For better or for worse, it seems likely that Covid-19 will go down as one of the great digital accelerators of the century. Especially in financial services.
There’s a popular meme going around that neatly captures the tipping point of digital. It’s a short questionnaire asking who is driving your digital transformation. The first two options are “CEO” and “chief digital officer.” Below that, highlighted with a bright red circle, is “COVID-19."
It seems that time and time again established banks and financial services providers must return to already overburdened buzzwords like “digital transformation.”
What Is Digital Transformation?
From a marketing perspective, digital transformation is a wonderful slogan because it’s vague enough for anyone in any function to see the key challenges they face in that phrase.
If you’re a CIO, it can mean replacing legacy systems and moving to the cloud.
If you’re a CTO, it can mean launching new customer-facing mobile apps and digital products.
If you’re a CFO, it can mean driving down the cost for new account acquisition with smart partnerships (remember how easy rideshare companies made it for new drivers to apply for car loans?)
If you’re a CEO, it’s an excuse to get into new business lines or sell old ones on the premise of preparing to grow in the future (US banks can now hold Bitcoin, which is still a thing...)
But the challenge of a wonderful slogan that can mean something to everyone is that it’s hard to rally everyone to move in the same direction. Perhaps this is where Covid-19, terrible as the pandemic has been for people and the economy at large, is at least clarifying for banks.
In “Realizing the Digital Promise” by Deloitte and the Institute of International Finance (IIF), the authors call out four clear and concrete actions under the ‘digital transformation’ umbrella:
- Digital channels become “table stakes” and banks need to find new ways to differentiate
- Cost-to-serve becomes a key metric for long-term survival (digital-only banks’ cost ratio is 47% vs 73% for traditional banks)
- Key processes (not systems) in the value chain must be digitized and transformed
- A (mostly) remote workforce requires an overhaul of people ops and culture initiatives
As a marketer myself, it’s comforting to see this level of solidity and clarity come to a grand project that has already consumed hundreds of millions of dollars and tens of thousands of person hours (and will consume many more). However, working for an API integration company, I know that the technology foundation these initiatives rest on is shakier than many like to admit.
Composable Banking: Building Digital Products Quickly and Repeatably
That’s not to take us down the cybersecurity rabbit hole (though a $700 million fine for Equifax's 2017 hack is a dizzying number), but rather it’s to highlight that the technology moves implied by Deloitte’s four pillars all lead us back to the need for rapid innovation and deployment of digital products as well as deeply integrated internal processes and data.
This is where we run into terms like the “composable enterprise,” but behind them lies the truth that integration takes upwards of 50% of IT’s time and budget, leaving only a fraction for innovation, according to Gartner.
We need to cut through the abstract words that make the realities of digital transformation abstract. A challenge we often see among our FI customers (like Silicon Valley Bank or US Bank) and our fintech customers (like American Express, Western Union, and FIS) is that sitting behind various applications’ APIs are data, but new digital products and platforms need to be built on top of data operations.
Said differently, IT typically thinks about integrations like the graphic on the left (below): move data from application A, map and transform the data, add/ update the data in system B, and vice versa. As much as legacy iPaaS vendors talk about ‘one-to-many’ integration patterns, the truth is their products are still architected for that point-to-point motion (again, the left side of the graphic). And these complex point-to-point integrations often take months or years to build.
However, moving from digital ‘table stakes’ to ‘digital differentiation’ requires integration to look like the right side of the graphic. Moving up from the system/ application level, the teams looking to create and deploy new solutions in days or weeks need data operations (i.e. process-based APIs) and even standardized data models (i.e. canonical data objects) to work with.
In a nutshell, you might call this the difference between a traditional iPaaS and an API integration platform, or the difference between a traditional integration strategy and a modern strategy built for distributed reuse across teams (i.e. a composable architecture). At its core is the idea that data virtualization makes true one-to-many patterns possible.
We recently explored this difference in much more detail in a piece we call The Parable of the Bridge. We find this analogy an easy way to see what data virtualization means for banks, services providers, fintechs, and, in particular, the corporates they serve.