23 October 2018
Darwin already knew: agility is key for survival, also for banks
According to Thomas Feiler, Head of Payments Product Management at Worldline, Charles Darwin predicted the fate of banks years ago, when he actually talked about the theory of biological evolution. “It is not the strongest species that survive, nor the most intelligent that survive. It is the ones that are most adaptable to change,” Darwin explained.
That is exactly the situation banks find themselves in, was the message of Feiler during his Open Theatre Session on the second day of Sibos. Agility is one of the key words for banks that want to become future-proof. To do so, the banking IT-systems have to change. Feiler explained in front of a packed room, where spectators even had to stand, what this means and how outsourcing can play an important role in the banks’ adoption of new digital platforms and value-added services.
Support the digital banking ecosystem of the future
One of the challenges of banks, unlike fintechs, is that they are facing technical limitations. Banks tend to struggle with their legacy systems because the infrastructure is not adequate to support the digital banking ecosystem of the future.
One reason for this is that banks consist of silos: each channel has its own department. These silos are basically small islands that function independently, making it difficult to align them. Because customers contact a bank through different channels, online and offline, this can lead to longer processing times, lower efficiency and, in the end, lower customer satisfaction.
Many banks, however, still link new data to these existing product and process silos instead of redeveloping the infrastructure. According to Feiler, this means a setback in the market, because the existing software needs to be updated continuously which leads to higher costs. In addition, it also harms the bank's ability to innovate quickly. Feiler: “It is difficult to carry out a proper data analysis when the channels are not properly integrated. Data analysis is necessary for the development of services, as well as for compliance with new regulations.”
Efficiency, scalability and cost reduction are required
Outdated systems make it difficult for banks to retain customer relationships via front end services, with both fin- and bigtechs (such as Alipay or Amazon) competing for the attention of end users. On the other hand, the back-end side is under pressure because more efficiency, scalability and cost reduction are required. Feiler: “The speed with which transactions are processed via instant- and mobile payments, among other things, puts the front- and backend in closer contact than ever before. If banks want to remain competitive and relevant instead of simply compliant, they must find a way to refresh and expand these backbone systems so that the efficiency increases, and the huge value of transaction data can be used properly via new digital technologies.”
According to Feiler, this requires a modern and standardized payment processing platform that is fast, flexible, scalable and transparent. This platform should also help to extract valuable information from data and manage transaction volumes at lower costs. Updating the payment platform is a huge effort that requires significant changes to a bank's overall IT-infrastructure. Feiler: “For that reason banks should always take the time to think about their current and future business. Afterwards, banks can decide if they want to develop these adjustments in-house or that they want to use a solution from a specialist third-party provider. Partnering and outsourcing the maintenance and processing of the back-end system is the third option.”
Silos can be integrated into one platform
Concrete steps can already be taken, according to Feiler, including standardization and the merging of a number of silos. “While there is a concrete need for a new infrastructure for instant payments, other payments types also require changes in the infrastructure. For example, both urgent payments in Europe and international payments via SWIFT will use ISO 20022, an international standard for the exchange of financial data, in the future. As this messaging standard has already been built for SEPA payments, it makes sense to also leverage this capability for urgent and international payments. Therefore, these silos can be integrated into one platform.”
Another argument that Feiler wants to point out is that multi-currency and SEPA payments show overlaps because they both can represent cross-border payments. “It is much more efficient and cost-effective to merge these silos. At the same time, SEPA payments and instant payments also show similarities: they have the same messaging standards, same rulebook change implementation timelines and the same scheme owner. You can also combine them in one infrastructure.”
After all, it is disadvantageous to work with four systems or silos. Feiler: “An example: a client calls a bank after he made a transaction, just to check if his funds went through, but the beneficiary bank claims that they didn't receive the money. In that case, the transaction must be checked in four different systems. It is inefficient and therefore frustrating the customer.”
In line with Darwin's theory
To solve this problem, outsourcing is an option. “It is quite an effort for banks to achieve this. It is a multi-year project”, explains Feiler, who states that Worldline has built up a lot of expertise in outsourcing projects with banks in the past five years. “In the end, every bank must become more agile. After all, if banks do not adjust, there is a good chance that they will be sidelined and will not survive. Fully in line with Darwin's theory of biological evolution.”
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- Business developments