ISG Provider Lens™ Digital Banking Services - Transformational and Digital Banking Services - U.S. 2021

The U.S. banking industry has been undergoing a dramatic transformation over the past 12 months and witnessed unprecedented digital acceleration in part due to the COVID-19 pandemic. The onset of recovery from the pandemic combined with the efforts from the federal government, and banking clients have accelerated spending on digital transforma­tion initiatives to support an enhanced user experience, and to compete effectively with emerging FinTechs. Although U.S. banks have started to recover and are witnessing profit growth due to increased consumer savings and narrowing credit losses, industry pundits are confident that technology spending would continue to spur on areas such as loan, wealth management, real-time payment, and anywhere banking.

ISG also identified four important areas of investment for banking executives: core banking modernization and integration, governance, risk and compliance (GRC), payment and other digital transformation services. Increased adoption of emerging technologies such as mobile banking, artificial intelligence, blockchain, contactless payments, open banking, and cloud-native solutions are becoming the norm for transforming front- and back-office operations.

The transformation of core systems and other systems that drive day-to-day operations are becoming critical areas of investment with retail banking taking center stage.

Digital banking transformations are highly intensive from an investment as well as implementation time perspective, and therefore should also consider future readiness, scalability and agility. While it is not as easy as switching off the old system and switching on the new system, ISG analysis reveals that the usual deterrents of core banking modernization include the inherent legacy complexity associated with data migration and integration, significant time and investment as well as regulatory compliance.

While the platform vendors and the banks have thorough knowledge of the functional aspects of the banking system, what they lack is the underlying technology know-how to undertake the transformation. Banks tend to rely on the implementation partner’s ability to analyze the existing systems and create a roadmap for future state of the underlying system. Service providers positioned in the grids have demonstrated and invested in several capabilities such as”

• The combination of functional and technical expertise allows them to customize components to suit individual project needs.
• Implementation partners should typically be systems integrators with functional expertise and technical experience in handling such projects with complete governance and control.
• Digital banking transformations are highly intensive from an investment as well as implementation time perspective, and therefore should also consider future readiness, scalability and agility. While it is not as easy as switching off the old system and switching on the new system, ISG analysis reveals that the usual deterrents of core banking modernization include the inherent legacy complexity associated with data migration and integration, significant time and investment as well as regulatory compliance.
• While the platform vendors and the banks have thorough knowledge of the functional aspects of the banking system, what they lack is the underlying technology know-how to undertake the transformation. Banks tend to rely on the implementation partner’s ability to analyze the existing systems and create a roadmap for future state of the underlying system. Service providers positioned in the grids have demonstrated and invested in several capabilities such as”
• The combination of functional and technical expertise allows them to customize components to suit individual project needs.
• Implementation partners should typically be systems integrators with functional expertise and technical experience in handling such projects with complete governance and control.

Systems integrators (SIs) are also becoming well versed and thought leaders in technology, giving them the necessary edge in undertaking such implementations.

SIs invest time and resources in building the relevant expertise with an army of consultants and architects, enabling them with the relevant banking & financial and technology certifications.

Most SIs are investing in labs and centers of excellence to build complementing solutions as well as to reduce time and investment.

In some cases, SIs partner with multiple core software providers, enabling them to gain experience in handling different systems. This allows them to partner in an advisory role, enabling smoother transformation for banks.

Implementation partners also have localized delivery and maintenance teams to ensure ongoing support as well as keep pace with regulatory norms relevant to specific regions.

ISG also identified several key factors that are prompting bank executives to invest in digital technologies such as branch automation, cloud-native core banking, cognitive chatbots, robo-advisors, and many more.

1. In the first half of 2021, the industry witnessed 47 mergers and acquisition deals, with a majority focused on mid-sized consolidation of banks. Consolidation results in com­bined operations, products and services, assets, accounts and other liabilities, resulting in revamp or transformation of the existing core systems and other IT infrastructure to reduce technology burden and costs.
2. The Paycheck Protection Program (PPP), announced during the COVID-19 pandemic, and other stimulus packages needed agile and nimble solutions to distribute funds from supporting banks. This spurred application development and other modularized platform spending from banks and financial institutions.
3. The improved savings from consumers, reduced credit-card spend combined with government stimulus packages have supported increased deposits pushing banks to invest in wealth management systems and personalized loan packages designed to attract consumers to offset the decreasing loan yields.
4. The change in mindset of consumers and bank executives to shift from branch-banking to anywhere banking. While branch networks are undergoing a drastic transformation, redesigned to reflect personas based hyper-personalization, there is an immediate demand for front-end automation emphasizing enhanced user experience with interactive bots taking center stage.
5. Banks need to effectively compete with neo-banks or pure digital-only banks, as these options are becoming increasingly attractive by offering higher interest rates, trans­parent fee structures and flexible underwriting policy. Banks also must contend with non-banking entities embedding finance and banking services as part of their industry operations.

Core banking modernization and integration services:

Next-generation core systems: In a bid to stay relevant and gain competitive edge in the prevailing business environment, banks have been shifting their focus beyond the tradi­tional scope of financial services to address customer-centricity and operational agility. It has become strategically essential to invest in next-generation core banking systems, thus enabling digital services to rapidly:

• Launch new products and services;
• Accelerate agility and scalability;
• Enhance customer and user experience;
• Automate to reduce manual processes and errors.

Emerging technologies: As many banks and financial institutions have been investing to transform their existing core systems, core banking platform vendors have been capital­izing on emerging trends including mobility, APIs, and advanced analytics. Many vendors offer full stack as well as modular core components, enabling banks to choose the optimal core banking system that aligns well with their business objectives and customize using modular components or third-party solutions.

Cloud-native core systems: The market is witnessing accelerated adoption of cloud and cloud-native core systems with product vendors designing and developing core systems for hyperscalers such as Google Cloud, Amazon Web Services and Microsoft Azure.

Banking Governance, Risk and Compliance services:

Automated compliance and RegTech: Increasingly, providers and banks are undertaking automation efforts and initiatives to tackle compliance and regulatory requirements. RegTech has become a mature market, with advanced analytics and machine learning being integrated with these solutions to better align and stay compliant with existing regulations. Providers are also integrating human and machine capabilities to platformize these solutions.

Partnerships with security and service-oriented process firms: Service providers and banks are expecting to partner with firms such as ServiceNow, SAP and other emerging technol­ogy vendors to ensure GRC becomes a part of business process and risk management. This also allows service providers to develop and design blueprints, frameworks on these enterprise platforms to seamlessly drive risk, governance and compliance initiatives.

Strong cybersecurity risk practices: Service providers are also building strong advisory and implementation capabilities for cybersecurity with banking and finance specific threats and risk mitigation becoming a key topic of investment. Digital identity, biometrics, and crypto-based protection are gaining traction among banks and financial institutions.

Transformation services for digital banking:

Hyper-automation and hyper-personalization: Banks and financial institutions are embark­ing on advanced automation and driving new products and services to match customer personas. Increasingly context-aware and human empathy driven analytics for products, interest rate, wealth management plans, and many more.

Accelerated AI and automation adoption: Service providers and banks are relying on and investing in process automation such as robotic process automation and business-process automation to reap benefits of cost reduction, enhanced accuracy, improved customer experiences, increased efficiency, and seamless flexibility. Robotics is also gaining mo­mentum to drive branch automation in the form of self-servicing kiosks, advanced digital assistants and in some exceptional cases, even front-office staff.

Payment and card services:

Increased FinTech partnerships: Banks are investing in FinTech partnerships predominant­ly from a payment perspective, to implement newer and modern schemes. As FinTechs are seemingly not affected by compliance and regulations, it makes sense for banks to open their data and systems with these players to reap benefits of improved technology adoption and scale it to gain market exposure.

Contactless and real-time payment: The market is witnessing an increase in the implemen­tation of real-time and contactless payments as consumer and enterprise behavior are driving adoption. The increase of non-banking, corporate and enterprise payment entities are further strengthening these implementations.

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