the business imperatives driving bank technology ... · the business imperatives driving bank...

IDC MARKET SPOTLIGHT Sponsored by: Nutanix

The Business Imperatives Driving Bank Technology Transformation October 2018

Written by: Jerry Silva, Research Director, Global Retail Banking

Introduction This is one of the most exciting and challenging times for banks globally. Because of changes in customer expectations and the burdens of regulatory compliance, risk management, and security, CIOs from banks of all sizes are taking extraordinary measures to fundamentally transform the technological underpinnings of their institutions to eliminate constraints to business growth. What started as a business tactic to improve customer engagement by migrating to mobile support in the front office has now become a strategic focus on the back office, where decades-old systems rule and progress toward the industry's full potential had been stopped in its tracks.

One of the biggest drivers of this move to modernize is the threat of disenfranchisement posed by a new breed of financial firm — the fintech. Fintechs are a group of small, nimble technology organizations that sprang up around 2010, and they are defined by a few characteristics that set them apart from the traditional financial institution:

» Fintechs offer primarily mobile-first products and services, fulfilling the public's demand for anytime/anywhere financial services.

» Fintechs often focus on a specific part of the market, such as loan origination or payment wallets, allowing them to concentrate on optimizing the customer's experience.

» While fintechs often rely on traditional banking organizations to fulfill customers' needs, they effectively become an intermediary that interrupts the direct relationship between the bank and its customers.

» Fintechs operate with completely modern systems (no legacy) that are almost always hosted on "as a service" cloud environments that offer flexibility and speed to market.

This IDC Market Spotlight discusses the business benefits institutions can obtain from digital transformation by using a connected banking model.

KEY STATS

According to a recent IDC survey, creating new business models is one of the top digital transformation objectives for banks. It was the number 1 goal for 33% of all financial institutions globally.

WHAT'S IMPORTANT

To support the goal of creating new business models for digital revenue, banks must disrupt their infrastructure, in a completely controlled manner, to virtualize the way their organizations deliver value.

AT A GLANCE

#US44411918

IDC MARKET SPOTLIGHT The Business Imperatives Driving Bank Technology Transformation

The good news is that banks need not fear fintech disruption. Instead, they should transform their own businesses by embracing the methods used by fintechs. Institutions need to emulate many of the same characteristics mentioned previously to fulfill the rich potential of the next generation of the banking industry.

Definitions IDC Financial Insights defines digital transformation (DX) as a business strategy that enables an organization to respond to or create disruption in the industry through innovative products and services. DX requires technological support through a combination of the four technologies that make up the what IDC calls the 3rd Platform of computing:

» Big data/analytics

» Cloud

» Mobility

» Social

DX is also supported by innovation accelerators such as:

» Next-generation security

» Artificial intelligence/machine learning (AI/ML)

Additionally, IDC Financial Insights defines "connected banking" as a bank's proactive response to the more general "open banking" movement. It is characterized by the transformation of the back office using a combination of open APIs, microservices, and/or agile development to improve speed and cost of product development internally. It also assumes the use of cloud principles in the modernization of the institution's applications, enabling deployment across a variety of platforms and interconnectivity with external partners that can deliver new value to the bank customer.

Benefits While DX is the heart of the modernization movement in financial services, it is ultimately a business strategy, not just an IT initiative. DX is about creating an enterprise environment that can weather disruptive events and threats in the industry to actually create disruption where it makes sense to do so. Financial products have not changed significantly over the years, but the value potential an institution can bring to its customers is constrained only by an aging infrastructure that limits the possibilities.

In addition to mandating an infrastructure that is "connectable" to new and innovative ecosystems of value, digital transformation and the underlying modernization of the bank's infrastructure inherently create an environment that is quick to respond to market changes. Banks are experiencing a pace of change that is quicker than it ever has been. Disruption can come from any industry, at any time, so the ability to respond quickly to market requirements makes digital transformation a competitive necessity.

#US44411918


IDC's 2017 Digital Transformation (DX) Leader Sentiment Survey showed that banks are thinking beyond the immediate need for customer engagement initiatives and looking into future states where new revenue streams based on innovative products and services can be delivered. As Figure 1 illustrates, 33% of banks chose "create new business models and develop new digital revenue streams with new products or services" as the top objective for their DX strategy. By comparison, 22% of banks selected "improve our customers' experience with new engagement models" as their top choice. The survey included almost 1,000 institutions of all sizes around the world.

FIGURE 1: DX Strategy Objectives Q Which of the following initiatives ranks number 1 in the organization's top 3 digital

transformation objectives?

Source: IDC's 2017 Digital Transformation (DX) Leader Sentiment Survey

The banks that are focused on new business models will find value in the "network effect" that drove success for companies such as Uber and Apple. By creating an environment that draws the development of new value propositions for bank customers, the institution will drive consumers to those providers, in turn attracting more sources of value to work with the bank to develop even more products and services. This chain of events is unattainable without first creating the open, flexible, and secure infrastructure of a digitally transformed institution.

But to effect real and lasting change to the institution's ability to respond to market shifts, and create the opportunities for innovation through a connected ecosystem of value partners, the line of business must drive transformation in partnership with IT. And the changes to the organization's technology infrastructure are not trivial. In addition to improvements in customer engagement, banks need to manage regulatory pressures, improve risk management capabilities, maintain secure environments, and increase the firm's efficiency and agility to create new value propositions. All these tasks are challenging but necessary for the bank to undertake if it is to compete effectively in tomorrow's markets.

0 5 10 15 20 25 30 35

Enter new industries or geographies

Improve operations (e.g., automate existing processesand/or improve speed and quality)

Develop new partnerships with suppliers

Create a competitive advantage in current business

Improve our customers' experience with newengagement models

Create new business models and develop new digitalrevenue streams with new products or services

(% of respondents)

#US44411918


Considerations To support the transformative business strategy, financial organizations are undertaking an ambitious approach to modernize existing back-office workloads using open APIs, microservices, agile development methodologies, and cloud frameworks. The primary logic is that by deconstructing the monolithic systems that currently run operations, institutions will gain agility and speed to market while replacing obsolete technologies such as COBOL where it makes sense to do so.

This approach, however, has a more significant secondary effect. By disaggregating the workloads into smaller components, using more modern technologies, and applying cloud principles such as elasticity and location independence to guide the modernization, the institution gains an unprecedented ability to locate the smaller workloads across a wider variety of infrastructures. Not all the bank's current applications need to run on private hardware at the firm's own datacenter. Depending on the workload, the institution could choose to run some applications (or microservices) through cloud service providers. In fact, certain workloads, once abstracted from the monolithic cores, could be outsourced to platform partners that can provide the functionality better, faster, and cheaper.

The transformation of the organization's back-office applications also enables a level of connectivity that can be leveraged to create products internally, even across currently siloed lines of business, and to establish relationships with external providers to create the very business models and sources of digital revenue sought by the institutions in the IDC survey. Importantly, one must distinguish "cloud" as a technology and not as a location. Whether the workload remains on-premise or runs on a public, private, or hybrid cloud platform becomes a business decision, not a technology decision. Ultimately, the power of the cloud is in its flexibility to deploy workloads across a variety of platforms, orchestrated to operate toward a single purpose.

Application portability isn't the only consideration when developing a modern infrastructure. Data has become increasingly important to the financial industry as institutions seek to monetize the rich information they have at their disposal. While the technology architecture evolves to an open and connected environment, the bank's data strategy needs to align with the same concept of location independence. There are many reasons an institution may not want to move data from its own controlled, in-house datacenter to some external location, but they won't hold true for every data source. There are also external data sources with which the institution will want to connect to add value to its own information. An effective strategy must include the flexibility to move data to where it makes the most sense — from a business perspective — and still maintain the levels of trust and stewardship required by the market.

IDC Financial Insights calls this holistic concept "connected banking," and it is the foundation for supporting the future of financial services (see Figure 2).

#US44411918


FIGURE 2: Connected Banking

Source: IDC Financial Insights, 2018

Connected banking inherently requires an architecture that puts less importance on the workload's location and more importance on the workload's value. Given the desire both to enable the creation of new digital business models and to improve the efficiency and agility of the institution's technology framework, it is difficult to argue that the traditional on-premise-only model of IT infrastructure will survive very long. The new connected banking environment will depend on a heterogeneous mix of on-premise systems (even some remaining legacy systems), private clouds, public cloud services, and hybrid architectures. The organization's infrastructure will become an expanded, virtualized environment where value is sourced seamlessly from internal systems and external partnerships.

Of course, such a model is easy to describe but harder to put into practice. The creation of hundreds or thousands of disaggregated applications or microservices spread out over a growing number of platforms — some on-premise and others in public cloud or hosted service provider locations — gives rise to increased management complexity. In such a virtual infrastructure, the ability to effectively track and control the heterogeneous environment is critical. The need for performance associated with mission-critical workloads must be met, along with availability, security, and other service-level criteria. Orchestration of such a "containerized ecosystem" is also vital to the continued growth and transformation of multiple connected and dependent infrastructures. Security across workloads and systems must remain tight. Privacy must be guaranteed in an environment where systems may lie outside the bank's own walls. Management of the connected banking infrastructure even crosses enterprise boundaries as institutions increase the

eCommerce Platforms

Amazon, eBay, Apple Pay

Non-Financial Partners

Real Estate, Automotive,

Education

FinancialPartners

Insurance, Wealth,

Investment

Support Platforms

Public Cloud,Compliance,

Credit Services, Data/Analytics

as a Service

Customers

Retail, SMB, Corporate/B2B,

Affiliates

Internal Lines of Business, Risk, and

Marketing

Connected Banking

#US44411918


number of partner relationships needed to drive value. For risk and compliance officers, IT managers, and security executives, this complexity must be converted to simplicity, not only for the sake of the institution's well-being but also for continuing to audit and demonstrate compliance with regulations. Software-defined and hyperconverged infrastructures have evolved to address the need to manage and monitor increasingly complex architectures such as those required by connected banking, and they promise to solve the issues of increased complexity. In some cases, the move to such infrastructures may be the first step toward transformation. In many other cases, hyperconverged infrastructures will be implemented as solutions to challenges encountered by financial institutions as they progress through their own transformation efforts. But in all cases, the eventual adoption of hyperconverged infrastructures and hybrid cloud options needs to be embedded in IT strategies worldwide.

Conclusion Science fiction author Arthur C. Clarke once said, "Any sufficiently advanced technology is indistinguishable from magic." The business benefits from DX using a connected banking model are deceivingly simple when seen through the lens of technology. But by creating the right combination of infrastructure models, and managing the advanced technology in the back office, business staff and customers will see magic.

Connected banking is not an off-the-shelf product that a bank can buy through an IT supplier. Rather, it informs a business strategy that helps the institution transform over time as the core back-office systems are modernized according to the priorities. Business agility through back-office infrastructure transformation grows over time and as the connected architecture becomes richer. As efficiencies grow, and each successive product development cycle becomes faster and faster, the monies saved can feed further rounds of investment into new digital business models and value propositions for the customer. Infrastructure transformation, and the associated virtualization of the bank's IT resources, is necessary for the business to survive and grow.

Where to Start

» Developing business priorities is the first step to infrastructure transformation. Where will tomorrow's revenue come from? What will tomorrow's customer demand? How do we want to position our business for the next generation of financial services? How do we deliver connected banking?

» Creating a strategic collaboration between the lines of business and IT is vital. Transforming the back office without guidance from the business will lead to efficiency gains but no business benefits.

» Taking a tactical and progressive approach to DX is necessary to "prove" the benefits of transformation throughout the journey. There are still plenty of day-to-day challenges that require attention, but keep a focus on back-office transformation with an eye toward a larger prize.

» Including data in the transformation strategy is an absolute necessity. This won't be a trivial task, but it is fundamentally important to align the data strategy with the infrastructure strategy if the lines of business are to be served well by DX.

DX has finally reached middle- and back-office operations. Part of that transformation involves reimagining the datacenter and its architecture, operation, and ability to support the business through transformative technologies.

#US44411918


» Taking advantage of toolkits that have already been built to solve some transformation challenges is a smart way to minimize the time, costs, and risks associated with making large infrastructure changes. There is no need to build everything in-house if suitable tools exist from appropriate providers.

» Finding partners that can support the move to a virtualized and cloud infrastructure is key in today's constrained workforce environment. The concept of creating and running the business on a collection of heterogeneous environments that operate as one and using only internal IT teams is a difficult one to execute for all but a few banks.

#US44411918


About the analyst:

Jerry Silva, Research Director, Global Retail Banking

Jerry Silva is research director for IDC Financial Insights responsible for the global retail banking practice. Mr. Silva's research focuses on technology trends and customer expectations and behaviors in retail banking worldwide.

IDC Corporate USA

5 Speen Street Framingham, MA 01701, USA

T 508.872.8200

F 508.935.4015

Twitter @IDC

idc-insights-community.com

www.idc.com

This publication was produced by IDC Custom Solutions. The opinion, analysis, and research results presented herein are drawn from more detailed research and analysis independently conducted and published by IDC, unless specific vendor sponsorship is noted. IDC Custom Solutions makes IDC content available in a wide range of formats for distribution by various companies. A license to distribute IDC content does not imply endorsement of or opinion about the licensee.

External Publication of IDC Information and Data — Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason.

Copyright 2018 IDC. Reproduction without written permission is completely forbidden.

https://www.idc.com/getdoc.jsp?containerId=PRF004833

https://www.idc.com/prodserv/custom_solutions/index.jsp

the business imperatives driving bank technology ... · the business imperatives driving bank...

Documents