Executive Summary: ISG Provider Lens™ Digital Banking Services - U.S. 2023
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Evolving businesses and regulatory environments encourage digital modernization
Banks are undergoing digital transformation to improve efficiency, meet evolving customer demands, and create resilient systems to become market-relevant and gain a competitive edge.
Increased cost of legacy banking platforms: Multitudes of challenges in maintaining legacy banking platforms increase the cost of maintaining IT landscapes and executing banking business operations. Technical debt, disparate systems, data silos, inefficient application portfolios, increased cost of adhering to the evolving regulatory standards and mainframe maintenance are a few impediments to such legacy systems. As customer evolution leads to new business models and revenue streams, legacy-ridden banks are unable to exploit the latest and rising opportunities.
Banks prioritize modernizing their legacy platforms or adopting modern, agile and efficient platforms.
U.S. banks undergoing significant transformations: Market landscape evolution due to changing regulatory requirements, geopolitical challenges and the recent failure of a few U.S. banks are propelling banks to fortify their risk management activities. Due to unstable macroeconomic conditions, they increasingly focus on capital and liquidity planning. Banks are expected to follow environmental, social and governance (ESG) mandates and address threats such as financial crimes, cybersecurity breaches and resiliency risks to comply with different regulations. Since the COVID-19 pandemic, customers have preferred digital modes of banking. The rising wave of challenger banks, neobanks and large tech firms entering the banking industry has intensified competition and the need to acquire and retain more customers. Many banks are undergoing digital transformation to build resilience in talent, infrastructure, compliance and governance, with technology as the critical enabler.
Digital banking service providers empower banks to build superior and augmented digital capabilities to navigate business challenges. The upcoming open banking regulations in the U.S. market and the need to adhere to ISO 20022 standards for payments modernization create the necessary environment for banks to adopt agile and modern IT systems, enabling them to develop new and differentiating revenue opportunities.
Technology modernization focused on gaining scale and efficiency: The ability of banks to meet CX expectations and other market realities through real-time processing becomes a key differentiating factor. Noncash, realtime payment processing is gaining traction for domestic (FedNow, Zelle and others) and cross-border payments. Real-time processing is also imperative for quick customer onboarding, digitally performing the know-your-customer (KYC), anti-money laundering (AML) checks and fraud detections. Fast credit decisions lead banks to embed banking services in new business models, such as buy-now-pay-later (BNPL). Real-time liquidity projection and risk decisioning capability enable effective treasury services management and cash flow forecasting. Banks invest in capabilities that allow them to exploit emerging market opportunities and resiliently handle the increased volume of banking transactions with an automation-first strategy, which is efficient and cost-effective. As banks deprioritize their discretionary budgets, the focus remains on scale efficiency.
Focus on innovative delivery models: Banks are undergoing progressive digital modernization to adopt cloud-native, microservices-based architecture with APIfirst design principles. Digital banking service providers are supporting banks with multiple innovative delivery models such as building self-funded digital transformation models based on efficiency gains, onshore and offshore rebalancing for localization preferences and cost optimization, joint innovation and cocreation of assets and client-centric intellectual properties (IPs) and cost-take-out commercial constructs for upfront savings.
Many service providers are enabling traditional banks to offer extended services in the form of digital banks to increase their customer reach and to match neo and challenger banks’ digital banking services. The SMB and retail banking segments are experiencing increased traction.
Emerging technologies create new use cases across segments: Digital banking service providers are adopting AI and ML to build capabilities for intelligent automation, increased straight-through processing (STP) rates, enhanced fraud detection and effective risk management and compliance, providing superior and contextual customer support. Generative AI (GenAI) remains a priority for investment as new banking use-cases emerge, such as those in wealth management advisory. Service providers are also using AI and analytics to build real-time and effective treasury management offerings to support supply chain finance with differentiating credit management value propositions. As the regulatory environment intensifies with the emergence of digital assets and other alternative payment mechanisms, service providers develop portfolios for blockchain-based payments and digital currencies. Emerging technologies such as AI, ML, blockchain and analytics remain critical areas of R&D investments for most digital banking service providers to help them support and respond to customers’ banking needs.
Technology partnerships and the fintech ecosystem unlock benefits: Digital banking service providers create CoEs for technology enablers and market-relevant tools and frameworks for accelerated modernization. They partner with hyperscalers and digital banking platforms for enhanced technology expertise, domain understanding and go-to-market (GTM) strategy to unlock mutual benefits, add value and enrich clients’ digital modernization outcomes. The fintech ecosystem helps bridge critical technology gaps and capitalize on emerging market opportunities. The fintechs and providers of API-based solutions and modular infrastructures are becoming strategic partners for banks and digital banking service providers.
As-a-service models gaining prominence: Digital banking service providers offer managed services to materialize banks’ digital transformation needs, reduce their total cost of operations (TCO) and increase operational agility. An increasing number of modern-age neobanks and many mid-tier banks seek to acquire modern IT capabilities without building a technological foundation. They are adopting integrated as-a-service models to extend their banking offerings and enhance their market reach. Service providers employ modular architecture, platform-based solutions and an automation-first approach to digitally transform clients’ operational capability. Across traditional, established and new-age banking players, the focus remains on performing banking operations that comply with the evolving regulatory requirements and are resilient to the changing market needs.
These providers offering as-a-service models execute business operations on proprietary technology platforms and on the managed estate of clients’ IT infrastructure. Digital banking service providers create long-term and innovative commercial constructs with strategic banking partners to unlock untapped value and create upfront cost efficiencies. Origination, lending, payments, financial risk and compliance remain key segments for adopting as-a-service models.
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