COVID-19 leaves its mark on every industry, and banking is no exception. Cash usage has halved and digital engagement levels have risen by up to 20 % – just two of the changes that banks have had to respond to. However the crisis has taken its toll on many digital banks, with collective app downloads sliding nearly a quarter from February to March. There has been notable casualties – RBS recently made a decision to “wind down” its digital bank, Bo, after only five months. However, as is a fact of life, alongside these challenges there is scope.
As more countries emerge from lockdown and the world slowly returns to “normal”, you will see some changes that remain. For instance, lots of people who never tried banking online or new digital payments, may emerge from lockdown as regular users. UK Finance recently found remote banking had increased across all age ranges throughout the pandemic, with 72 per cent now using online banking and Half using mobile banking. If these changes are indeed a part of a longer-term shift, then COVID-19 could accelerate the need for modernisation and the key to accomplishing this would be the digital capabilities that banks build at their core.
Competing customer experiences
Since the UK's lockdown began in March, the way in which consumers spend, and interact with banks, has become digitally led. But banks have historically been slow to deal with digital channels. Before COVID-19, efforts towards digital transformation were limited; for example, one report from Accenture discovered that only 12 percent of banks were dedicated to digital transformation last year, with 50 % having made little progress, and the remaining 38 percent with digital strategies without coherence. Now, the fallout from the pandemic along with the shift to digital could expose any gaps traditional banks have within their digital infrastructure.
We now reside in a world in which the bar for customer experience is set by the likes of Amazon and Uber. Consumers expect this “on demand”, “click and go” type of service everywhere. In banking, new battlegrounds are forming around digital customer experiences. Whilst traditional banks will always take advantage of loyalty and credibility, it seems increasingly more clear that as consumers increasingly adopt digital services, these banks will face growing challenges from digital natives.
Traditional banks are built upon robust systems and services dating back the 1970s and 1980s, and also have done well to evolve these to the difficulties of multi-channel banking. However, it has introduced multiple layers of complexity, and as the pace of modernisation accelerates, and because the utilization of digital channels and payments increase, banks will face growing pressure to ensure their legacy infrastructure will keep up.
As such, banks' dependencies on legacy systems allow it to be hard to transform and provide new digital experiences. In comparison, digital banks are much better placed to innovate quickly because they have been built on modern cloud infrastructure, which provides the flexibility and scalability required to adapt quickly. It's clear that traditional banks need to make some changes to help keep pace.
Banks and legacy infrastructures
But how to pull off accomplishing this change? Many traditional banks' critical applications are written in old coding languages, such as COBOL, that are extremely hard to integrate with newer systems. Additionally, the individuals with the skills to develop on these old systems might be few and far between, with lots of rapidly approaching retirement. Because they leave, they take decades worth of knowledge and expertise around these old systems.
The choice of migrating across to newer platforms may seem obvious but it is a complex challenge, relating to the integration of dozens of interdependent systems. Because of this, migration includes risk; with countless customers reliant upon services, any disruption or outage can lead to reputational damage, revenue leakage and even regulatory fines. As such, it's obvious that many banks are unwilling to modernise.
Building a solution from within
However, there are other possibilities. Instead of taking on the risk of full migration, some banks are instead concentrating on 'hollowing out' certain services – leaving core services that are too risky to maneuver, whilst shifting other services onto more modern platforms. Another approach would be to begin with scratch and instead develop a stand-alone digital 'bank-within-a-bank' – a “Russian Doll” of sorts. Such digital banks are made upon modern core banking platforms, letting them modernise the whole stack by incentivising people to switch to the newer entity. An example of this bank-within-a-bank approach is Goldman Sachs' digital bank Marcus, which has debuted to much success and powerful demand.