Connected Banking Through Enhanced B2B

Transcription

1 White Paper Connected Banking Through Enhanced B2B Sponsored by: IBM Jerry Silva October 2017 IN THIS WHITE PAPER Digital transformation is the driving force behind new initiatives in financial services worldwide. In a recent IDC survey on digital transformation, 100% of global financial institutions surveyed reported that digital transformation was a priority for the organization. While many institutions understand at some level that digital transformation is important, many still struggle with its definition, understanding how it might apply to their own businesses, and how to measure its success. IDC Financial Insights proposes that the goal of digital transformation in banking should be to enable the organization's ability to respond to, and even create, disruption in its industry. This goal involves transformation across a number of dimensions of the institution, but ultimately, the end result is something we call "Connected Banking," a combination of leadership, staff resources, operational capability, information, and technologies that allow the enterprise to more easily create composable products, services, and experiences regardless of the source of information or computing. Connected Banking supports the institution's ability to proactively seek out external partners, when it makes sense, to support the creation of those products and services for the benefit of the customer, whether consumer, small business, or corporate client. To do so, the bank must be able to effectively integrate with and manage connections with external organizations through a robust B2B architecture. INTRODUCTION Digital transformation has reached the "not if, but when" stage of adoption in financial services globally. In 2016, a global IDC survey of banks reported that about 93% of banks had a digital strategy in place and had started acting on that strategy. A 2017 IDC survey now shows that 100% of banks recognize digital transformation as a priority. This is further acknowledged by investments in digital technologies by the financial services industry, which will be nearly $93 billion worldwide in 2017 and will reach $170 billion by In the United States, investments in digital transformation among retail banks alone will top $20.3 billion in 2017 and will grow to $37.5 billion over the next three years. In IDC's 2017 Digital Transformation Leader Sentiment Survey, financial institutions were asked about the important criteria by which digital transformation would be measured the key performance indicators (KPIs) that the institutions would use to measure success. Implied in the responses would be an indication of the business goals financial organizations hoped to achieve through digital transformation. Figure 1 shows the results of that survey question. October 2017, IDC #US

2 FIGURE 1 KPIs Used to Measure Digital Transformation Success Q. When measuring overall DX success, which of the following key performance indicators/metrics (KPIs) are you using? Participation in digital marketplaces Digital revenue as a percentage of total revenue Market share growth Market recognition Improved ROI Other (%) n = 165 Source: IDC's Digital Transformation Leader Sentiment Survey, March 2017 Figure 1 shows that almost 60% of institutions cited participation in digital marketplaces as an indicator of success for their digital transformation initiatives. Clearly, institutions are looking "beyond the walls" to find opportunities for growth. Historically, and for most banks today, participation in external partnerships and marketplaces has meant individual integration projects or business-to-business (B2B) connections that don't leverage common technologies and aren't embedded in the institution's overall business strategy. Three drivers are fundamentally changing this approach today: As fintech start-ups continue to take bites out of financial revenue streams by offering point solutions mostly focused on payments and lending institutions have started focusing on larger customer relationship goals and creating stronger intimacy through analytics-led services delivered through omni-channel experiences. Value-oriented business is also recognized as the strategic driver to go outside the institution to find value and value augmentation that will enhance the products and services that the institution already offers. One example is the bank's desire to be involved in the whole homebuying experience, instead of only offering the lending services attached to the purchase. 3rd Platform technologies (mobile, big data, cloud, and social), and associated innovation accelerators, are enabling a more effective way of creating an open environment. Particularly, cloud and big data/analytics enhanced with artificial intelligence are enabling technologies that will transform the institution's ability to derive value from external partnerships To expand the bank's ability to augment and analyze data through external sources, and to connect to partner businesses that can add value, there is a need to create a better B2B capability within the institution IDC #US

3 DEFINITIONS IDC Financial Insights defines digital transformation as the application of 3rd Platform related technologies to fundamentally change the business' ability to respond to, or create, disruption in the financial services industry. 3rd Platform technologies include cloud, big data/analytics, mobility, and social networking. Of these, cloud and big data/analytics are key technologies to accomplish the objective of B2B capability and Connected Banking. IDC defines a category of technologies as "innovation accelerators," of which cognitive technologies/artificial intelligence (AI), next-generation security, and Internet of Things (IoT) have significant impact on financial services. In the context of enhanced B2B capabilities, cognitive technologies/ai and next-generation security are the most significant of the innovation accelerators. In the context of Connected Banking, B2B support includes: The exchange of data in a variety of formats with corporate clients and other external partners such as exchanges and data-as-a-service providers and all associated processes that preprocess or post-process data exchange Integration of internal business processes with external partners Transaction (payments) processing and settlement Security and compliance safeguards Fundamentally, the approach to enhancing B2B capabilities should reflect the trend in IT to move to enterprisewide architectures. Such architectures are already being developed for risk management, delivery channels (omni-experience), and data/analytics. Likewise, "B2B hubs" will be central to the ability of the institution to not only open its systems to agile composition of new value propositions, but the approach also limits risk by centralizing the development, security, and regulatory compliance of B2B connections. One of the "hidden values" of a B2B hub is the ability to format, collect, analyze, and act on data that flows from organization to organization. In this regard, artificial intelligence/cognitive technologies are disruptive capabilities that will magnify the value the institution can extract from every step of the B2B data flow. Figure 2 depicts what IDC Financial Insights calls a "Connected Banking" architecture focusing on the open aspect of API-driven technologies and including a hub for B2B partnerships constrained by a subset of APIs that is managed using a different set of criteria than the frameworks for internal product development IDC #US

4 B2B HUB FIGURE 2 Connected Banking Architecture: B2B Spotlight Nonfinancial partners Real estate, automotive, education Internal product development ecommerce platforms Amazon, ebay, Apple Pay Support platforms Compliance, credit services, data as a service Customers Retail, SMB, corporate, affiliates B2B HUB Financial partners Insurance, wealth, investment Source: IDC Financial Insights, 2017 BENEFITS As stated previously, as an inherent aspect of digital transformation, financial institutions are acknowledging the need to look to external partners to drive value propositions that are either risky, costly, or too slow to deliver using internal resources. Thus the IT and operational benefits of an enhanced B2B solution include: More efficient, less costly operations through centralized B2B capabilities Minimized risk and complexity due to centralized architecture and control Ability to work with more external partners regardless of size or communication format Centralized data management 2017 IDC #US

5 The implementation of an effective B2B hub essentially enables a financial supply chain that integrates internal business and operational processes with those from the bank's partners in a way that is seamless and efficient and, more importantly, adds value. These technology and operational benefits result in the following business benefits: Faster and more agile product development through external value providers, leading to increased revenue streams from the introduction of new products and services Higher customer engagement and satisfaction across consumer, small business, and corporate clients, translating to bigger share of wallet and higher margins Competitive differentiation through innovative products and services Better customer insight through data analytics A number of use cases are enabled by an enterprisewide B2B hub, including, but not limited to: Centralizing payments for more efficient operations, lower cost, and increased visibility Partnerships with best-in-class lending firms in parts of the lending process (experience, origination, underwriting, secure document management, etc.) in a way that allows banks to "compose" the best overall solution from a variety of partners Improved trade finance capabilities with greater visibility into the processing of global business The primary benefits to Connected Banking through an enterprise B2B solution lie primarily in the ability to more quickly attract and onboard new clients, strengthen the relationship with existing clients through more comprehensive and transparent products and services, increase client retention through more active and meaningful interactions, and improve efficiencies in the business operations of the institution. CONSIDERATIONS In a 2016 IDC survey on digital transformation in banking, 58% of financial institutions listed "making technology more open and agile" as the top enabler to succeed in their digital transformation journeys. The only criteria ranked higher was "implementing advanced analytics," which was ranked top by 59% of the institutions. The nature of the legacy platforms at most institutions today, including the discrete, point-to-point solutions built over the years to handle B2B interchanges as those needs arose, certainly challenges the banks' abilities to create strategically connected environments. In addition, there are a number of challenges associated with the implementation of an enterprisewide B2B strategy: Current governance models do not explicitly cover B2B technologies. Consolidating B2B environments to achieve open and connected capabilities requires such a focus. Most financial institutions are led by individual line-of-business leaders operating out of silos. In fact, 31% of the financial services respondents in IDC's 2017 Digital Transformation Leader Sentiment Survey cited the siloed nature of the organization as the biggest challenge to transformation (see Figure 3). It can be a challenge to create enterprise solutions in such environments. The technical resources required to achieve Connected Banking through digital transformation can also be a challenge to most banks certainly to those smaller institutions that cannot maintain their own IT departments IDC #US

6 To overcome these challenges, a clear transformation strategy, including those aspects that affect B2B operations, must be in place and socialized as important to the future of the business. The role of IT partners, those organizations that provide advisory, consultative, and deployment services, becomes critical to the success of any of the transformative initiatives of the bank, including B2B. FIGURE 3 Main Challenges to Digital Transformation Q. What are your company's main challenges related to digital transformation? Organization is too siloed No digital transformation strategy Too tightly tied to existing revenue model Lack understanding of digital transformation Insufficient digital skills No financial incentive to undertake change Lack of technology Culture does not support change Leadership lacks the vision for transformation Too many legacy processes Other (%) n = 165 Source: IDC's Digital Transformation Leader Sentiment Survey, March 2017 CONCLUSION Digital transformation in banking fundamentally requires the institution to look outside of itself to deliver more value to its clients whether this is done to improve the commercial relationship with corporate firms that rely on the bank for transactional as well as informational support or is done to partner with a technology or product/service firm to bring value to its clients in a way that is better or faster than possible through the bank's own resources. The system that supports these value chains should be architected in a way that is strategic, not tactical, and in a way that supports efficient processing and growth. The institution's connection to its outside clients and partners should be based on a holistic B2B infrastructure that is easy to maintain and enables, not hinders, innovation. The availability and analysis of the data involved in this connected network are critical assets to both the bank and its clients and partners. As such, data, analytics, and the role of AI and/or machine learning can't be understated. Data architecture is a key component of the B2B infrastructure and should be "baked-in" from the start IDC #US

7 Where to Start The foundational step in developing a transformational B2B capability is the creation of a strategy that is in line with the bank's overall digital transformation business strategy. It is key to get executive suite support to ensure the initiative's success. Subsequently, institutions need to look at the new connected capability in an architectural context. The decisions made at this point will endure for the foreseeable future; thus the infrastructure needs to be as "future-proof" as possible. Prioritization is an important next step in the building of the B2B infrastructure. Innovation for innovation's sake is not a tenable approach in any business or technology project. The institution should categorize its needs (e.g., corporate banking, small business lending, consumer onboarding) in terms of the ability to support those needs through external connections and develop key performance indicators (including cost and risk) to help drive the decisions around deployment. If the bank concludes, for example, that it can drive substantial new business, or improve a KPI around client satisfaction for its corporate banking service, then the updated B2B capabilities should be focused on that line of business. Decisions on technologies and development approaches must be made. Most, if not all, of the technologies needed to implement a connected bank through a B2B hub are available today. But decisions must still be made for what tools to use to build the infrastructure. These decisions include not only the hardware and software to be used to create transactional exchanges but also data decisions surrounding storage, analysis, reporting, and the role of AI in the management and analysis of that data. Last, and arguably most important, the institution should conduct a long-term audit of its own in-house technology and governance resources. As technology accelerates and competition increases, it is often not wise to try to build these kinds of capabilities completely internally. IDC Financial Insights' own FinTech Rankings research shows an increasing trend toward the use of third-party IT providers for the purposes of transforming the bank's capabilities. Once an internal audit is performed and gaps are identified, institutions should seek out partners with experience and expertise in technologies that support Connected Banking IDC #US

8 About IDC International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make factbased decisions on technology purchases and business strategy. More than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company. Global Headquarters 5 Speen Street Framingham, MA USA idc-community.com Copyright Notice External Publication of IDC Information and Data Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason. Copyright 2017 IDC. Reproduction without written permission is completely forbidden.