#26 Digital Banking Platforms

Analysing Digital Banking Platforms, their history, the market structure and the decisions that banks will have to make

Hi all - This is the 26th edition of Frontier Fintech. A big thanks to my regular readers and subscribers. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀

Introduction

Over the last 10 or so years, Digital Banking Platforms have become all the rage. DBP’s are a rethink of banking technology applications where higher value elements are pulled out of the monolithic core banking system so as to enable a more seamless management of the customer life-cycle. We will get into this in more detail later in the article. My interest in this space stems from a few core observations. The first is that non-bank consumer fintechs have made a lot of strides with regards to user acquisition globally. Moreover, the recent fund raise by Revolut which valued the company at US$ 33 billion showed the appetite investors have for digital challenger banks. Despite this, a recent analysis by BCG showed that of 249 surveyed Digital Challenger Banks, only 13 were profitable globally. Additionally, none of these DCB’s have achieved a market share of 2% or more in either total deposits or assets in their respective markets.

Source BCG

One can argue that we’re still very early in the innings and there’s a lot still to come from them. However, for me, the question becomes whether Digital Banking Platforms offer existing financial institutions the ability to offer a similar service as these digital up-starts thereby defending their market share and growing into new customer segments.

The article will thus analyse the evolution of Digital Banking Platforms, the key players in the space, how banks should approach DBPs and other considerations within the overall space.

Software is eating the world

The famous “Software is eating the world” quote by Marc Andreesen back in 2011 almost coincides with the shift by bank software vendors towards Digital Banking Platforms. In banking, the success of companies like Netflix and Amazon with regards to reimagining industries, led to a view that customers would come to expect similar or even better experiences from their financial services providers. This demand push factor meant that customers were now demanding better services from their banks and this included the same omni-channel approach that companies like Amazon took. Omni-channel in this case meaning that customers wanted a seamless experience across not only devices but consumer touch points i.e. branch, call centre and ATM. 

On the supply-side, improvements in technology drove a complete re-imagination of what a bank’s core technology stack should look like. My article on “Core Banking Platforms” gives a good overview of how bank technology considerations evolved from mainframe servers to modern microservices driven architecture. The design of bank technology platforms evolved around a monolithic core where services, data systems, user experience and product engines were tightly packed into one system. This in turn was driven by the fact that consumer access points were limited and thus it was sufficient for a bank to have a monolithic core with bank-staff accessing the system through poorly designed interfaces whose core function was transaction processing.

Sample Traditional Core UX

Essentially, banking services were driven around transaction processing at ATMs and branches with document driven credit and trade finance services handled manually. A bank customer thus never interacted digitally with their money. Of course, banks bolted on specific apps and systems to “modernise” but these created data silos whilst building mountains of technical debt. I have personally been involved in such a situation, what happens is that you get diminishing returns to product innovation whilst increasing technical debt exponentially. The ultimate outcome is that the whole organisation develops innovation fatigue.

One of the fundamental issues with traditional CBS’ was the conflicting interest of trying to maintain a robust source of truth infrastructure whilst trying to foster rapid change to drive innovation. This is a fundamental conflict that is almost impossible to resolve.

It then happened that demand side factors collided with supply-side factors driving the realisation that banks needed digital banking platforms. As a recap, the demand side factors consisted of customer experience expectations driven by Netflix and Amazon. Supply side factors consisted of the maturing of cloud, microservices and data streaming services such as Apache Kafka.

The best way to understand DBP’s is to understand the paradigms behind how customers access banking services and the technology behind them. There are three core systems;

1. Systems of record - core record of truth in terms of customer balances and interest calculations;

2. Systems of engagement - how customers and staff engage with the overall system;

3. Systems of insight - the manipulation of data to generate customer insights;

Additionally, there are services that link all these together whilst enabling the integration to both internal and external capabilities. These are generally APIs.

In the past, traditional vendors packed everything into one “Core Banking System” and there was little regard for “insights” and integration services given that these were bank in a box platforms. I’ve written before about industry 3.0 commercial dynamics that are driven by standard infrastructure and product, with profitability driven by marketing and efficiency through cost control. The same applied to the banking sector.

The diagrams below represent the crux of what a Digital Banking Platform is. 

Source: Forrester Research

The idea is that a bank’s technology architecture is split between the three systems identified above. At a lower level are core capabilities and systems including payments systems, core banking ledgers and KYC and compliance capabilities. These are then integrated upwards onto an aggregation layer that connects to a UX layer. With this in place, a bank can then create omni-channel experiences given that data and insights are aggregated. The diagram below from a presentation by Backbase is more intuitive.

Source: Backbase Presentation