Modernizing the bank: A look at key strategies and technologies

Modernization affects all aspects of a bank, not just the bank’s IT management and spend. It changes a bank’s organization, customer interactions, culture, and products and services. Banks spend, on average, 7% of their revenue on IT, which is higher than most other sectors. Historically, no one has really questioned this amount, but it has come under increasing scrutiny. Does it represent value for the money? 

Regulation, the move to open banking, new disruptive technologies and competitors are forcing banks to re-evaluate their IT spend and look at modernization initiatives. This year’s CGI Client Global Insights reveal that bank executives are concerned about what we term “digital drag,” which results from the constraints that bank legacy infrastructures and systems place on the digital journey. Banks are under pressure to do something about this, so modernization is rising to the top of their agendas. 

Business model strategies banks are evaluating as they pursue modernization

There have always been options in choosing a modernization strategy. For example, there was a big move toward stand-alone, web-based banking models in the dot-com era in the late 1990s and early 2000s. Interestingly, however, few survived. However, many banks are now bringing this model back as an option. Alternatively, we’ve seen some banks attempt to go fully digital, foregoing branches and doing business completely online. The question is which transformation strategy is most effective.

Modernization in the 21^st century is like dot-com on steroids. It’s not just about e-commerce. The industry has changed since the dot-com era due to the maturing of new technologies, like artificial intelligence, robotics, machine learning and chatbots—technologies that can transform core banking operations rather simply change how the bank interacts with customers. 

Customer expectations also have increased. Real-time payments and account access is the norm, and customers today want the same for other services like mortgages and wealth management. With open banking, we also are seeing a move towards changing the value chain and unbundling services, so that the bank no longer does everything, but instead offers products and services from third parties and works in conjunction with them. Banks, for example, will process payments, but a third party will handle the front end.

In addition, today’s modernization strategies include expanding the ecosystem, with new business models that leverage external partners. 

The technology implications of modernization

Today, many traditional processing platforms in banking fall short. They aren’t agile in accommodating business and ecosystem changes, nor are they good at sharing and organizing data. They also remain product centric.

Customers are now used to and expect a fast response to their changing expectations. Technology should enable the bank to respond to change by simplifying its operations and making it more agile. For example, through simplification, customers should be able to enter their data only once, instead of multiple times. The bank should then keep this data secure and use it to offer the customer the best product at a particular point in time. Simplification also improves the customer journey, making it easier for the customer to understand and purchase a product.

Technology transformation also should involve a set of interventions rather than a “rip and replace” approach. Responding to FinTechs and other disruptive competitors requires something broader than an internally focused technology renewal. It involves new business models, which can take time to implement. In a large bank, for example, a major IT transformation could involve a sustained five-plus year effort.  

However, that doesn’t mean a wholesale transformation can’t be done. Incremental interventions combined with careful tracking and measurement can help overcome the challenges. For example, our CGI Client Global Insights show that bank executives are focusing on just a few transformation initiatives, instead of wholesale change. Interventions should be agile and completed in three-month cycles.

Change in terms of organization, culture and behavior is another part of the puzzle. Modernization can’t be accomplished without culture change. Going digital requires changes to business models, processes and ways of working, so change management is a critical element of modernization and a major challenge. 

Recommendations for banks embarking on a transformation journey

First, the reality is that banks can’t afford not to embark on this journey. The need for transformation is becoming more and more acute, and it’s important to realize there’s no single way of doing it. Here are my recommendations for smooth and successful journey.

1. Invest in a roadmap that addresses customers, products and technology.
2. On the product side, look at each product to define and assess its purpose, function, construct, data flows, and customer expectations, etc. Product design should reflect lessons from other sectors, such as mass customization in manufacturing or price planning in the mobile phone operator sector. The new product architecture also must include a catalogue to support product evolution and customization.
3. On the technical side, examine your technical architecture to assess the feasibility of integrating real-time processing, proactive monitoring and multi-channel capabilities. If you’re a small bank, consider tearing down and starting from scratch. For universal banks, however, fixing the current architecture is a more workable solution. It’s important also to incrementally change current systems using an agile approach, while working on innovation in parallel.

Banks, particularly large universal ones, are complex entities, heavily regulated and with a wide reach and product range. We all know that digital is the destination. The challenge is which transformation road to take—whether in consumer banking, corporate banking or capital markets—and when.

Our banking experts work with clients to develop incremental transformation roadmaps with clear milestones that lead to successful overall transformation. If you’d like to learn more about our work in this area or discuss your organization’s modernization challenges, feel free to contact me.