PILOTING BIGGER BANKS TO SAFETY

Kunal Galav from Mambu, a banking technology provider for challenger banks and speedboats, and McKinsey analyst Henning Soller discuss how incumbents mired in complexity can compete in shifting seas

Digital transformation is a well-established trope among legacy institutions, but simply adding new technology to an already complex infrastructure hasn’t proven to be an effective strategy for long-term growth.

In fact, the prevailing sentiment from key players in the industry is that cultural transformation is more important. Strategies to achieve this need to be considered if incumbent banks are to continue competing with challenger banks around the world, who typically spend around $120 less to sign up a new customer than a traditional bank.

In McKinsey’s recent Annual Review Of Banking, the firm concluded: “Over the next five to 10 years, market pressures and shifts, including technological changes that disrupt traditional banking, will amount to fundamental structural breaks.

“Banks will need to improve their short-term resilience and invest in the long term to innovate and prepare the path for future profitability, increased growth, and higher valuations.”

Another McKinsey report suggested established companies ‘should launch new businesses that have start-up-like freedom’ to guard against disruption and ensure long-term survival.

Mambu, where Kunal Galav heads up partnership development, helps companies do just that by providing the infrastructure to launch ‘speedboats’; agile new ventures that use less resources, but are supported by the incumbent.

Mambu has been building core banking engines for 12 years and has 250-plus customers across 65 countries. It’s served disruptors such as TymeBank and N26, helping them slash operating costs, as well as Tier 1 institutions, including

Dutch bank ABN AMRO – which launched a spin-off lender for small and medium-sized businesses called New10 in 2017.

Many of the larger banks Mambu has worked with turn to it because they recognise that their existing technology and operating models are ‘too slow, expensive and resource-heavy’, says Galav. But the overarching problem for these banks is adopting new technologies without acknowledging the need for the cultural and structural change required to make those products truly valuable.

Successful challengers are those that are driven first and foremost by changing customer needs. Galav points out that ‘when the first wave of digital banks by incumbents came up, they weren’t successful because they [continued] what they were already doing, just with digital “on top”… Customers are increasingly expecting banks to be a day-to-day part of their lives. And that’s how incumbents need to work’.

Henning Soller, a partner at consultants McKinsey agrees that, by and large, they’re stuck with ‘the culture, the processes and the legacy technology that they have acquired over time’.

“I think traditional banks and digital banks agree on customer focus, going forward,” he says. “However, where they have different views is what makes a good digital customer experience, and how banks can build digital processes… The mindset change required to overcome these paradigms is significant and much bigger than we had originally thought.”

With established cultures and infrastructure being difficult, even impossible, to change, one answer, he suggests, is to build something on the side of the organisation that allows for the digital experience. “And, over time, by building a digital mindset and culture in a newly established entity, you will be able to change the culture [of the main organisation] also.”

It’s something that is being explored across the banking world, to varying degrees of success. In a previous issue, we featured Mox Bank, a Hong Kong offshoot of Standard Chartered, which was looking for a radical new approach to banking. We’ve also featured a conversation with Dr Dennis Khoo, who led the creation of United Overseas Bank’s digital challenger TMRW. He went so far as to say ‘there’s no such thing as digital transformation’ in purely technological terms: his experience taught him that people and processes need to be the focus. And here, incumbents face another challenge: retaining and even attracting top talent is becoming more difficult. Galav picks up on the importance of motivated people.

“For a fresh engineering grad [at an incumbent] looking at code which was written a long time ago, you’re thinking, ’I don’t understand this,’ and yet you still need to fix it… imagine the motivation levels in that situation.”

Indeed, the McKinsey Global Banking Report highlights the need to invest in attracting, reskilling, and retaining the best talent to preserve organisational resilience among banks.

“Create fun workplaces, where staff know that what they are doing has a tangible impact,” says Galav. “That’s why creating something on the side, providing modern developer experiences and modern tools and getting staff to feel how they’re impacting the customer is critical.”

Speedboats in and of themselves represent a ‘new way of working’, Soller says: “A new approach, a new vision, that challenges the incumbent bank.

“Meanwhile, there needs to be a big renovation, restoration, implementation of interface layers, so that, over time, the migration to a more modern platform can happen for the legacy business.”

Questions also need to be asked along the lines of ‘how do we get rid of legacy code that was written somewhere in the mainframe times?’ and ‘how do we get the complexity of the entire estate down? ’ because product-focussed digital transformation initiatives have themselves resulted in further layers being added to an already sedimentary infrastructure. Rather than solving the problem, it’s kicked it further down the road.

Both Galav and Soller agree that regulation is not at fault for creating this situation and regulation itself can no longer be seen as an excuse for larger banks that institutions tend to keep adding new layers. At least that’s the way it has been.

“Looking at the IT complexity in the banks, we saw a correlation between the size of the balance sheet, and the number of applications that a bank has… meaning you afford the complexity that your bank provides,” says Soller.

“The reason why banks in the Middle East, banks in India, or elsewhere have been more successful was because their balance sheet was smaller. They needed to do something about this.”

So, they readily adopted a digital proposition, he says, whereas elsewhere established organisations ‘were much more comfortable’ and, as a result, have largely stayed as they were. But according to the Global Banking Report, banks just won’t have the money for feather-bedding in future. Creating standalones, perhaps in partnership with others, might be the best way of ensuring not just their long-term transformation but their long-term survival.

Composable Solution

Organisations like Mambu hope to be part of the solution, providing the tools to enable change in larger organisations. And it’s no longer simply about adopting the Cloud, which should now be seen as ‘table stakes’, suggests Galav.

“Our platform helps in three ways. We have a real-time subledger, allowing the bank to react to things live, not waiting for a process to run over the weekend, and for payments to show up 48 hours later.

“Secondly, we provide the ability to integrate with the bank’s current setup. And thirdly, we have configuration-based products that are good for the customers.” to compete to do nothing it. That crutch has been kicked away: many challenger banks, after all, hold a full banking licence.

“The complexity that we see is not driven by the regulators,” says Soller. The layers of database technologies, old and new, that act as a barrier to entering certain markets, are a problem created by the banks, not the overseers, he contends.

Soller also points to previous McKinsey analysis that suggests incumbents just can’t help themselves finance complexity because they have such deep pockets. While leaner organisations will prioritise efficiency, and make this an ongoing concern, big

Dutch global bank ABN Amro chose Mambu as the core engine for its spin-off New10. It built its architecture on API-enabled services, leveraging a wide ecosystem of third-party vendors to create a new offer in the business banking market. By deploying on Amazon Web Services (AWS), New10 benefitted from instant scalability and elasticity, reduced operational effort, and automation. Made up of a small team of internal and external talent, the startup had a go-to-market time of less than a year and is now viewed by the main bank as ‘the spider at the centre of a web’, as one senior exec described it, spinning out ideas that are influencing ABN Amro’s entire commercial banking strategy.

That instant scalability and elasticity is clearly attractive; the ability for existing organisations to essentially start afresh allows for progress and innovation. According to a report last year from Simon-Kucher & Partners, one in three neobanks is considered a ‘speedboat’– and they typically have deeper funding than the independent startups they compete with.

“These speedboats can capture additional synergies and open new strategic avenues, such as business diversification, new revenue streams, keep the pace with market and customer change, or build more agile, innovative, and efficient operating models,” says Galav. That said, it would be wrong to see them as a quick-fix solution to the problems facing the parent body. “Organisations like Mambu are enablers, but there still has to be cultural change.”

Soller agrees: “Mambu, and other tech platforms in the same space, can only be a catalyst to the developments that have to happen within the organisation.

Neos Of Note

“In order to make [transformation] successful, and to make sure there is nothing adding to the bank’s overall complexity, there needs to be a talent shift within the organisation, because the thinking should now be, ‘this is what our future should look like; how can we make our legacy bank into something that operates and looks like what we have acquired/launched?’.”

Ayaz Haji, chief data officer and head of data engineering at Credit Suisse has previously suggested that ‘banks should seriously consider putting a technologist, such as their CTO, on the board’ as a way of integrating an engineering viewpoint at the top of the company.

For many institutions this change at management level is a seismic shift in thinking. Nonetheless, both Soller and Galav agree it is vital.

“If people at the top fail to understand that this is currently the most important transformation in banking, and that this is the only path to their possible future as a bank, then [any additional digital developments] are futile,” says Soller.

And that vision has to start at the top – at board level – he adds.

“If this is left somewhere within the IT department, and people say, ‘it’s a technology transformation’, it will not be successful. This is because it’s a whole bank transformation, and that requires a change of mindset around how we think about talent and technology.”