Future proof banking: evolution or disruption?

This is why banks need to modernise the core systems, according to the Finextra Research report Invigorating Banking. The big question is: will banking be disrupted by innovative start-ups or can banks evolve to a future proof and sustainable institute?

Technology is rapidly changing and innovative start-ups are disrupting multiple sectors. Digital structural change is piling up the pressure on traditional banks, who are under increasing pressure to provide access to accounts to third parties. Some think disruption will be the destiny of banks. PA Consulting Group recently published an analysis ‘A Decade of Disruption’ which includes a clear warning: that financial services organisations should prepare to enter a period of unprecedented disruption.

This has two reasons, according to the report:

1. The financial services sector is no longer seen to be working.

People are increasingly critical of the financial services sector and of banking in particular. Dissatisfaction with financial services is not restricted to the general public.

2. Inertia is no longer your friend

Nowadays a combination of socio-demographic and technological changes mean this traditional customer ‘stickiness’ can no longer be relied upon.

PA Consulting Group thinks that banks will face a phenomenal amount of change over the next decade, driven in part by five disruptive realities:

1.   A world of ongoing uncertainty
2.   Shifting trade and capital
3.   Fundamental socio-demographic change
4.   A new technology landscape
5.   A data and analytics revolution

“In the context of these realities, too many companies still believe their size and former glories will protect them from disruption. In fact, it is relevance and agility – not size – that will be the critical determinant of success,” as stated by PA Consulting Group in the report.

Prepare for a digital revolution

A digital revolution is upon the financial world, but not all banks are prepared for it. Consultancy agency Accenture found in the report ‘The Future of Fintech and Banking: Digitally disrupted or reimagined’ that 40 per cent of the respondents think that banks are too slow with the deployment of new technology. “Digital disruption has the potential to shrink the role and relevance of today’s banks, and simultaneously help them create better, faster, cheaper services that make them an even more essential part of everyday life for institutions and individuals,” according to the report. “To make the impact positive, banks are acknowledging they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence.”

Banking is regulated

On the other side, there is financial expert Chris Skinner who disagrees that banking is disrupted. Instead he believes the current changes in banking are part of a natural evolution. He writes in his blog that banking will not be wiped out by a new player who creates new ways of doing things, because banking is regulated. Skinner: “Banking is integrated with government policy; is a political instrument; is used as the government’s control mechanism for social order; and is core to a country’s economic success or failure. For this reason, it is in government’s interest to license value stores and value exchanges. This controls monetary supply and economic stability. For this reason, banks are given the luxury of time to adapt that book stores, travel agents and music shops didn’t have.”

In his eyes disruption is the wrong word for the process because banks are re-architecting their model: “Banks are turning legacy structures designed for the physical distribution of paper through a localised network into a digital structure that can support the digital distribution of data trough a globalised network.” Skinner writes that banks are being re-architected by new business models, new ways of doing business, new opportunities to do things differently and new technological concepts. “So banks are being disrupted but more from within, through re-architecting their business models and structures, than from without.”

To change and adapt to survive

Skinner agrees that banks need to change and adapt to survive. Their survival is being determined by how quickly they can step up to the new model of being digital and not physical. In the report ‘Invigorating Banking’ he explains how banks should adapt to the new digital circumstances to ensure business in the future. Skinner: “You cannot become a digital bank without core systems renewal; you cannot renew core systems without using cloud for data management; you need to consolidate data in the cloud in order to be able to perform effective data analytics; and when you’ve renewed core systems through the cloud to perform data analytics, well then you can innovate.”

Banks need to innovate to ensure their business in the future, but that is said more easily than done. Their luck is that they have the time to adapt to changes in the market with gradual changes. The question isn’t really about evolving or being disrupted. The experts all agree that changes in the core systems are needed to become fully future proof. In three to five years we’ll see which bank have embraced the digital era.