Banks’ digital transformation, fast forward: time to accelerate
Banks’ digital transformation, fast forward: time to accelerate
Most financial institutions are facing major upheavals that are pushing them to accelerate their digital transformation.
THE EUROPEAN BANK: THE SITUATION IS GETTING WORSE
European banks today, even in the middle of a difficult situation, have low incomes accompanied with poor growth prospects. This is particularly attributed to a low interest rate situation, which persists (as it is the case in France) and penalizes the profitability of financial institutions, especially retail banks. Additionally, European banks perceived that their activities, investment activities in particular, are being literally governed by restrictive regulations.
These conditions are not revealed in the United States or Asia, banks of which are dominating the global banking network. The top five investment banks are American and the top five retail banks are Asian, (four Chinese and one Japanese).
But also and above all, European banks are facing a transformation of their competitive situation with the rise of more agile and efficient stakeholders. FinTechs and Neobanks have proven able to offer their customers more efficient and less expensive banking solutions along with an enriched customer experience.
Mobile payment app Lydia has managed to attract 3 million users in France, a figure corresponding to over a third of Société General customers i.Lydia processes around 1 million transactions per month, which escape traditional banking system. With the attempt to offer an optimal customer experience, these payments are made at a much lower cost compared to traditional institutions. Similar cases are found with N26, Revolut, Qonto. Not to mention the GAFA (Google, Apple, Facebook and Amazon) where a large number of users have already signed with Apple. Amazon has already launched their payments card and Google is expected to launch current accounts by 2020 in the United States.
A PROFOUND PARADIGM SHIFT
The process is not only a new competition but rather a thorough change to the financial services being provided to individuals. The banks’ smartphone app rubs shoulders with the taxi booking or online shopping, and the user expects always the same experience. These are the new market practices that are emerging, modifying customer habits and creating new demands.
European Banks are therefore facing risks to which they cannot easily adapt while leaving the end customer with unfair experience (multiplication of brands / subsidiaries of online banking, disappointing digital experience).
It is becoming urgent today for these establishments to adapt. It’s a question of continuity. They either radically transform and accelerate their digital transformation, or they will face a risk of mid-term continuity, given the significant paradigm shift. The bank of 2025 has no other choice butto be digital.
Covid-19’s economic impact will make traditional banks’ situation even worse. In addition to a slowdown in some digital transformation projects during the lockdown period, creditors will face a wave of defaults (mainly large companies and SMEs) and a significant destabilizing effect on the financial markets, as well as a significant destabilization of the financial markets: price drop, then selective consolidation, flight to quality on the securities which the States will manage better, materialization of counterparty risk, and country risk. In the absence of IMF intervention in such risk, some nations are more deeply affected than others.
Neobanks, on the other hand, should be relatively protected thanks to more modern information systems and limited market exposures (only their financing operations, in capital or through debt issuance, should be affected for those requiring capital).
IT IS NOT NECESSARILY A MATTER OF INNOVATING
The situation is compared to the transportation revolution in the United States in the 1920s-when the automobile first appeared, which constitutes it as a paradox. At that time, horse-drawn stagecoach manufacturers had the know-how, the workforce, the reputation, the production and distribution network (what is considered highly important in such a vast country). However, none of them has ever started making cars. It was not about innovating, because the internal combustion engine was already part of a mastered know-how. It is a matter of fast adaptability. The new entrants, start-ups at the time, such as Ford, General Motors, and Chrysler were able to be the largest companies taking dominant positions and making stagecoach manufacturers all disappear.
Traditional banks are now in the same situation. They are not called upon innovating or delivering changing growth in the banking services; it seems like fundamental changes are not needed(products, including credits, investments, and payments remain the same while being facilitated by technology – in reality what has changed is only their access and usage). Bank customers need credits, deposits or investments. Payments are now an easy process thanks to digital transformation (no more checks or orders to enter). The innovation processes are clearly identified and within reach. There are, to date, over 22.000 FinTech worldwide with the availability of open source technology.
INTEGRATE TO INNOVATE FASTER
The banks’ priority is therefore not to innovate, but to integrate innovation faster. Accelerating is the real challenge banks are faced with, i.e. to speed up their innovation integration process. Technologically speaking, we have observed five key success factors among the most advanced banks who have accelerated their digital transformation:
1. Components. Break down the information system into autonomous and modular components, with independent life cycles.
2. Common base. Define a common base allowing components’ interconnection (at the logical and technical level) and the integration of new technologies in interaction with older systems.
3. Technological independence. Ensure their independence from suppliers and technologies (“non-vendor locking”).
4. BizDevOps. Establish a continuous BizDevOps process bringing together trades, architects, and developers, supported by no-code or low-code business-oriented development platforms.
5. Customer journey. adopt a constant and iterative approach to improve customer and internal users’ experience , boosted by simplified and highly automated customer journeys.
PRIORITIES ARE SET, SOLUTIONS EXIST
We are facing difficult and serious circumstances due to the urgent need to shift toward a digitalized process. Nevertheless, works to be carried out by banks are set and technical solutions are here to make their execution faster. In particular and among the most familiar cases, several leading financial institutions today use Palmyra platform, our journeys and business components for addressing the aforementioned elements. Thanks to Palmyra, digital transformation is extremely successful. We are proud that Palmyra platform is the key contributor.
The number of individual customers of the Société Générale network (excluding Credit du Nord and Boursorama) in June 2019 was around 8 million (source: France Transactions)