In a world mired in the chaos brought about by the COVID-19 pandemic, a transition to digital seems to be inevitable in many aspects of life, not least the banking and financial services sectors.
In fact, a digital banking revolution is already underway in many countries across the Asia Pacific (APAC) region, and those countries that have been a little slower off the mark will soon be forced to catch up. If COVID has shown us anything, it’s that the future is digital.
What’s a little less clear, however, is whether banks and financial institutions across the Asia Pacific region are ready to capitalise on the enormous opportunities this new age will present.
In the banking world, the need for a truly agile approach has never been higher. Senior leaders across a range of financial institutions in APAC are facing a serious challenge right now as they grapple with the best ways to enhance their core banking systems so that they align more effectively with a ‘cloud-native’ world.
We’ve identified four pathways that legacy banks can take as the digital revolution takes hold.
Option 1: Wait and see – AKA do nothing
Many legacy banks have hundreds of years of history, and equally ancient core banking systems, processes and ways of servicing customers in place. But for now, it works, so why change it? This approach sees incumbents sit back and wait for the dust to settle as the new wave of fintechs and challengers fight amongst themselves for primacy in the digital space.
However, this approach assumes that there will be a place for non-digital banks in a digital world moving forward… an assumption inherent with risk. In fact, McKinsey & Co. states that legacy financial institutions that ‘fail to evolve digitally’ could see profits fall by up to 60% by 2025.
Option 2: Invest in a challenger
Sounds like a good idea, right? Maintain the legacy bank’s status quo as a trustworthy and reliable brick and mortar institution, while purchasing one of the fresh-faced new fintech challengers that are taking off.
But does the legacy bank have the funds available to make a worthwhile purchase, and the human resources to make it happen? And what about the inevitable culture clashes that will occur between an upstart challenger and an established bank with, shall we say, less than modern ways of thinking?
While it may seem like a good idea on the surface, the integration and micromanagement required in a situation such as this are often extremely complex and fraught with risk.
Option 3: Knockdown, rebuild
This path sees the legacy bank undertake a complete swap out of its ageing systems with new and improved core banking tech. But at what cost? This ‘all or nothing’ approach is an incredibly high risk, potentially gambling the entire business on successful implementation.
What if it fails? We don’t have to look very far afield to find examples of total disasters of the ‘rip and replace’ approach – in the UK, both the Co-operative Bank and TSB lost hundreds of millions of pounds and took a serious reputational hit thanks to their failed implementations of new core banking systems.
Option 4: Evolve and augment
This final pathway is what Mambu recommends as the ‘gold star’ approach to digital transformation. It sees legacy banks evolve progressively, changing systems over time, with less upheaval on the organisation, and minimal disruption for the end-user.
Instead of implementing a wide-scale ‘knockdown, rebuild’ of entire systems, individual systems are targeted for transformation with pinpoint precision. Taking what is known as a ‘composable banking’ approach allows legacy banks to invest in lean, flexible technology that can enable a faster response to changing market dynamics, while also encouraging greater innovation as the bank moves into the cloud in a staged response.
This approach also comes with an inherently lower risk, by maintaining control of the legacy infrastructure while new systems are introduced.
Myles Bertrand is the Managing Director, APAC, for Mambu.
The views and opinions expressed in this Viewpoint article are solely those of the author(s) and do not reflect the views and opinions of Fintech Bulletin.