How to Prepare Banks for Digital Transformation
“The digital transformation of any enterprise is a herculean task requiring a willingness to embrace cultural change, the ability to immerse the entire organization in the customer journey, and a total commitment to digitize to the core” — David Gledhill, DBS Bank Chief Information Officer.
Bank customers’ requests are rapidly changing. Providing flawless branch services and keeping clients’ money safe is no longer enough. Today, people want to be able to manage their finances entirely online, a feature not every bank is currently able to provide. But why is this?
In recent years, many new banks have been created that have introduced a number of unique financial services. Among them are N26 in Germany, Nubank in Brazil, Revolut in the UK and Tinkoff Bank in Russia. Through web versions or mobile apps, these banks’ clients can open new accounts and block old ones, order bank cards, buy or sell stocks, and conduct cryptocurrency transactions, among other services.
How is this new generation of banks able to launch all of these new services so successfully and fast? And why are conventional banking giants having such trouble keeping up with them?
For many years CSSSR has been developing IT systems for the biggest online banks, witnessing their success firsthand. This experience has led to several key insights:
You Don’t Need a Large IT Department
“We operate in small teams. We identify opportunities. We plan. We execute. We deliver. Fast. Precise. Inevitable. No corporate bullshit. No politics. No red tape” — from the Revolut manifesto on its careers page.
To begin with, the development of new functionality requires considerable resources, including people.
Previously, online banking was just a user account to perform money transfers and other simple operations. In-house resources were enough to develop and support these services. Banks bragged about poaching the best specialists from competitors and having the biggest and most powerful IT departments on the market. This approach indeed worked well in its time, and banks have IT departments following this model are still functional now.
However, modern online banking is achieved best through a unified platform for multiple, constantly updated services. Under these conditions, internal IT teams often spend most of their time developing and supporting core functionality, leaving no time and, more importantly, no expertise, to develop new services. Meanwhile, the market offers turnkey development and implementation for just about any technological solution.
As a result, the trend has shifted, with the majority of banks preferring to outsource at least some of their business processes. Top management teams have realized that banks benefit more from reliable partners with strong expertise than from the ongoing expansion of IT departments, which brings with it the headaches of worrying about workload, scaling and constant training.
Start with Transforming Internal Processes
“It’s generally believed that when outsourcing work a company gets a cheaper product, with poor quality control. But in reality, the quality of the product depends on the organization of the processes” — Vladimir Makarov, development director for remote client services at Sberbank, the largest bank in Central and Eastern Europe.
Digital transformation is impossible without restructuring banks’ internal business processes. You cannot outsource web development and leave internal processes unchanged. It is especially hard for big banks to adjust to the digital age, because their processes have been built over many years and have been almost permanently etched into their operations.
Outsourcing allows banks to instantly buy the expertise of a team that has completed many similar projects in a given field. Banks’ main responsibility is to redesign their processes so that internal and outsourced teams can effectively collaborate.
At some banks, internal security requirements are high, and outsourced developers are not allowed into the backend, hired only for their frontend development services. In these cases, the bank builds a test environment and populates it with the data necessary for the function. In this case, it is better if the backend is slightly further along than the frontend, thus making it possible for the outsourced team to complete its tasks faster.
The best option is to choose a contractor that has relevant experience in the banking sector. Both managers and developers should be familiar with the specificity of working with banking products and understand how to organize work with clients in a way that ensures results, without wasting time.
Outsourcing is Safe
“A well thought-out outsourcing strategy — combined with carefully carried out due diligence — can set a bank apart from its competitors” — Angelos Deftereos, senior underwriter, operational risks at XL Catlin (AXA Group)
There is a stereotype that banks, as a matter of principle, avoid all outsourcing because it carries extra risk. In fact, nowadays banks can outsource almost any task unrelated to backend development, which is only preserved in banks’ control to protect personal data — no real names, numbers or data are shared with developers. The main database, with clients’ personal information, should be available only to a strictly limited number of employees and, of course, only those officially employed by the bank itself.
We have extensive experience working with banks and financial organizations. At first, we were given small, simple tasks: modifying landing pages, websites and building calculating tools. However, after passing the required security checks and proving we can both write high-quality code and strictly adhere to NDAs, we were entrusted with more serious projects. For seven years we have never had a commercial information leak.
Successful Banks Use Flexible Technologies to Organize Processes
“The goal is to establish an Agile center of gravity around our company” — German fintech startup N26
Agile software development is all the rage in banking these days, and almost all banks now describe their IT development approach as using Agile. However, few financial institutions really understand the advantages of Agile, or even what it actually is. There is a story about one bank that implemented an Agile happiness metric for developers that measures number of smiles per day. However, the metric appears to have little to do with increasing productivity.
It seems that everyone has heard that Agile is helpful and wants to adapt their processes to it. In fact, there is only one reason to use an Agile approach: launching new products quickly. Agile methodology principles help achieve the desired results in a relatively short time frame.
Westpac is one of the largest banks in New Zealand, with over one million clients since 1817. In 2014, the bank’s management decided to integrate its services into one unified banking platform. Using the Agile approach allowed the bank to launch a beta version of the platform in 3 months, while the full-scale platform, with 120 services, was released a year later.
However, methodologies should not be applied blindly. If the classical Agile model does not work for your company, apply only the parts that improve efficiency for your team. For example: all CSSSR employees work remotely, and the classical Agile mantra that ‘all developers should be in the same room to work faster’ does not fit us.
Our clients also often do not follow all of the Agile rules. If there is no need for a scheduled conference call on a particular day, it can be canceled to divert resources to more urgent tasks. The main idea is to be reasonable and not blindly follow someone else’s advice.
Digital Banks are Professionals at Creating Prototypes
Imagine you are a big bank, and you want to launch a new technology. What would you do? Typically, you’d create a new department, allocate investment to it, obtain licensing, start the long process of development and then, finally, release a pilot version….after at least half a year of work.
And what do next-generation banks do? They create a prototype based on readily available technology. Instead of getting their own license, they form a partnership, and quickly design a website and buy traffic. This approach allows them to analyze demand quickly and identify potential problems. If a bank can see that the new service — stock purchasing, for instance — is in demand, and it makes sense to develop it within the bank’s system, they switch from prototype to independent development.
The pace of innovation and speed of prototype deployment are changing for banks as a matter of survival, according to Revolut founder and CEO Nikolay Storonsky. Storonsky says the company’s British banking service, currently valued at $1.7 billion, applies a planning horizon of ‘six to twelve months’.
Sberbank CEO German Gref agrees that increasing the speed of innovation speed is key to banks’ survival. At the Gaidar Forum in Russia in 2016, Gref said, “Last year we made 27,000 modifications to our platform. In comparison, five years ago we made 600–800 modifications. This year we are planning 41,000 modifications.”
Among the leaders in rapid prototype creation is one of the largest online banks in the world, Russia’s Tinkoff Bank. When Tinkoff Travel was being launched, the bank entered into a partnership with the One-Two-Trip vacation planning service. The prototype allowed Tinkoff to test demand, without spending a small fortune on development.
In Conclusion:
- Create quick prototypes and add-ons instead of launching time-consuming development projects;
- Hire partners that have experience working with banks and reputations for reliability in confidentiality;
- When hiring an outsourced team, think through a convenient and safe testing environment
- The speed of innovation is increasing. Your competitors are probably already ahead of you. Don’t be afraid of change.
CSSSR is a large outsource team of IT-engineers working hard yet completely remotely across the world. We specialize in front-end development of high load web applications, including online banking systems, payment interfaces, sales and brokerage platforms, customer portals for airline companies, and websites for mobile network operators. Connect with us here.
