Challenges for Banks

Digital transformation for many banks is largely a myth as institutional mindsets, processes and structures stand firmly in the way of progress. Established financial services providers must move faster on developing digital business by building digital platforms or finding niche products and services to sell on others’ platforms

In addition, emerging technologies (such as blockchain) offer transformational opportunities by creating trust between parties that do not know each other, without intermediary relationships that incumbent financial firms cultivate. Equally, peer-to-peer consensus algorithms can directly match borrowers to those with money, without requiring a bank to mediate.

Banks also struggle with many other challenges unique to their industry.

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

Vision

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

Systems

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.

Culture

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.

Security

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.

What's the Cost of 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.

Digital Securities & Tokenized Assets Create Market Opportunity

Distributed capital markets creates new opportunity for more institutions to integrate and offer 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 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

How We Help Banks

An agile, risk-friendly work environment, with a data-centric business model, and scalable systems is 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. 

We help banks, trusts, and custodians develop and launch digital securities and tokenized asset business lines with a comprehensive digital transformation strategy and process.