A research report released last year estimated that in 2014, large financial institutions in the US would spend close to US$75 billion on IT improvements that would help them ‘change the bank’ rather than ‘run the bank’. Change seems to be the operative word for banking across the globe given the fact that that every aspect of the business of banking is also changing.
Customers are no longer satisfied with mere transactions; they demand a personalized digital experience that resonates with their financial circumstance and lifestyle. They are drawing from their experience from retail, which is also where they learned that they can make businesses work hard to earn their loyalties. Digital players who already have the loyalty of these customers are extending that equity into the banking space. New models of enterprise technology consumption are leveling the playing field within the traditional space. The events of 2008 have also infused regulatory oversight with a newfound fervor that will only exacerbate the cost and complexity of compliance.
All things considered, banks have to change, or better still, transform, in order to compete in the new norm. And that transformation will have to start by addressing the systemic complexities that have gradually built up in banking systems over the years. Beginning with the simplification of banking platforms.
But platform simplification is a capital, time and risk intensive process. Even if banks were to get on board with the capital and risk pressures, the time to performance is still too protracted to yield any immediate benefits; unless they opt for the rip & replace route, in which case the risk of business disruption goes through the roof. What banks need then is a system of progressive simplification and transformation that is optimized for capital, risk, time and performance.
Componentization is the concept underlying the process of such systematic and phased simplification. Componentization enables banks to design their transformation strategy around their individual investment capability, risk appetite and business performance priorities. Most importantly, the componentized approach creates a sophisticated platform for future evolution even as it simplifies and transforms existing systems.
It has always been easy to make the connection between platform simplification and competitive advantage. But with componentization it also becomes easy to achieve that ideal without the agony of extended rollouts or the stress of instant transformation.