Banks must digitally evolve, and how they approach the building, launching, and managing of their product offerings depends not only on the specific demands of the market, but the idiosyncrasies of each financial institution.

Speed to market is one such demand, forcing banks to enhance existing products and perfect their strategy around building completely new products and addressing the need to launch them on short timelines. This can involve adding new value and products into the existing systems, while looking at new initiatives.

Featuring expert commentary from WSO2, Lunar, and Santander’s PagoNxt, this article will explore the challenges tied to building new products for both incumbents and digital banks, the imperative to prioritise partnerships in an increasingly digital ecosystem, and why shifting the cultural mindset is essential for banks to succeed into the future.

How banks can build visionary products

According to Seshika Fernando, VP for banking and financial services, WSO2, it is vital to have a foundational understanding of the current status of a given incumbent banks’ digital transformation when discussing building or evolving new products. “Depending on various characteristics of a given bank, there may be lots of traditional or manual processes and products that have been built up over the years. When you talk about a new product, it really comes down to where it will digitally fit in your existing list of products and services.”

When evolving a product, banks should consider whether it is an improvement on an outdated, manual structure, or if it is a truly digital innovation. WSO2 breaks down digital transformation into three key stages: digitisation, digitalisation, and digital transformation.

1. Digitisation: where banks convert manual or paper-based processes and products to digital. There will be a digital interface and a digital form, resulting in a digital asset.
2. Digitalisation: where banks connect those different digital assets and enable a new product or an entirely new lifecycle.
3. Digital transformation: transformation can arise in cases where banks create digital assets without necessarily digitising their existing manual processes. Some banks may prefer to digitise first in efforts to develop digital assets quickly.

Many incumbent banks that are doing 'digital' well are those which have reimagined their products and processes without necessarily trying to digitise their existing products and processes.

When considering the journey of evolving an existing product or creating a new product, this should be kept in mind.

The pressure to enhance existing products rather than focusing on pure innovation can’t be ignored. Fernando argues that, “for banks this would naturally take precedence, as banks have customers who are engaging with existing products daily. Rather, finding a balance between enhancing existing offerings, and exploring new and visionary ways of doing things is  ideal.”

Lunar, the rapidly expanding Nordic digital challenger bank, is “a bank with relatively simple banking products compared to incumbents,” states Sebastian Sommer Akselsen, Lunar’s lead of Nordic infrastructure. Despite this, it is highly focused on developing new products and services to expand the product portfolio and are focusing a significant amount of time on building “the next visionary thing, and less time making minor tweaks to our existing products to perform 1-2% better.” That being said, Lunar does however continuously balance the initiatives of developing new products and improving the existing, as both are perceived as important to ensure growth and customer satisfaction.

The challenger bank provides an interesting perspective about just how agile financial institutions can be around prioritising visionary products when they aren’t constrained by legacy technology. “We work as a tech company insofar as we structure ourselves in ‘squads’ that are domain-driven […] We give the squads autonomy. Acknowledging that while we have overall strategy and vision we want to achieve, we also want each squad to have autonomy within each quarter to have influence on the initiatives they wish to focus on within their domain to support our overall strategy and targets,” Akselsen added.

Lunar promotes the “you build it you own it” mentality, where the squads that are building a product or service also own the software they build, following the big tech thinking around domain-driven design and creating autonomy. Traditional institutions, Akselsen observes, often run into trouble when development teams handover to maintenance, as the former might not be as focused on quality or avoiding potential bugs.

Leveraging tech to build products in the new digital ecosystem

The rise of digital ecosystems is inextricably linked to the way in which these digital products are built and deployed by financial institutions.

Open banking regulations have driven the emergence of new digital ecosystems, as financial institutions have been compelled to share more data about their customers, with their consent, to promote competition throughout financial services.  As a result of this increasingly competitive marketplace, banking-as-a-service (BaaS) has seen an inestimable upsurge as both FIs and non-financial companies seek to embed banking services within their offering.

Fernando explains that while a certain degree of digital transformation is possible for banks to achieve without extending into a more ecosystem-focused strategy, reaching a stage where the digital ecosystem becomes a core element of your product development cycles will put banks ahead of the curve.

“By participating in a digital ecosystem, banks are then able to provide services, products, and APIs into the ecosystem, but more importantly, they become able to consume the services, products, and APIs available externally within the ecosystem, in order to create and build value.”

Leveraging the digital ecosystem environment, she argues, is the only way to create and launch visionary products. “It's difficult to imagine a visionary product that could be launched by a single participant. Visionary products are about new ways of doing things, new ways of providing financial services. How could banks come up with a completely new way of doing financial services without engaging their ecosystem? The core step of building visionary products must be done exclusively by participating in the ecosystem collaboratively, not independently.”

Fernando remarks this is crucial  as companies look to the future, adding that, “It’s where the financial services ecosystem is going. More importantly, it’s where customer expectations are going.”

Concepcion Montiel Diez, chief architecture officer at PagoNxt, the company bringing together disruptive payment businesses from Banco Santander, speaks to the importance of being cloud native in the shift toward digital ecosystems. “A cloud native, open platform facilitates greater speed to market for new products and services, as cloud native systems are based on automation, easy integration, and easy scalability.”

This strategy and also being API first means PagoNxt can develop and assemble products and services for their global customers, and adapt to meet customer demands in the notoriously fast-moving payments and retail markets. Diez states, “Such agility and speed of business processes means that when we have a good idea, we can test it, fail fast, and build a workaround even faster, to tackle any issues.”

Only established as a tech company two years ago Diez explains that it is easier to manage a small company, with autonomy to build and create products that benefit not only Santander customers but also others in the open market. “It builds on what a big bank like Santander can provide, such as direct access to millions of customers worldwide, cybersecurity expertise and global vendor contracts. PagoNxt is on the public cloud, which has enabled us to use cutting-edge technology that significantly improves time-to-market.”

Diez furthers that APIs facilitate the connectivity among different systems in a standard, secure, and easy way worldwide. “Using APIs allows us to reduce the effort to connect complex applications, and simultaneously accelerate the development of reusing building blocks and enable  easy scalability.”

These capabilities allow PagoNxt to respond fast to continue evolution and changes in digital products, which helps to innovate with new business products. Their platform is based on open API first architecture, with orchestration layers that allow synchronous and asynchronous events. This gives their technology a “powerful integration capability”, not only with third party providers but also to integrate internal components of the PagoNxt ecosystem.

Diez states, “Our use of APIs has been vital to developing and building upon our internal capabilities, to ensure that our products and services can be scaled and developed where necessary. Without the capability to scale our services, how would we improve the payment space?”

As connectivity is crucial to technology nowadays, Diez furthers that Santander and PagoNxt have been working together on API-driven integration, as it presents the best model to connect not only PagoNxt with Santander banks, but also to connect both PagoNxt and Santander with third parties.

Why banks should prioritise partnerships when building new products

To leverage the ecosystem effectively, banks need to examine their approach to partnerships and how they collaborate with other players in the financial landscape.

Diez states that given the architecture of the PagoNxt platforms, the possibility of collaboration with partners is enormous. “Our architecture is based on key principals: Open architecture (API first), real time, scalable, efficient, data-driven and security. Partners play a big role in the strategy around a new product.  For example, if a partner is part of the payments ecosystem, PagoNxt can provide added value to them. By using a common API, this partner can seamlessly integrate with our platform, no matter where in the world they are.”

PagoNxt can also solve local functionalities in local partners through secure integrations. An example Diez provides is around the recent acquisition of MIT in Mexico by one of their merchants’ business. The company provided the services of a call centre with a chatbot, and PagoNxt connected its merchants with a superior chatbot in just 10 days.

“This is our mindset on the ability to move fast. And this is not the only integration, because the global platform is integrated with the POS of MIT through a Payment Gateway API. Our global portal or APIs can connect and  offer non-financial information services. For instance, a small SME in Latin America can now track its shipment globally from China. This ecosystem of services is a game changer,” believes Diez.

Akselsen adds that partnerships are also vital for Lunar: “We believe it’s crucial for us to find and build good partnerships rather than finding suppliers or vendors. We want to build good partnerships because we believe this creates the best working environment to ensure performance and development, and we wish to have ongoing dialogues around new ideas and opportunities with our partners. They bring ideas to the table that they have learned from their market, and we benefit from their expertise.” 

“Because we are perceived as a front runner in the Nordics, a lot of organisations come to us with propositions and opportunities, wanting to know if we’re interested in testing some of their ideas. We have done this a lot when we see opportunities that could benefit both of us. In general we really want to have an open and transparent dialogue with all our partners where we find opportunities to work together, and test things together.”

Lunar is also very interested in pursuing dialogue and building a network with the incumbent banks, as they are considered something of a “new boy in class.” They believe they can learn from the incumbents’ many years of experience and that the incumbents can learn from them as well.  For Lunar it has been a positive experience that a lot of the incumbents are very willing to share their knowledge and experience and build a network for knowledge sharing and sparring.“

Why should banks fix culture to improve innovation?

To compete in this new ecosystem, it is vital that banks address cultural stagnation which may be hampering their ability to make fast decisions or provide the freedom employees need to innovate effectively. As banks are custodians of peoples’ finances and data, they are naturally risk averse. How can bankers adopt a new approach, innovating and designing ways and means of providing financial services that are applicable and relevant to changing customer expectations?

The culture around decision making is the first thing that must be addressed, argues Fernando: “Traditionally, banks have had many layers when it comes to decision making. A range of employees may come up with new ideas, a plan, an execution mind map, but getting approval to go ahead often takes a lot of time owing to the bank’s hierarchy. With the current tide of innovation across industries, these kinds of models and decision making processes can hold back innovation as by the time the decision making process is over, someone else has already done it.”

“We need to enable a culture change throughout the entire organisation from the people who are innovating to those who are making the decisions,” notes Fernando. 

This thinking is shared by Diez, who notes that while it is important to have the right tech in place,  it is the different way of working which makes it possible to implement this technology. “All teams, businesses, operations and technology must have the same objectives; but, at the same time, they have to know how to manage their own role working. In the end, the technology is only the means to a specific end in terms of regulation, operations and business, which is not easy to achieve without empathy and trust.”

Akselsen observes that while Lunar works as a tech company, like every other financial institution in the Nordics, it is heavily regulated and there are regulatory requirements that needs to be complied with, i.e. the product approval processes that must be carried out whenever a new product is introduced where all stakeholders needs to be involved – including credit, risk, compliance, and legal among others. This acts as something of a stick in the mud to fast innovation and decision making, and Lunar is continuously working on finding the best approach to ensure fast decision making and time to market.

Fernando echoes the comments, noting that “it’s very easy for fintechs to innovate and provide new products because they’re simply not as heavily regulated as banks. But how should banks innovate within this regulatory framework that serves to maintain the risk balance and trust that is so important for keeping people’s finances safe?”

Akselsen adds that some banks have a more bureaucratic and long product approval process that defines the product building journey in a more formal way, but “I don’t believe that’s the best approach. It quite quickly becomes quite slow and rigid, where decision making  takes quarters rather than weeks or months.”

Across the Nordics, Akselsen points out that while many incumbents claim to be working in squads or tribes, that doesn’t cut it. “It’s not about putting people together and saying ‘ok, now we’re working in squads’, it’s about the autonomy you give your employees in the squad, the decision rights you give your employees, and how you ensure quick decision making processes. If you don’t give squads autonomy to make some decisions themselves and be in control of their own roadmap and deliverables, you lose motivation. You need to ensure your services are decoupled and that your squads are organised based on the principles of domain-driven design, enabling them to work independently of other squads. If not, you become slow, constantly waiting for others to make decisions, releases etc..”

Having squads working independently from other squads allows them to progress and deliver without having to wade through hierarchical and technical test, releases and approvals.

Akselsen continues: “Several banks are still working in a reality where they have a monolithic infrastructure, and you cannot just make releases independent of each other. There is a risk in a lot of these systems that if you do something in one area or service i.e. loans, you might end up crashing something over in deposits – everything is connected, hence you’re forced to test large parts of your system prior to doing releases in production.”

Akselsen boasts that Lunar currently carries out releases 50 to 70 times a day as all squads work and release independently of each other. 

While banks could leverage the improvements of their own systems or the ecosystem to partner and improve their product building strategy, Akselsen notes that banks often find that they aren’t comfortable relinquishing the control that tends to accompany working more as a tech company or with partners.

“I believe incumbents need to rethink their current quite siloed organisational structures that banks traditionally have maintained. This requires them to rethink their whole organisation, including decision mandates, reporting lines, accountability and so on. It requires them to shake up the organisation and break up the hierarchical structure with many managerial layers and push decision power, autonomy and control out in the organisation. For me, becoming more agile and improving innovation is just as much an organisational challenge and a mindset challenge, as it is a technical challenge.”

Akselsen adds: “Partnering with other companies, especially tech companies, may also turn out to be a challenge for several of the incumbent banks. Fintechs in general have a very different way of working compared to incumbents and relies on quick decision making and fast time to market, which often conflicts with the incumbents wish to be in control, bureaucratic organisational structures with slow decision making and many stakeholders needed to be involved. This often creates tensions in the partnerships and is something that needs to be addressed continuously to have a valuable and long-term partnership.”

Building and launching new products in the financial services industry remains a significant challenge for financial institutions, particularly those encumbered by legacy technology. However, by capitalising on the new opportunities presented by the new digital ecosystem to build fruitful partnerships which deliver tech solutions to incumbents, banks can avoid being pushed to the side-lines. Additionally, by evolving the cultural mindset within these legacy institutions, banks can steer clear of outdated bureaucracy to build and launch innovative products efficiently, for success long into the future.

You can read more about these themes in WSO2's e-book:
Reprogramming the Bank - Shift Gears on Digital Innovation