As the COO of a new bank-owned fintech, my first task was to set up the new company’s operations to support users on our app and our network of partner merchants. Our goal was to deliver a superior customer experience through intelligent capabilities like context-relevant push notifications, seamless system integration, and data-driven fraud prevention. In the background, we had already addressed complex but mundane challenges like settlements with the Bank, invoicing transactions to merchants, and ensuring holistic and compliant customer service across different legal entities. We had endless calls with the bank’s operations, legal, IT, and accounting teams, navigating what we called a ‘zoo’ of old and new systems. We made great progress, but the pace was painfully slow. This gave me a real feel – and empathy – for the profound challenges facing any legacy bank on digital transformation journey, and an insight into why fintechs are eating their lunch in many areas. It is easy to look at the horror stories such as the failed IT migration that left 1.9m of TSB’s customers without access to their online banking for weeks, and think this could never happen here. Their failure was so significant, it even bled through into the subsequent digital transformation efforts by TSB’s former owner – Lloyds Banking Group. But why is this phenomenon so distinct in banking?

The pace of new regulations exceeds banks’ capabilities

To ensure the integrity and safety of customer assets, Banks are among the most regulated entities in existence, and need to operate in an environment of extreme limitations, where change is not always favourable. However, when regulatory changes occur, they can exert profound impacts on all aspects of a banking institution, as they must be reflected at every level. Back in 2016, our Link*Log looked at PSD2 as a catalystof banking digital transformation. In 2023, a new wave of digital money and crypto regulations is knocking on the front door, not to mention new services like FedNow’s launch in July 2023.

Core systems are legacy, but reliable

In the 2000s, banks started offering digital customer services, online banking and electronic payments, becoming the first industry that digitally-transformed itself, embracing new technologies to automate and improve customer experience. As a result, the entire industry early-adopted systems that entire organisational structures were formed around, improved, and adopted over a decade. But as we got used to increasingly data-driven systems, we took what served us for granted and as Mary Shacklett states:

”In today’s transformational business landscape, legacy systems are routinely discredited even as they continue to deliver value.”

The old tech was ancient, and the skills needed to update it have become scarce or forgotten, but it worked more reliably than some of the consultant-led Heath Robinson systems that followed.

Technology ≠ Digital business capabilities

If we treat digital transformation as a traditional waterfall project and break it down into discrete logical stages – as advised by the authors of ‘Financial institutions digital transformation: the stages of the journey and business metrics to follow’, for example – then we might be tempted to start with:

“…the adaptation to the digital world, which is identified with incumbents looking at aligning digital technology with strategic priorities…”

But the risk here is that we wrap the new technology layer around existing sub-optimal structures and processes, rather than create net new digital capabilities. Sometimes we need to take a fresh approach and look at how we can create value in new ways, based on the new affordances that modern technology makes possible.

Over-reliance on external parties

In some of the bank IT failure stories, what stands out is an over-reliance on external consultants and systems integrators and a lack of real in-house digital skills. Relying on one or two key vendors for something as crucial as a cloud migration means exposure to a single point of failure. This underlines the necessity for banks to carefully evaluate their digital capability needs, and focus on building enough client-side capability before their migration begins (…or fails). Banks remain accountable for regulatory compliance, and reliance on outsourcing parties for essential functions increases risk. Over-reliance on consultants and organising transformation efforts as a single “big” project, instead of growing internal capabilities, can be a recipe for disaster. Outsourcing crucial aspects of transformation may lead to a loss of expertise and capacity within the bank, hindering its ability to innovate and effectively handle future digital challenges.

Empowering banks with capability mapping for an impactful transformation

Capability mapping and gap analysis against strategic needs is often a better place to start, well ahead of procurement and engaging external consultancies to define your needs. This approach can be a more reliable starting point for digital transformation in the banking and financial services sectors, that not only identifies strategic capability gaps and goals, but also helps align existing digital efforts and ensures the delivery of shared value. By prioritising the identification of the capabilities required to tackle future challenges, rather than merely focusing on the technology itself, this approach ensures that the digital transformation aligns with the bank’s strategic direction.

Where to begin?

By starting with simple, understandable and testable capability gaols – perhaps expressed as user stories – a capability-driven approach can help identify clear goals and foster a kind of ‘organisational self-awareness’ through ongoing feedback and small, iterative changes. As my colleague Lee Bryant describes it:

“We express these capabilities in a similar way to agile user stories in software development so that they indicate clearly what is needed by whom and why, and this has the added advantage of giving something testable to work towards.”

Rather than big, one-off, bet-the-farm project run by third parties, transformation should be ongoing, iterative and internally-owned. We have written about the key role of digital leadership previously, but the basics of this agile transformation loop are quite simple.

  1. Convene a Digital Leadership Group involving all major digital stakeholders to coordinate digital efforts and reduce duplication, and ensure everyone is aligned towards a common platform and roadmap. Use the group as a filter on procurement and project approval to minimise waste and maximise shared capabilities.
  2. Define and map target digital business capabilities that can deliver short-term benefits in terms of optimising existing work; medium term transformation benefits (e.g. switching to more automaton or service-oriented structures); as well as long-term innovation. This map should include talent and skills as well as digital services, data and technology.
  3. Align your various distributed technology, org design and service design effortstowards the creation of shared capabilities that can create the building blocks for new ways of working, future products, services and customer value propositions.

This is also a useful approach when thinking about mergers and acquisitions, and how to make the most of both sides of the deal. For example, Deutsche Bank’s 13-year digital transformation journey had a key goal of technology de-duplication. By consolidating their IT platforms for the existing retail operation and Postbank, DB aims to save €300M by 2025. As Lars Stoy, Deutsche’s head of retail banking in Germany, explained it to the Financial Times:

“It was like having two banks in one. The systems generated twice the costs.”

All too often, mergers become a zero-sum political game to see which of two competing functions will prevail, rather than an objective process of selecting the best digital business capabilities and then considering how best to organise combined teams to support them.