Seven components for building the (digital) bank of the future

20 December 2022 Consultancy.eu 14 min. read

Banks across all corners of the globe are aiming at building the (digital) bank of the future. While there is no silver bullet to cater for the complex world of banking, experts from management consultancy Fincog have – based on their experiences and research – identified seven critical elements for building the bank of tomorrow.

To become truly future-proof, banks should transform all parts of their organization – and strategy – to be fully geared towards serving the client of the future.

Banks that succeed in making this transition will according to Fincog’s ‘Banking for Tomorrow’ research await a bright future, however, others those fall too far behind will risk becoming irrelevant. To become future-proof, banks need to reinvent how they operate across seven fundamental areas:

Seven components for building the Bank of Tomorrow

1. Customer Centric Organization

Customer behavior and their needs are constantly evolving onto new channels. The bar is constantly being raised by innovative providers outside the industry, providing on-demand, tailored services. To further compete in the market, banks need to be laser focused on solving specific customer needs by being present at the right time and place with simple and efficient solutions.

To compete and solve customer needs, banks need to establish a customer-centric organization, away from a product- or segment led operating model to a customer journey-led model.

This typically requires banks to redesign their operating model from the ground up. The bank’s strategy forms the starting point, based on which required capabilities and building blocks are defined. Then business journeys and process flows are specified, which provide the basis for the organization design and technology requirements. The underlying objective is that processes, people and technology work hand in hand to deliver a unified customer experience across each customer journey.

Then, banks must train their employees to think and work following customer journeys; to equip them with the necessary skillset to identify customer issues at every step in the journey, and integrate resources and capabilities where needed until customer problems are solved within the whole organization – including the business functions that are not customer-facing.

Once the required capabilities are in place across customer journeys, banks can then assess their services and implement the desired changes into the organization and way of working.

2. Technological Competency

Standardized, cloud-based banking capabilities, including the core banking systems, are at the center of tomorrow’s bank. A modern, clean technology stack enables differentiated propositions and allows to improve cost efficiency.

However, banks currently face the challenge to migrate their often outdated, siloed, and monolithic technology solutions. Due to historical and cultural challenges, such endeavors often result in huge, complex transformation programs that could take multiple years without guarantee of success, ultimately preventing banks to roll-out new and standardized technology across the entire organization and to shut down their legacy systems.

A ‘quick-fix’ and commonly used approach is to apply a middle-ware layer, or integration layer, on top of the legacy systems that provides the bridge across the organization. This allows the unification of access to various back-end systems in the form of publicly available APIs that enable third-party services to be integrated, and in turn to decouple the front-end from the core banking system, while at the same time maintain stability and security of the core bank.

This way, new services can be developed independently and accessed anywhere, at any time.

This is often an effective and achievable solution for banks, yet also a suboptimal one as it does not allow legacy systems to turn off and requires continuous maintenance of compatibility with the various systems. A more sustainable solution is for banks to take on a greenfield approach and start from scratch.

Such an approach allows full building of the technology on cloud-based principles and a composable architecture from the ground up. Banks can thereby avoid the risk and complexity of migrating their existing infrastructure, instead of migrating their customers onto the new platform.

Alternatively, the bank could migrate the core business away from the monolithic mainframes onto composable solutions. This allows the bank to evaluate problems for each particular business and product, to find systems and technology that seamlessly interact with the rest of the architecture and align with multiple platforms from different vendors. This caters to complexity and differing needs across the organization.

When it comes to migration, the new technology is best implemented by choosing a pilot country with complex requirements to test the approach, and then quickly rolling out the solution in smaller, contained migrations. For example, starting with one product, and one customer segment, and over time gradually expanding the migration.

Such segmentation realizes proof points much faster and manages risks due to the transfer of customer data in controllable parts. And ultimately allows to turn off the legacy systems sooner by avoiding large, lengthy migrations.Which approach best suits your bank ultimately depends on a variety of factors such as size of the organization, the culture of the various branches, as well as the current technology landscape and the complexity of its migration.

3. Data Analytics

Data provides enormous opportunities for banks to assess customer needs, and design their products and services to fulfil those needs. However, despite the vast amount of data available, most banks do not yet utilize the full potential and fail to extract valuable insights and actions. This, amongst others, is due to complex and outdated legacy infrastructure that makes processing of data slow and access to insights cumbersome.

In addition, concerns on data authenticity, privacy, cybersecurity, and potential misuse of data may leave banks, unnecessarily, to steer too much on the save side.

For banks to harness the power of data, the infrastructure should be scalable and efficient and most importantly allow for real-time aggregation of data and universal access to data for everyone in the bank at any time. This can be achieved, amongst others, by using a data mesh inspired approach.

In a data mesh approach, each business domain or function becomes a data owner for specific data segments and is accountable for producing its own data which reduces bottlenecks and delays produced by centralized data teams. Data is kept decentralized and can be accessed by anyone in the banks whenever they need.

For instance, when a customer makes a card transaction, this data is then made available by the responsible business domain in real time via a single integration point to which all the other business functions connect and can consume the data. With this approach business units are each producing and consuming relevant data for and from each other.

This net of available data allows business functions such as the product management to easily make data-based decisions, for example, to enhance products and propositions but also allows the bank to feedback relevant information to the customer for example via its dedicated banking app.

However, there are two components for a decentralized data sharing model to work. Firstly, banks need to establish cross-functional teams that possess the necessary skills and resources to take full ownership of data end-to-end from extraction to use. This includes, keeping high-quality standards such as keeping data clean and up to date, to always have “one single source of truth”.

Secondly, the underlying technology needs to support the organization in processing data as seamlessly as possible. This includes a move away from monolithic data architecture that enforce data siloes. Modern data architecture built on cloud-based solutions that eliminate siloes via a microservice architecture allows banks to make changes faster, scale efficiently and eliminate security concerns as changes only impact the specific microservice instead the whole system.

4. Digital Leadership

While technology and organizational structures provide the foundation for the bank of the future, ultimately it takes people to change and run the bank. Leadership is what differentiates the ones that do well from the ones lagging behind. Understanding and embracing the digital economy starts at the top of the organization, at the board level and then should trickle down through the organization.

A clear, commonly shared vision forms the critical foundation, including what the end-state looks like, why change is necessary and how to get there. In addition, leadership needs to ensure that the necessary mindset and skills are available throughout the organization regardless of roles, functions or individual backgrounds.

Next to the traditional skillset of leaders being excellent communicators with a deep acumen for business strategy, a key skill for modern digital leaders, is to be ready to adapt and to constantly challenge the status quo.

Traditional leadership can be reluctant to change, posing a serious impediment on the potential of new transformation programs. Digital initiatives are never ending and so, modern leaders need to have the capability to quickly respond to new circumstances and environments.

Furthermore, leaders nowadays need to be generalists and specialists at the same time. This means leaders should excel at their core skills of managing the business strategy and its people as they traditionally do, but also for example, understanding new technologies and how they can be used to the bank’s advantage. This understanding then needs then to be translated into the way of working throughout the entire bank in order to navigate the business in the right direction.

5. New Ways of Working

As the Covid-19 pandemic has shown, change can happen rapidly and unexpectedly. Many banks struggled to adequately adapt their business and introduce a more agile way of working. Banks need to leverage new technologies in the right way in order to operate more cost efficiently and cater to a more seamless customer experience.

Looking to the challenges ahead, banks must re-evaluate and redesign their operating model across processes, people and technology.

When re-designing and optimizing, banks need to think beyond digitizing existing processes, rather completely re-iterate the concept of a given task from zero. Starting from scratch, with the customer journey in mind, will help determine how to satisfy the newly envisioned processes using technology.

For example, ask yourself how the best possible and most frictionless experience for opening a new bank account or initiating a bank-to-bank transfer from a customer perspective should look, and then seek available solutions in the market.

Moreover, the role of technology is changing. Instead of technology taking over processes entirely, technology and employees should work hand in hand so that digital tools are assisting and enabling human capital. Elevating the potential of both technological and human capabilities frees up wasted human potential and redirects it towards more meaningful objectives.

Last, but not least, the reorganization of the workforce into interdisciplinary cross-functional teams are increasingly important for breaking up existing siloes within banks and developing an agile organization. To achieve effective collaboration, agility, and an understanding of the current market within teams, it is critical that incentives are properly aligned to do so. This allows organization to speed up time to market, improve customer satisfaction and, across the board, run more efficiently.

6. Embedded Sustainability

Climate change is increasingly a significant threat to life, ecosystems and economies around the world. Banks have a vital role in funding the required change to society, and with customers’ attention and loyalty to ESG criteria increasing, it is essential for banks to define a forward-looking sustainability agenda.

Such agendas should address both social and environmental challenges and implement ESG measures throughout their organization. Before taking on specific initiatives across the business, ESG should firstly be embedded holistically across the banking organization.

This starts by defining clear targets, supporting universal initiatives such as the UN’s Sustainable Development Goals or the Paris Agreement. Targets should thus be set within the ecological boundaries of the planet and the bank’s contribution thereof.

Consequently, banks need to translate these targets into strategies, action plans and key performance indicators (KPIs) for the business, for instance, into specific policies for the risk department, corporate lending etc.Banks should adopt a science-based approach in developing the methodologies to define the current position, its targets, develop strategies and follow their progress. This takes new skills, expertise and experience to interpret such data.

With clear targets and KPIs in place, in order to be successful, the bank should begin to adopt green practices across the entire organization. As a base line, banks need to operate in a sustainable way, for example, by sourcing renewable energy for buildings or reducing the use of paper in the operations.

The biggest impact, however, can be achieved via financing activities, for example, decarbonizing loan portfolios by investing in ventures such as reforestation and wind energy, next to initiatives that make grey sectors more sustainable. Furthermore, sustainability can be embedded into products via offering loyalty points that incentivize a low-carbon lifestyle, tailoring loans for sustainable products (e.g. hybrid cars, low-carbon farming, green mortgages), or starting to issue green bonds.

What approach to take, where to invest and which initiatives to undertake, ultimately is a question of strategy and depends on a variety of factors. In any case, if unsure what approach to take, generally doing more is only a good thing.

7. Focused Organization

Competition is increasing and customers have greater and better choice of products and services than ever. This requires one to focus on their core business and leverage their core competencies. Only by doing so, they develop truly differentiating propositions, remain competitive and withstand ongoing changing market conditions.

In order to do so, one should start by evaluating their current portfolio to determine the core markets that are profitable and exit market segments that are less profitable or pose increased risks. As a result, one could decide to fully focus on a niche segment of the market with propositions tailored specifically to that segment, for instance centered around specific products, themes, type of clients or geographical areas.

Think of for example buy-to-let mortgages, wealth management geared towards retirement, or catering to the e-commerce industry. Building upon the specialization, this strategy allows one to better meet customer needs with greater service and operating more cost efficient.

In parallel, banks should focus on their core competencies while leveraging specialized third-party solutions for non-core capabilities. This could include the maintenance of the technology infrastructure, the development of applications or even the operation of certain business functions such as customer support.

This requires banks to let go of traditional thinking and be open to alternative operating models, whereby for instance they outsource mortgage processing, customer support or sales to third-parties. When properly executed, this allows to reduce operating expenses, reduce time-to-market and enables them to scale the bank rapidly if new opportunities arise.