Banks have not invested sufficiently in modernising their core internal systems due to a stronger focus on customer-facing applications, says Synpulse partner Salomon Wettstein.
Technology has already changed the business models of today’s banks, but operating models have been slow to catch up. Modernising the core platform and establishing an IT architecture driven by modular applications and harmonised processes are the keys for traditional banks to remain successful in an increasingly competitive market.
The entrance of new players like Tencent, Alipay or Grab to the banking market pose an existential threat to traditional banks. These tech-savvy intruders have already captured a significant share of the banking revenue pool in the Asia Pacific region. Their advantage: no IT legacy.
While traditional banks face mounting pressure to digitalise faster and innovate to remain competitive, they are often hindered by outdated legacy applications that are difficult and costly to integrate with new solutions. Many leading institutions in Hong Kong and Singapore are still running on technology platforms that are decades old.
The reason why banks have not invested in modernising their platforms is their stronger focus on customer-facing applications to keep up with fast-paced digital innovation. This has helped banks to sustain innovation and improve customer experience. However, neglecting front-to-back platform modernisation has led to operational inefficiency and increasing costs.
Instead of investing in value-adding solutions for clients, banks are now forced to spend heavily on maintaining their legacy applications just to keep running.
Regulatory push for competition and innovation
The pressure on traditional banks in Hong Kong and Singapore is set to rise further, as regulators are fostering competition and the use of new technologies. The HKMA (Hong Kong Monetary Authority) for instance in March announced the approval of the first three virtual banking licences, a fourth in April, and four more yesterday (9 May), bringing the new customer-centric, purely virtual banking model into Hong Kong. Looking at the successful applicants, one can see that companies with industry backgrounds in telecommunications, insurance or e-commerce will enter the market.
Additionally, with the HKMA’s announcement of the launch of its Open API (Application Programming Interface) framework, Hong Kong has also made its first steps towards open banking, through which client data and product information can be accessed by third-party service providers. Virtual banks have the tremendous advantage of building their platforms from the ground up with API compatibility in mind. For incumbent banks, however, the establishment of an open API platform can be a complex undertaking.
Banks need to respond to the above-mentioned challenges, if they wish to remain competitive in Asia Pacific. The guidelines discussed below help banks to succeed in their operating model transformation. Larger scale operating model transformations were discussed in our recent whitepaper here.
First, banks need to completely modernise their internal platforms. Banks are spending significant amounts of their IT budgets on just maintaining and running legacy applications. A mere update of the core will not enable digitalisation and automation of processes from front to back. Banks should consider replacing legacy platforms entirely to build a strong base for future innovation.
Modernising the platform allows the business to offer new products and services faster and enter new customer segments. A modern banking platform is designed and built in a modular way. This gives banks the flexibility to pick and choose specific functionalities from different service providers, leading to a hybrid model with best-of-breed applications seamlessly integrated with the core.
Second, it is crucial for banks to develop a microservice-driven architecture – an architecture driven by modular, independently deployable and harmonised applications. Update cycles of core applications are far less frequent than the innovation cycles of client facing applications. Banks need to adapt their architecture for improved microservice compatibility to guarantee seamless integration between core applications and client facing applications.
This can be done through a service orchestration layer that integrates new solutions with existing core applications. Moreover, banks should establish an ecosystem of software partners to leverage on external innovation, as in-house software development is not a core competence for most banks.
Changing operating models
Given rapid technological innovation, investments in core banking platform modernisation and the adoption of microservice-driven architecture will pay off in improved efficiency in the long-term. These two major investments will increase the ability of banks to innovate and integrate new solutions, resulting in a positive influence on the top line due to a better client experience.
Banks need to become more agile to foster collaboration with third-party suppliers. Acquiring the knowledge and technology externally rather than building the solution in-house will lead to cost savings and reduced time-to-market.
With the increasing pressure from new challengers, banks have to take action to remain competitive in the future.
Salomon Wettstein is the Hong Kong Managing Director a Partner at Synpulse Management Consulting.