In the latest edition of the Innovation in Retail Banking study co-produced by Infosys Finacle and Qorus and authored by Jim Marous, 14 percent of respondents – down from 17 percent in 2020 – said their digital transformation had been deployed at scale and was delivering value as expected. 43 percent said it was partially deployed, compared to 63 percent the previous year. It’s easy to read this trend as a lack of complete effort among banks, but that is only part of the truth. The real picture is that although banks have made sincere efforts to digitize in the last 20 years, they have been chasing a constantly moving goalpost.
To understand this, let's track the evolution of “digital” in these two decades.
1.0, 2.0, 3.0
Digital 1.0 of the early 2000s was primarily about taking banking from manual to digital mode. In the first few years, banks merely replaced branch-based processes with their digital equivalents, delivering some of them via internet/ mobile banking.
While that was a start, it was clearly not enough from a customer standpoint. As digital 2.0 took hold, banks relooked at their customer journeys to shift from a product-centric to a customer-centric approach. They reimagined their customer journeys by expanding their digital touchpoints, using them to deliver personalized services and contextual interactions.
Today, banks must reimagine their business once again because digital 3.0 trends, such as open banking and embedded finance, are migrating their transactions away from bank-owned to third-party channels, and merging banking customer journeys with primary customer journeys – for housing, transportation, shopping, travel etc.
Other dimensions of banking have also progressed in tandem with digital 1.0-2.0-3.0. Take large banking operations, which at the turn of this century lumbered under a cost to income ratio of 50-60 percent. In the last 20 years, many banks leveraged digital capabilities to reduce their cost to income ratio to 40-50 percent; the digital-only players did even better to operate at nearly half the CI ratios of incumbent banks.
During this period, banking technology went from “on-premise” to private cloud and is now on public cloud. Data analytics has similarly evolved, from descriptive to diagnostic to predictive, and is moving towards a prescriptive stage where it forecasts important events, recommends next best actions, etc. Since 2000, core banking infrastructure has gone from homegrown solution to packaged application and is now available as a composable solution built on a foundation of APIs and microservices. Even product definition has undergone change: 20 years ago, defining a product took time and involved effort from both business and technology. Digital 1.0 allowed business product managers to launch products with less technical support; today, the goal is to co-create products with partners, or even have customers design products for themselves.
Whichever dimension you look at, the progress from one stage to the next is well demarcated. However, banks have not evolved in sync to achieve digital 3.0 maturity because they have focused most of their investments on front-office technologies rather than the entire stack. This is the second reason why they have not extracted the full value of transformation.
Digital to the core
We believe that the answer lies in being “digital to the core”. A modern digital core is required for meeting digital 3.0 expectations, such as customer-driven innovation. Also, only a digital core can provide the scalability and resilience to support embedded finance, which creates massive volumes of low value transactions, with additional surges on special days. Yet another reason for switching to a modern core is that it is cloud-native. A digital core powered by APIs and event streams will drive operational efficiency to bring about a reduction in CI ratios, and with the help of blockchain, even enable inter-organization automation. In total, this will unlock complete transformation value.
In the past, banks procrastinated core transformation because of its considerable cost, timeline, and risk of business disruption. Since core banking solutions were either monolithic applications or pre-packaged solution suites.
But today, with most leading vendors offering componentized solutions, core migration is much simpler than what it was even a decade ago. A componentized stack allows banks to modernize their core flexibly, in stages, as best meets their needs. For example, a large tier 1 bank may sequence its modernization to derive some benefit within the year – start with deposits, before moving on to unsecured lending, mortgages etc., and in this way, exercise control over the cost and time to value. Another bank may take a “speedboat” approach, that is, build a parallel stack for new digital services, and slowly transition existing offerings to the new core.
The choice of solution and transformation partner is extremely critical to core modernization outcomes. In an earlier article, we listed the eight criteria that are key to making the right selection. These are functional richness, technology prowess, depth of services, long-term viability, customer references, operational performance, partner ecosystem and total cost of ownership. Fortunately, all contemporary componentized solutions offer a significant cost advantage over legacy core systems, and in the medium to long-term, deliver value several times the investment.
About The Authors
Puneet Chhahira
Head – Product Management and Marketing, Infosys Finacle
Puneet is the co-head of product management and global head of marketing at Finacle - Infosys’s digital banking products unit that serves financial institutions in over 100 countries. Puneet has led multiple roles across consulting, startup engagements, and platform strategy during the last 17 years at Infosys Finacle. With his close collaborations with global banks, startups, and industry thought leaders, he brings along a deep understanding of the evolving financial industry landscape and how modern technologies can help unlock new possibilities. Before joining Infosys, Puneet was a regional business leader at Bajaj Allianz Life Insurance – one of the largest life insurers in India. Puneet holds an engineering degree in computer science and specialized in Marketing & Finance during his post-graduation.
Theo Albers
AVP & Head of Business – ANZ, Infosys Finacle
Theo heads the business for Infosys Finacle for the Australia and New Zealand market, supported by a team comprising of sales, business consulting, pre-sales, delivery and marketing. He comes with a strong technical background, and ample experience in complex multi stakeholder strategic delivery programs. From his many years of experience Theo has good knowledge of banking software functional capabilities, ability to design solution offerings and services to support customers strategic objectives by applying technology to address real world problems.