Banks in the Age of Digital Darwinism

Charles Darwin’s theory suggests that it is not the strongest of the species that survives, nor the most intelligent, it is the one that is most adaptable to change. As the world races towards digital banking, we consider why banks need help to adapt to a digital future.

Technology is redefining what’s possible across all sectors. For the most part this is a triumph for consumer sovereignty. Consumers are better informed, more empowered and enjoy greater choice than ever. Disruptive technologies bring tremendous innovations, but today’s source of competitive advantage can quickly become tomorrow’s table stakes. The age of the customer experience has arrived, but undoubtedly it creates many challenges for those on the supply side. Especially banks.

A Proud Heritage Does Not Determine Future Success

Banks face a real quandary with their technology investment strategies. Recent research from Forrester suggests that 83% of banks will execute a digital transformation within the next two years.* An important caveat is that making technology investment decisions based on what has worked before will likely miss the mark regarding the array of benefits and challenges inherent in modern banking transformation.

Risk, Uncertainty and a Lack of Know How 

Established risk models need to be adapted and aligned to the present day. For many banks, investing in a new core is uncharted territory. Many core systems have been in place for decades; in-house knowledge may be limited in terms of understanding the nature and scale of the tasks and changes that modern transformation involves. In most cases, replacing a core platform is a journey into uncertainty. The good news is that the journey is far safer and more predictable with an expert guide.

Banks are good at managing risk, indeed it’s what they do. But investment in new technologies has evolved from being a question of risk to becoming an issue of uncertainty. When a situation has a finite number of possible outcomes it involves risk; when the number of potential outcomes cannot be quantified it becomes uncertain. As technology change accelerates at breathtaking speed, it creates an infinite number of possibilities. Many banks simply cannot keep up with the pace of change and are uncomfortable in an environment that’s uncertain.

In many cases, technology stacks that drove profitable growth over many decades have become unwieldy and expensive behemoths that cannot adapt to a digital future. Moreover, banks that have never installed a new core platform may lack needed awareness – not only of the challenges to be faced but also of the opportunities that are ahead.

The Need for Original Thinking

The implications of Digital Darwinism are clear and pungent – invest strategically in “future-proof” technologies that facilitate change. As I discussed in a recent blog, digitalization is about doing different things and doing things differently. While this seems relatively easy in theory, the practicality of shifting from a product-led mainframe environment to an agile open platform microservices architecture is an involved process.  

Transforming a bank is also about much more than technology. It’s about people, processes and culture. Technology is fundamentally a people business – it is produced by people and designed to work with and for people. Following the Darwinian analogy, the modern bank technologist is a different species to those who went before and occupies a different habitat.  No longer confined to the back office, the bank technologist of the future will be obsessed with the customer experience and how the bank delivers on its brand promise. Technology is no longer just the engine of the bank, essentially it IS the bank.

Greenfield Banks and the Missing Link

Many banks acknowledge this “missing link” in their technology skillset. The growth of new digital banks on greenfield sites reflects a common desire to escape the past and start afresh. But many of these digital bank projects are still run by incumbent banks, with the same mindset and an absence of new thinking. Experience suggests this will put a ceiling on what can be achieved and may even hinder progress.

For example, many banks seeking to realize the benefits of cloud elasticity and scale have shifted existing business processes to a cloud environment. While these will produce generic cloud benefits, they will miss the transformational potential of a cloud-native build that embraces modern methods, such as Agile, DevOps and continuous delivery. In practice it’s like fitting a new engine in an old car – the engine is fine, but the car is still old.

Collaborate, Improvise and Move Ahead

The message is clear: To be successful, modern banks require modern technology and modern thinking. While this may seem obvious, many banks are uncomfortable with the practicalities of running two misaligned technology stacks. They shouldn’t be – open application program interfaces (APIs) are constantly redefining systems integration; modern components can facilitate a migration to a digital technology stack when the time is right. Today’s world craves digital banking, and timing is sensitive.

While getting started may seem daunting, we know it needs to be done. Darwin himself suggests a way forward: “In the long history of humankind … those who learned to collaborate and improvise most effectively have prevailed.” With the right partners, cultural shifts, and strategy, banks can successfully adapt, transform, and prevail.

* Forrester Infographic: European Financial Services Firms Accelerate Digital Transformation, June 2020.