Digital transformation for many banks is largely a myth as institutional mindsets, processes and structures stand firmly in the way of progress. 

Ever Increasing Compliance Costs

Since 2008, banks have spent more than $321 billion on settlements, enforcement actions and fines. The U.S. financial services industry spends more than $270 billion annually in compliance and regulatory obligations. The most impacted are smaller institutions, who spend a larger average percentage. Smaller institutions are required to adhere to the same or similar compliance requirements with fewer resources.

High Cost of Global Regulatory Divergence

recent report from OECD and the International Federation of Accountants estimated the annual cost to markets to reconcile assets across global jurisdictions costs more than $780,000,000,000 (that’s BILLION). Nearly a trillion dollars per year drain on capital markets just to ensure  rules are being followed between jurisdictions! That’s a lot of money that would otherwise go to profit and yield. It is estimated that 5-10% of a financial institution’s annual turnover is consumed by costs related to regulatory divergence.

Institutional costs for dealing with regulatory divergence includes:

  • Increased head count to manage local, international, and cross-jurisdictional regulatory matters.
  • Training costs for personnel to deal with regulation and legislation across different regions, in addition to cross- jurisdictional issues.
  • Systems costs, including the need for multiple different systems and systems implementation specifically designed to address regulatory divergence.
  • Restructuring compliance department to better adjust to regulatory divergence.
  • Costs of external consultants to help deal with regulatory divergence.

And this is just one example of the inefficiencies that are perpetuated by business processes and practices created before computers even existed. Bank fund transfer and payment systems are literally engineered around a messaging model from the telegraph era.

Trusting information is still literally another human being vouching for the authenticity of documents and data, which get replicated, hacked, lost, outdated, and even forged or intentionally destroyed to cover up fraudulent activity.

Legacy Core Processing Systems Aren't Keeping Up

Near-term wins versus long-term growth is an age-old dilemma for banks. Generally, speaking, firms tend to choose short-term benefits And as a result, they layer new and sometimes less-compatible business models over existing legacy systems, which leads to ever-increasing complexity and high maintenance costs.

Complex legacy layers limit straight-through processing from the front-to-back office. And that affects customer experience and operational excellence. Moreover, banks’ proprietary systems complicate the adoption and integration of emerging technologies – such as blockchain, artificial intelligence, process automation, and API-based microservices. An unfortunate but now well-known conclusion – a layered legacy system reduces the overall capability to innovate and improve value for customers and shareholders.

Failure to Leverage Data as a Strategic Tool

Despite lower average compliance costs relative to assets, traditional banks are badly lagging in leveraging data as an asset.

Why Do Financial Institutions Struggle With Innovation?

There are many obstacles to in-house innovation, the biggest of all are linked to an organization’s leadership’s resistance to change and willingness to allocate an appropriate budget to meet the tidal wave of market transition. 

In addition to lack of data usage, a risk-averse mindset can undermine innovation and impede incumbent growth. 

Financial institutions that cannot utilize good-data-hungry emerging technologies are at a disadvantage when it comes to developing products that today’s increasingly tech savvy clients demand.

  • Insufficient Budget Allocation
  • Lack of Project Management Agility
  • Business Improvement Prioritization Too Time Consuming
  • Inefficient Data Usage
  • Shortage of Skilled Resources

An agile, risk-friendly work environment, with a data-centric business model, and scalable systems are necessary for banks to achieve platformification goals. Adequate preparation to overcome concerns will also help to mitigate potential issues or business interruption.

While vision and cultural harmony are critical, modernized core banking technology is more essential to surmount system and security challenges and to deliver successful platform-based banking experiences.

To create a scalable platform, firms must carefully build a foundation around four pillars – people, finance, business, and technology – that work in concert to create harmony and ensure efficiency. 

What's the Cost of the Status Quo?

In 2018, Gartner reported that by 2030, 80% of traditional financial services firms will close, become commoditized, or exist formally but will not compete effectively.

These firms will struggle for relevance as global digital platforms, fintech companies and other nontraditional players gain greater market share, using technology to change the economics and business models of the industry. Established financial services providers will have to move faster on digital business by building digital platforms or finding niche products and services to sell on others’ platforms.

Of the 20 percent of traditional firms that will remain as winners, three types will flourish:

  • Power Law Firms – Companies that own a digital platform will use its scale, low-cost infrastructure and the customer information it generates to create new services and enter new markets. Very few (5 percent) of these winning heritage institutions have the ability to become power-law firms.
  • Long-tail firms – The dramatically lower costs enabled by digital platforms will allow some traditional providers to act as service brokers. This is likely for large populations of poor and working-class people around the world that were not profitable customers previously. Simultaneously, they can act as concierge providers of bundled offerings to high-net-worth individuals. Around 80 percent of winning traditional financial services providers can become long-tail firms.
  • Fintechs – Individual companies or pure-play/neo-bank subsidiaries will dis-aggregate traditional financial services in discrete product areas. They will participate in digital platforms, but will not own them. Less than 15 percent of the winning group of traditional firms can convert themselves into or successfully spin off fintechs.

Four Pillars

To create a scalable platform, firms must carefully build a foundation around four pillars – people, finance, business, and technology – that work in concert to create harmony and ensure efficiency. 


Lack of a strategic roadmap with adequate budgeting is a symptom of underlying market myopia – short-sighted inward thinking wherein a firm focuses on itself versus market dynamics and customer expectations.


When it comes to IT systems, bankers around the world are adherents to the “if it isn’t broke, don’t fix it” principle. Incumbents avoid legacy system transformations, and instead create complicated, non-linear systems, and propped up extensions and patchworks. Workarounds make emerging technology adoption difficult, limit straight-through processing, and lack real-time processing capability. Performance issues and rigidity of aging systems constrict platform development.


Incumbents often struggle with cultural friction during the platformification journey. Banks that choose a build approach may face cultural discord as the work to re-skill a legacy workforce. Banks that buy a platform must integrate two, often very different cultures. And when power struggles ensure, guess who wins The “culture eats strategy for breakfast” philosophy attributed to legendary management consultant Peter Drucker colorfully describes how corporate personality clashes can significantly impede platformification.


The financial services industry is among the most exposed to cyberattacks. Moreover, game-changing regulations, such as Europe’s PSD2 and GDPR, are testing banks’ cybersecurity capabilities. PSD2 regulation has spurred several new types of transactions that open the door to additional cybersecurity challenges. As platformification empowers more and more banks to become active participants in the open financial services ecosystem, multiplying digital devices will prompt network traffic vulnerabilities.

Emerging Opportunities

Emerging technologies such as blockchain, controllable electronic records, and AI, offer transformational opportunities by creating trust between parties that do not know each other, without the traditional reliance upon the legacy methods of intermediary relationships that incumbent financial firms cultivate. Peer-to-peer consensus algorithms can directly match client accounts, identities, entities, assets, and transactions between institutions in a highly secure, auditable manner.

Distributed capital markets creates new opportunity for more institutions to integrate and offer qualified custody, escrow, and clearing services to the emerging market as a growth strategy.

As tokenization continues to power primary and secondary markets for all asset classes, the need for traditional bank services to be delivered via distributed ledger becomes an exponential opportunity for forward-looking institutions to capture market share.

Even retail lending assets can be converted into digital controllable electronic record token form, and directly liquidated directly on licensed exchanges and marketplaces. 

The opportunity to leverage the emerging decentralized capital marketplace levels the playing field for even the smallest of traditional institutions.

  • Digital Securities and Tokenized Asset Custody Services
  • Treasury and Payment Distribution Services
  • Asset Tokenization Services
  • Decentralized Capital Markets Participation