation consultants about our tailored Core Banking Capability Assessment, or for assistance in undertaking a current state analysis, determining a target state and developing a roadmap / digital transformation strategy.
