Legacy still plagues incumbents, opening door ever wider for fintechs
Banks must act now to overhaul legacy systems and embrace real-time process monitoring or risk falling prey to an increasingly insurgent fintech threat, a new report by EY urges.
Despite an anaemic global economy and persistent trade tensions impacting financial services' profitability, the EY-commissioned report, Banking in the new decade, stressed the need for established banks to redouble their transformation investments and overhaul legacy systems that have long stymied digital innovation, effectively allowing upstarts to establish themselves as genuine alternatives to the incumbents.
“Fintechs (and bigtechs) benefit from an absence of legacy systems, which allows them to invest in the latest technology and customer experiences, rather than just keep existing systems ticking over,” the report contends.
What is more, these upstart challengers have further squeezed incumbents’ margins, attracting investments that would have otherwise gone to traditional brick and mortar institutions.
Speaking with FST Media, Mike Orman, EY Oceania’s financial services technology leader said that while Australian incumbents appear to be “well progressed” in their innovation journeys he frets over local banks' tendency to “overlook [opportunities] to re-examine their operating models end-to-end [and] to strip out inefficiency and waste.”
“Leveraging new technology innovation does promise real benefits to those that embrace it,” he said. “Those that embrace new technology in parallel with well-considered and coordinated strategy, people, and process initiatives will see amplified results.”
Andrew Gilder, EY Asia-Pacific banking and capital markets leader, said increasing pressure from new market entrants across the Asia-Pacific will remain a foremost challenge for the region's incumbent banks, particularly if they neglect legacy.
“A thriving fintech scene, the success of bigtech in markets like China and new digibank licenses being made available in markets such as Singapore and Hong Kong are all adding to an increase in competition across the region. In response, Asia-Pacific banks will need to focus on ramping up the digital transformation of their businesses,” Gilder said.
The report stressed the need for incumbents to address legacy in accounting and booking systems, data reconciliation, and in delivery of a single customer view, which has long proved a bane for data-burdened incumbents.
Further, it urged banks to address a “persistent inability” to deliver operations in real-time, a factor the report's authors say has stymied the development of new services and experiences demanded by customers.
“Once the legacy issues are addressed, only then the industry can adopt a more agile approach and lean thinking for investment allocations and have a DevOps approach to implementation,” the report said.
“To achieve this level of agility, decisions need to be made quickly and the level of bureaucracy and ideation to implementation and delivery timelines should come down. Other drivers which will enable agile decision-making are the simplicity of the [organisation] and strong internal technology.”
In order to meet the shift in consumer expectations, with customers increasingly seeking out a range of financial providers to address individualised needs, rather than seeking solutions within their existing institution, banks should not shy away from exploring new models of service and engagement that are specially built for digital age consumers, ensuring this increasingly prominent customer cohort can be served holistically with relevant product offerings to meet their demands.
As incumbents expand further into the digital realm, Gilder said success will be determined by those that adopt a “mix and match strategy" with their service models.
This may require established banks to selectively adopt or partner with existing operating models that target specific markets and customer segments – this could include relationships with independent or build-outs of full subsidiary digital banks (effectively, a fully digitised clone of a traditional bank; locally, examples abound, such as independent neobank Xinja or NAB subsidiary UBank) to open platform and utility players (such as WeChat Pay and Apple Pay, effectively banking overlay services utilising apps, which also freely share data, processes and processing with other banks, non-banks and developers) that create fast, low-cost route to innovation and non-traditional revenue streams for banks, according to Gilder.
Ultimately, the report contends, as customer preferences change, banks should draw their focus back to delivering “brilliant basics”.
"This starts with fast, digitised online customer onboarding, enabled by new technologies that allow them to conduct their own KYC reviews and get instant decisions and disbursement of credit."
"Technology can also help banks bridge the industry’s 'advice gap' and deliver the right advice to the right customer at the right time. Many banks have already piloted video tellers and AI-driven business advisors, while others are offering products that seek to positively influence overall customer wellbeing."
"Delivering the simple, easy experiences customers want depends on banks building a deeper understanding of them — using technology and data insights to know them better than they know themselves and being ready to support them, not just through their major financial moments, but in all the moments where a decision or transaction is made."
EY's full Banking in the new decade report can be accessed here.