For some years, banks have been going through a digital transformation to reinvent themselves, but the jury is still out on what this strategy actually involves.
The answer is that the end result is quite muddled, says Pete Redshaw, vice-president analyst at Gartner, addressing a Gartner banking event today.
Gartner believes one of the critical questions is how banks will engage with the financial ecosystem, looking at two axes: autonomous adaptability and ecosystem engagement.
This boils down to what kind of platform the bank opts to participate in: individualist, integrationist, platformist or industrialist.
At the moment, most banks are still somewhere in the middle, and may even migrate from one quadrant to another.
“Are you going to remain a human-centric-bank, or move to being a machine-centric bank?” Redshaw asks.
The important thing is to decide what the destination is going to be, then plot a way to get there.
There is some urgency to the exercise, he adds. Currently, hot topics in banking and IT include issues like growth – we are seeing a demand from business that banks return to growth.
Geopolitics, risk and inflation are also concerns, and banks are looking to business continuity plans, risk management systems and regulatory compliance.
Innovation is key, but has swung to a more conservative approach since last year,
Redshaw believes that the three massive issues facing banks, however, are cost optimisation, fintech startups and regtech 2.0.
Cost optimisation is a pretty predictable issue, and plays into the legacy modernisation dilemma. Indeed, often radical cost-cutting ends up damaging the business, while those with the courage to invest during a downturn could end up winning.
Optimising is not the same as cutting costs, Redshaw says. Cutting costs can be reactive, immediate and short term. Optimising performance, on the other hand, is about programmative structure improvements, And then there is value creation, which talks to business-drive value and stakeholder partnerships.
If you’re creating value, you need to measure it, Redshaw adds.
Business-outcome-driven metrics should be linked to technology-outcome driven metrics, all feeding into aggregated business outcomes
Bank CIOs expect to spend more on most areas of their operations, with just one area where they think they’ll spend less – legacy infrastructure and data centre technologies.
“So they are hoping to spend less by moving to the cloud, automation and AI.”
Traditional banks are hitting a major challenge in that their modernisation efforts are often stalling. The peripheral systems have been modernised, but the core banking systems are much more difficult to untangle.
“You cannot turn any of these systems off, even overnight; they are very complex; they are core; and they are critical. So modernisation is hitting a barrier,” says Redshaw.
Banks have two options: they can continue what they are doing to bulldoze through or retain their existing core, but put a “wrapper” around it to improve customer experience and operations.
The more radical option is to spin off or acquire a new challenger bank, with no legacy, branch network or core systems, that’s architected as digital from the beginning. The bank could then migrate customers and services to the new infrastructure.
“It is high-risk,” Redshaw says. “Some have done it, and there haven’t been good outcomes. But it’s not a technology issue, rather trust issues. Customer trust the traditional names.”
Another major challenge for banks is a reliance on fintech services. “A lot of small startup fintechs are in precarious financial health, so if there are major banks relying on their innovations, they could be vulnerable.
At the same time, there is an opportunity for traditional banks to buy these fintechs up, to acquire their technology, Redshaw says.
“I think we will see a crisis in fintechs. But I think it will be temporary.”
The final major challenge is regtech 2.0. “This is something that has been overlooked and underplayed,” Redshaw says.
Regtech was an attempt to make compliance more streamlined. “I think we are poised for the next generation of regtech,” Redshaw says.
This involves a four-step approach that uses artificial intelligence (AI) to analyse what he regulations means, assess the gaps between what the bank has and what’s required, a suggestion of next-best actions to do so; and informing those people who need to know.
“This is where AI, especially generative AI (GenAI) will make a huge difference.”
Source: IT-ONLINE
