Banks need to rethink their game plan in the digital age

In financial services, the rise of digital banks challenges traditional banks to adopt new approaches to remain competitive.

As web-based and mobile financial services become increasingly popular, a concern on the minds of banking industry insiders is how traditional banks will remain relevant in the face of growing competition.

More banks are realising the need for improved customer engagement, which prompts them to apply innovative technologies to complement face-to-face interactions in bank branches. The model of an open-source multi-cloud architecture as well as digital-native applications and platforms are allowing financial institutions to launch new service capabilities.

Furthermore, traditional banks are acknowledging that the entire system no longer belongs to them alone; there may be other players such as fintech companies or aggregators that maintain customer relationships either as utility providers or back-end systems.

Identifying priorities and adopting a new culture
Even though technology enables banks to expand their range of services, the most important element for success is a robust business model that sustains the viability of their operations. Another factor to consider is how to deal with disruptors that may seem trivial at first but, in reality, can have a strong impact on their business.

When working with new technologies, banks should not underestimate the role of culture. Arvind Swami, Director, FSI, APAC at Red Hat Asia Pacific, noted that acquiring new software does not necessarily translate to success in developing and deploying new applications.

“You could be using new technologies like Red Hat OpenShift Container Platform but still be running the traditional waterfall model. That is not going to result in the agility and time to market that technologies like containers can provide. The big thing is the cultural side of it—shifting the mindset and embracing the new culture,” he said, emphasising that banks first need to understand the problem they need to solve, the use case to be deployed on the relevant technology, and the strategic steps to leverage the right aspects of the technology.

In other words, a cultural change is essential, along with introducing an organisational structure that promotes effective DevOps practices and collaboration between the business and IT sides of the organisation.

With regards to the rise of digital/virtual banks, Arvind believes that they pose a threat to traditional banks only in terms of how they provide quality service. This means that customer experience and engagement, as well as continuous innovation, are more important than ever for established banks to compete with new competitors.

But apart from enhancing the customer experience, traditional banks also need to upgrade their business strategies to achieve long-term success. “From a business perspective, the traditional banks have stronger books and the ability to lend over a longer period of time, which may lead to consumers perceiving established banks as more trustworthy than new digital-only banks or fintechs. Banks can take advantage of this and better compete with those competitors by transforming their business models and enhancing their ability to deliver innovative, personalised services,” he noted.

Onward with open banking
Red Hat’s concept of “open way of banking” provides a path for financial services to open their capabilities to the external world. “Open banking” is different from “open API” in that the latter is only one component of the former.

Open API allows players like software developers access to different projects and use cases. Meanwhile, open banking consists of three elements: technology (open API), the business ecosystem, and the data and consumers’ data rights.

In other words, open banking gives consumers control over data access when they have financial transactions with third-party service providers. In Southeast Asia, examples of financial institutions that have been successful in open banking are Singapore’s DBS Bank and Indonesia’s Bank Central Asia (BCA), which have created a good ecosystem of collaborators, as well as Malaysia’s Hong Leong Bank (HLB), which has integrated its offerings with WeChat Pay to enable WeChat users to make payments more easily when visiting Malaysia.

Considering the difficulty of doing away with legacy technology, Arvind cited the importance of governance. “You have to make sure that you work together and this is where the governance framework comes into play: How do you make sure that the old and the new can exist? Will you either transform or replace the old? That aspect is extremely important because for new technology, a lot of it is open and works in the open world,” he commented.

In the current environment, both traditional and virtual banks can easily deploy new technologies that reinforce their relationship with customers. The advantage of digital banks lies in their agility because their business model is inherently more flexible than the business-as-usual approach of traditional banks, which takes time to re-architect older technologies—a challenge that incumbents have to overcome in the long run.