Can banking be future-proofed?

When we commissioned MagnaCarta Communications to study how financial institutions in Europe were developing digital strategies, no one could have predicted how the global landscape would have changed by the time the study took place. With a slightly shifted emphasis to the study, we gained a unique snapshot of business confidence, adaptability and plans.

Even before the pandemic plunged businesses of all types into crisis mode, banks had been changing their business practices, their culture and, most of all, their technology to create more responsive and flexible businesses that centre on customers’ requirements and experience.

Although the banking industry has long been tech-heavy, its technology has not always served it well. Banking tech has not been able to keep up with the pace of change in other industries, and the monolithic systems and in-house servers on which banks are built have prevented them from competing with agile new entrants. The once-pioneering systems pose a significant challenge for banks deploying new software and applying best practices. And that’s before you factor in a global pandemic.

Our survey and interviews involved senior executives from a range of financial institutions across Europe, and feedback showed industry-wide optimism for the future. A substantially different picture from a decade ago.

When we carried out the survey, in the early days of the pandemic, the most confident banks were those that had already made heavy investments in their tech stack or realigned their financial infrastructure to use third-party services to respond to changing demand. Less than a third of financial institutions are now concerned about the pace of technological change in banking – dropping to one in six among commercial banks.

Ninety per cent of institutions reported that they are building technology design and architecture into their business planning; 80% of retail banks and 74% of commercial banks have already worked with infrastructure providers.

One area in which incumbent banks struggle to compete with fintechs is international transfers. Using the correspondent banking network, cross-border payments are slow and expensive. In a competitive, fast-paced, digital and international market, delays in cash flow and the high cost of cross-border transfers wastes resources and limits growth.

Resolving these challenges has been on banks’ agendas for some time, but Covid-induced pressure has undoubtedly pushed the issue higher up the list. Financial infrastructure providers are delivering new technological solutions that play an increasingly vital part in the financial ecosystem, supporting banks and payment businesses improve cross-border payments for their clients, helping them to access new opportunities and get back to profitable growth.

Financial infrastructure providers are focused on developing the technology to process payments directly, and to integrate with a vast network of local clearing and payments schemes. Using decoupled architecture, financial infrastructure providers can easily update or replace individual pieces of architecture with limited impact on the rest – meaning they can quickly add more functionality and work within new geographies.

This means they are uniquely placed to give banks and payment businesses the ability to provide their customers with faster and cheaper cross-border banking solutions. All without the need for them to build their own infrastructure or correspondent banking partner network or wait for different national payment systems to be joined up.

Many looked forward to 2020 as the hopeful dawn of a new decade, reflecting the number’s connotations of clear vision and perfect eyesight. Sadly, the reality has been very different: a rapidly changing landscape and an uncertain, unclear future. However, it is both exciting and encouraging to see how recognition of the value and potential of digital has increased dramatically during the crisis.

Survey respondents and interviewees confirmed that the businesses they represented did already have in place plans to digitize more processes. However, many shared that these plans had to be fast-tracked due to the crisis, demonstrating the need for organizations to be adaptable, agile and prepared. Covid-19 has certainly proved to be an accelerator for change.

That change, though, has taken place at different rates in different regions and among different countries. Thibault de Barsy, vice-chairman and general manager of Emerging Payments Association EU said: “The biggest problem for digital solutions in Europe is that it is not a truly unified market. It’s not even about cultural differences. We’re talking about basics like regulation and tax.”

When the survey and interviews were carried out for this study, in spring 2020, the long-term consequences of near universal lockdown had not yet filtered through into the responses. However, the pandemic has demonstrated the efficacy of working digitally, as well as the importance of human interaction.

Understanding how and where human interaction fits into a digital model and determining which services should be digitalized will be critical in the future. As Santander’s Juan Jimenez Zaballos said: “We’re going to see a real statement of values in general and as a society. Human touch will be treasured. Solidarity. Empathy.”

As the world makes its way out of the pandemic and crisis mode, banks must take time to understand the future, use the lessons of the past – including those learned during this pandemic – to determine longer-term thinking around the collaboration and infrastructure that enables success.

In the process, everyone can regain the clarity and confidence that 2020 originally offered and see it as a time that laid the foundations for a bold new collaborative, accessible and future-proof financial ecosystem.

To understand more about digital strategies in financial institutions, download the results of Banking Circle's study in a series of three white papers.