digital

core.
a guide on true digital transformation
executive
summary.
Evolving business conditions
in the banking industry and
dynamic changes in the core
system market are driving
legacy modernisation
decisions that will dramatically
change banking’s technology
landscape.
Digital core banking in a nutshell the process of accessing services or even
Gartner observes that many banks are pursuing just opening an account. Influential financial
core banking renewal. This view is in line with markets commentator, Chris Skinner, has long
the results of our own research, which has held the view that you cannot become a digital
found that the majority of financial institutions’ bank without core systems renewal. The real
existing core technology no longer supports focus of bank technology change needs to be
their needs and will have to be replaced in the on the digitalisation of core banking across the
next few years. We understand that incumbent institution.
banks struggle to react quickly to market
change. In practice, this means re-engineering core
systems and processes so they run on a digital
While this can partly be attributed to regulatory core foundation.
constraints, they are also burdened by legacy
systems and the need to manage a much wider
range of products and services than fintechs,
who can target what BBVA’s CEO recently
described as ‘one very thin slice of what a bank
does’ and do it better at a lower cost.
Get closer to a customer base
But disruptive technology is not just for
challenger banks – it can also help established
banks get closer to a customer base that has
in some cases become disillusioned with
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digital core Digital core banking brings flexibility
banking.
Digital core banking will allow a bank to
implement a flexible approach to products
rapid
and platforms, and let them focus on
customer acquisition and interaction, business
returns. intelligence and analytics, and customer
support and growth.
Banks understand that traditional core banking
restricts flexibility. The introduction of a digital
banking mid platform to complement the
tradition core system offers a multitude of
benefits.
Many industry observers remark that the future
of traditional core banking lies mainly in data
storage.
Customized digital core banking
Customizable products and services allow a
bank to define workflow and orchestration
procedures that create a smooth and engaging
customer experience. Digital core banking
also enables an open API system and feature
integration, offering a bank the seamless
expansion of products and services as
required. The digital banking platform becomes
the main customer data storage. Complex CRM,
facilitated by detailed and interlinked customer
data and analytics, will be the norm. The
traditional core banking system is pushed to
the back office to become an instrument used
only for transactions and accounting.
Digital banking confines and reduces legacy
backoffice issues, while simultaneously offering
proven benefits to banks within a short
time-frame.
Continual improvement and minimum risk
Digital core banking offers a systematic
move away from legacy core banking, yet at
the same time introduces a rapid change in
user-associated functionalities and abilities.
Customizable digital core banking will also
greatly decrease unnecessary banking features
and services. A competent application and
integration of digital core banking ensures
minimum risk while offering maximum flexibility
and future-proofing.
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technology Rapid, multichannel digital services
driven.
The extent to which banking has become
consumer-centric and technology driven
customer-
was one of the core topics discussed at
the 2016 British Bankers’ Association digital
centric. banking conference. The author of the
Juniper Research report Retail Banking: Digital
Transformation & Disruptor Opportunities 2017-
2021 refers to record levels of investment in
banking technologies, stating that investments
in banking technology reached record levels in
2016 and that traditional banks are expected to
focus on digital transformation initiatives.
The report forecasts that by 2021, nearly
three billion users will access retail banking
services via smartphones, tablets, PCs and
smartwatches, up 53% from the total for 2017.
Banks have undoubtedly As consumers increasingly opt for banks
offering the convenience of rapid, multi-channel
grasped the importance of digital services, banks will need to focus on
providing a more frictionless digital experience
bringing digitisation to their
if they are to remain market leaders. Many
customers. banks that have tried to digitise their services
have started in the front layer with portals or
apps. This approach may appear logical since
this is the layer that the client sees, but all the
other layers in the system have to be able to
support it, which has huge cost implications.
Many banks are running technology that is
decades old, which not only prevents a good
customer experience, but is also very costly to
maintain. In addition, there is a time to market
issue in that banks have limited flexibility if
they are relying on old systems to deliver new
services.
Core banking systems were initially developed
in the 1970s and 1980s and have been
continuously modified in order to cope
with changes in business practices and
technological evolution. As a result these
legacy systems have become saturated with
extra layers of functionality, making them even
more complicated and harder to manage.
Isolated systems can become impractical and
the lack of system interconnectivity can inhibit
business growth.
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The decision faced by banks is whether to
swap out the core banking system for a more
up to date customer experience. Outdated
systems are expensive to run, often leading
to redundant tasks, including excessive
processing and slow system response times.

Information is the foundation

In addition, technological advances mean
customers now want to purchase products
and view accounts using applications as
well as being able to use their information
interchangeably, which legacy systems do not
have the capacity to do. Banks have realised
that information has become the foundation of
many financial products, which requires them
to develop more customer-centric strategies.
However, the lack of interconnectivity between
systems is affecting the creation of new
revenue. These interconnections between
potential products are only achieved when data
is easily accessible from core systems to all
departmental applications, allowing the bank to
quickly adapt to market needs.

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addressing Our view is that rather than focusing on what The 2015 World Retail Banking Report states

the issues.
the customer sees, it is more effective to focus that the back office is an area of banking
on all three layers of the core banking platform that has failed to keep pace with the digital
– front, mid and back - or as we describe them transformation occurring elsewhere in the
the presentation layer, client and orchestration sector. Many banks have multiple back-ends
layer and product layer. for different types of product, which makes
it difficult to achieve a single view of the
Customers increasingly expect a seamless customer and to provide them with a single
customer experience from their bank. view of all their accounts.
Innovations in mobile technology and
Presentation Layer smartphones enable banks to simplify their
services on mobile devices, as a convenient
channel providing a host of self-servicing
Client &
Orchestration facilities to customers. But no amount of
Orchestration
Layer
Layer social media, mobile services or cloud-based
infrastructure will make a difference if banks
Product Layer
cannot leverage that technology to innovate
and ultimately improve business performance.

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addressing
the issues.
A true digital core banking
system takes this process a
stage further by using APIs
rather than screens.
Only APIs can provide the flexibility that is
needed in the front or presentation layer.
With services exposed to the ‘outside world’
anybody can in principle access the services
and (depending on their role) gain access to
certain data and functionality. In this scenario
the bank has moved beyond omni-channel to
omni-access.
At the client and orchestration layer, APIs
unlock the potential of the fintech world,
enabling customers to make use of providers
developing niche services for KYC or data
analytics, for example.
In this environment, banks and fintechs provide
customers with access to products and
services from other providers as well as their
own, interconnecting via open APIs.
We have already seen Zopa partner with Metro
Bank to allow the bank to lend its funds on
the P2P platform and we will see more banks
connecting to third party ecosystems to add
value for their customers.
We believe the banking industry is moving
towards a more interconnected model where
banks will use the services of their competitors
to fill gaps in their offerings.
Current processes for client onboarding
employed by many financial services
organisations involve collecting documents
or individually engaging credit reference
agencies to verify customer identity against
other independent data sources on their behalf.
However, this can be a lengthy process that
is costly for the bank and frustrating for the
customer.
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addressing
the issues.
Fintech partners are able
to better serve banks’
customers through streamlined
onboarding and more efficient
authorisation processes.
This is especially true for small and medium
sized businesses where the presence of
multiple directors/owners increases the KYC
workload and complex product portfolios make
the creation of a single digital service channel
effectively impossible.
A multichannel service approach through APIs
and third party solutions is therefore required,
with a single client view being even more
important now different parties are serving the
client.
With this system there is no need for repeated
onboarding of the same customer, which also
improves the customer experience.
It is tempting for banks to wonder how they can
ever update their ‘spaghetti’ of legacy systems
and to be concerned that by the time they
have updated their systems, the technology will
already be obsolete.
This is where non-coded configuration comes
in. Processes are adjustable in the client
and orchestration layer and products are
configurable in the back layer, meaning banks
can make changes and introduce new products
and services in a matter of weeks rather
than months. Banks can only be digital if all
operations - front to back - are digitalised.
This involves the automation of a large number
of processes with many activities needing to be
performed to make sure that clients can access
a bank via any channel.
By adopting a layered model that moves the
focus from presentation to orchestration, banks
can deliver an omni-access digital service that
truly works for customers.
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conclusion.
We have outlined some of the reasons why
digital transformation on legacy systems is a
flawed strategy for large banks. The answer
lies in the greenfield approach that a number
of large banks have adopted, setting up new
operations alongside their existing businesses.
While this requires some significant upfront
investment, the authors of Oliver Wyman’s
Beyond Restructuring: The New Agenda report
note that the cost is often a fraction of the
budget allocated to legacy IT re-engineering
and that this approach gives banks the long
term potential to operate at a radically lower
cost point, as well as increase the potential for
advantages of scale.
Several greenfield digital banks are targeting
cost-to-income ratios of 30% or lower and
while there remain uncertainties about
when and if they will reach these ambitious
targets, digitalisation is already enabling cost
efficiencies elsewhere.
These new entities are often managed by
young, talented people with a mandate to
deploy new technology. In many cases
they operate out of different buildings and
have direct reporting lines to the executive
board in order to not be influenced by any
organisational legacy, which can be even more
limiting than IT legacy.
The objective is that new customers will
eventually onboard themselves from the old
to the new bank. It is clear that there is more
to being a digital bank than having a great
website or app.
It also requires the implementation of next
generation software in the mid and back
layer to provide the customer experience that
customers already expect – and receive - from
other service providers.
five°degrees offers with the Matrix Digital
Banking platform, a platform where all the client
related functionalities are centralized.
The platform acts as the middle layer to
combine the data and functionalities that
are related to the client. One of the most
valuable advantages of the Matrix Digital
Banking platform is the easy adoption of
loosely coupled (new) services or applications
to the system. With the upcoming app store
five°degrees also introduces a trusted
marketplace for banks where partners can
provide their innovation and add-ons to the
Matrix platform.
The Digital Banking Platform becomes the main
customer repository, driving sophisticated CRM
based on detailed data. Tangible business
benefits are gained in a short timeframe without
the high-risk, high-cost multi-year ‘rip and
replace’ projects of yesteryear.
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information
and a demo.
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