ISG Provider Lens™ Digital Banking Services - Core Modernization and Integration Services - Germany 2022

Enterprises are setting new goals for digital banking

Global spending on technology is rising. In Germany, the past few years have been a catalyst for innovation in the financial sector, with most banks already embarked on their digital transformation roadmap. While the market is widely dominated by traditional players, with the appearance of a vibrant fintech space and neo-banks, the landscape has become more heterogeneous. More importantly, with savings being transferred by older generations to younger and more digital-oriented customers, digital acceleration is inevitable.

Greater competition and potential for consolidation and specialization

Germany’s three banking segments – private, savings and cooperative banks – and core financial infrastructure providers are now facing increased competition among themselves and from international banks, fintechs, neo-banks and global tech firms such as Apple and Facebook. These segments used to have their own nearly immutable IT-provider landscape, with particularly the savings and cooperative banks (two-thirds of the banking market) being dedicated to their own large, shared service providers and setting the technology agenda.

Nevertheless, the market is changing. Branches are gradually closing, and the consolidation of cooperative banks is a visible phenomenon that has led many players to engage more intensively with fintechs, global technology providers (GAFAA) and a wider IT service provider community. The success of fintechs such as gini, Figo, wikifolio, Fino and Tradeshift underscores this trend.

Greater competition also means the search for unique and differentiated business models is on. If the physical proximity to clients in every small town is no longer sustainable and the most important competitive differentiator, many banks must now think about which part of the value chain they will perform much better than their competitors. This is driving specialization and the emergence of new digital business models. There is clearly an opportunity for technology and service providers to develop solutions that will find resonance beyond Germany.

Beyond the competitive pressure, technology spend is also driven by the evolution of regulatory requirements, such as Basel 4, BCBS 239, IFRS, MiFID III, GDPR, PSD2 and ESG, and the move toward greater European banking integration.

The meaning of digital acceleration

Digital acceleration typically means moving to the cloud, monetizing data, using more AI, creating new digital platforms and adopting blockchain. However, more fundamentally, it is now about achieving much greater levels of business model transformation at a higher speed. While the first wave of digital transformation focused on optimizing the customer journey, integrating the back-end and digitalizing entire processes, the future requires a much deeper transformation of organizations in terms of processes and business models. The new status quo for the foreseeable future is, therefore, constant innovation, which is good news for the technology and IT service provider community.

The quadrants in this report identify and assess leading service providers in the main areas of transformation.

Core banking modernization

While global banks are generally well engaged in core modernization initiatives, the requirements for smoother customer journeys and decoupled business models will drive investments in this area. The landscape of platforms being used in Germany is fairly heterogeneous, with local IT companies, such as FinanzIT and Atruvia, being the historical platform providers for large parts of the market.

Nevertheless, new technology products around microservices and APIs provide easier ways to modernize core transaction systems gradually and with a lower financial risk. This presents an opportunity for global players that have already completed large engagements in this area.

Digital banking

While digital banking will still be, in large part, about smoother customer journeys, especially in corporate banking and wealth management, retail banking will also demand more functionalities and value. For banks setting up their own neobanks, new technologies and frameworks, such as Mambu and Thought Machine, present new, exciting possibilities. Many leading service providers have invested in their own solutions and platforms, with variations in terms of flexibility with respect to customization, deployment and commercial options.

Payment modernization

Payment technology has been one of the most exciting areas over the past years, with banks and network providers investing significantly in their own platforms. The road forward is geared toward real-time payment capabilities and increased data monetization possibilities. Most initiatives are at a proof-ofconcept stage in this area, with the use of data technologies and AI offering the greatest potential value. Payment is also one of the most competitive areas, with many providers offering excellent service capabilities.

Governance, risk and compliance (GRC)

Although the GRC area receives much focus, it is generally believed that changes are happening gradually in this area. Nevertheless, integrated risk platforms, ESG and associated implementation projects are seeing some traction in the market. It is also an area in which machine learning and AI models have the highest maturity. Advances in fraud analytics are a good illustration of this phenomenon

The provider landscape with respect to GRC provides an interesting and differentiated value proposition. While global providers promote global best practices and more standardized platforms, local players provide market-customized solutions and products.

What does this mean for the vendor ecosystem?

Consulting, deep banking domain knowledge and business transformation services are essential for helping banks transform their business models and entire process chains. These are services provided by most of the quadrant Leaders. Smaller vendors with local market knowledge and consulting capacity also get an opportunity to play a significant role in the market.

Technological capacity and the ecosystem

Digital banking transformations will require complex integrations of old and new systems and the establishment of a truly “hybrid” technical landscape that will be more complex to manage. This will favor IT providers with strong technological capabilities, solutions, their own platforms and a tight integration with the technology ecosystem.

Many IT service providers have become global giants with significant financial strength. As the focus remains on technology, they also have a unique opportunity for stronger partnerships with banks and other financial service providers. They obviously provide technical and consulting skills but can also play a better role in restructuring the value chain in the market.

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