Product innovation is the key to growth for banks
Banks have a significant opportunity to take advantage of the digital shift driven by the next generation of customers. Or, they can be left on the wayside and watch neobanks and fintechs drive their own growth. This generation of customer not only values digital efficiency and convenience but also looks for value and reward for loyalty.
Product innovation is the best way for banks to survive and thrive
Where the banking market was defined by physical presence, either locally or nationally/internationally, it is now defined by products and services targeting specific customer segments, like landlords or members of the immigrant community.
Forward-looking banks have already started to prove that expanding their distribution through brands and fintechs is a strategy that will not only help reduce the cost of sales but also increase cross-selling opportunities to a broader customer base.
However, expanding distribution is not the only way banks can grow. In this post I argue that product innovation is the best way for banks to survive and thrive. After all, banks have massively broadened their product portfolios over the last few decades.
In the past, this was done expensively with new core banking systems to suit each product category. With modern technology, this is no longer the only approach and there are certainly vastly more cost effective approaches now. Hence, banks must embrace product innovation and unlock its immense financial and customer retention benefits.
The compelling business case for product innovation
Increased revenue streams
Innovative products like micro-investment platforms, robo-advisors, and real-time income streaming attract new customer segments and generate new revenue streams. These solutions cater to underserved demographics or address unmet needs, expanding the bank’s reach and profitability.
Reduced costs
Automation through innovative solutions like artificial intelligence (AI) powered loan processing and chatbots for customer service can significantly reduce operational costs. Streamlining processes frees up resources for further innovation and improves overall bank efficiency.
Enhanced customer retention
Customer loyalty is paramount in today’s competitive landscape. Banks can increase customer satisfaction and retention by offering innovative features and a user-friendly experience. This translates to a more predictable revenue stream and a reduced cost of customer acquisition.
Data-driven decision making
Fintech solutions excel at harnessing the power of data analytics. Leveraging this data allows banks to personalise product offerings, target marketing campaigns more effectively, and identify cross-selling opportunities. This data-driven approach leads to improved customer engagement and increased profitability.
Future proofing
Using open technology that accelerates time to market, banks are freed to launch, test and update products in much faster iterations than before, thereby continuously meeting changing customer needs. Not only this but as more banking capabilities based on modern technology are introduced, less will be required in the future. By reusing existing proven components, not only is time to market increased and cost reduced but the bank is also future-proofed.
Legacy core banking systems: a hurdle to innovation
As I’ve discussed before, traditional banks face a significant challenge: legacy core banking systems. These outdated systems hinder their ability to develop innovative new products or integrate fintech solutions effectively due to:
Lack of agility and flexibility
Legacy systems are rigid and struggle to integrate with modern fintech solutions requiring real-time data access. Nor are they easy or quick to change for new features or products.
High maintenance costs
Maintaining these systems is expensive (and risky), diverting resources away from new product development. As years go by, skills availability for many of these platforms will also diminish, posing a significant risk longer term.
Data silos and integration challenges
Data stored in incompatible formats makes real-time analysis or integration with Fintech platforms difficult.
Security concerns
Legacy systems can be vulnerable to cyberattacks, making banks hesitant to embrace new technologies.
The impact
These limitations force banks to choose between maintaining the status quo and core replacement.
Maintaining the status quo
Doing nothing is no longer an option for banks, as this risks losing ground to fintechs and neobanks. Today’s customers are more likely to be “silent leavers”, i.e. leave existing accounts open while opening an account at a digital bank and undertaking most of their banking there.
Hence, banks need to drive and measure customer engagement rather than customer attrition and the number of accounts. Increased engagement requires modern banking features and new products targeting the needs of digital native customers, something that we know is not easily supported by legacy systems.
Core replacement
Not only is this a costly and time-consuming process, but there is a very real and high risk of failure, as a number of banks have already experienced. Migrating customers and data may seem like an easy task, but a migration will also require systems integrated with the legacy to be re-integrated with the new core.
Light at the end of the tunnel: overcoming the legacy hurdle
With modern technology it is now possible to enhance banking products and features by “hollowing out the core”. This approach essentially makes the core system responsible for product ledgers whilst new products and product features are created in new software that uses the existing core only for ledger entries.
Banks can address these challenges by:
Strategic investments
Modernising core banking systems to create a flexible foundation for fintech integration. Introducing new components that are API enabled not only enables fintech integration but also enables the bank to leverage existing functionality in the future, strengthening the business case for this approach over time.
Phased approach
Upgrading critical components while minimising disruption. These upgrades, developed as microservices, mean that a huge monolithic installation is no longer required. Updates and new capabilities can be introduced in phases targeting very specific business goals.
Cloud migration
Adding new capabilities from a public cloud platform increases the bank’s scalability, security, and agility while reducing its implementation and maintenance costs.
Headless
An API-first solution enables banks, fintechs, and brands to innovate customer experiences without the constraints of legacy system processes.
Conclusion
Banks have struggled for meaningful growth and now face an existential crisis as digitally native customers turn to fintechs and neobanks for digital banking products and services.
Some banks are looking for growth by growing their product distribution capability through fintechs and brands and this is a viable strategy but not the only one. Banks have decades of experience of creating new products and this has served them well till now. It is simply too risky and costly to replace core banking systems to enable banks to launch new products and features.
However, the latest technological advances enable banks to modernise their legacy core banking systems, enabling them to either partner with fintechs or create their own product innovation.
Platforms like Zafin allow banks to have a single product catalogue and create new products on top of existing cores.
However, coreless solutions like Infinant and XYB go even further and enable broader banking capability like money movement and fraud detection to enhance a banks existing core. In the US, Infinant’s approach to hollowing out the core is resonating with banks of all sizes but especially small and medium sized banks who are looing for alternatives to core replacement.
This week I’m saying, hollowing out the core gives banks the best of both worlds: the stability and reliability of legacy banking with adherence to regulations, coupled with the agility and flexibility of modern technology to create new products. Such an approach doesn’t “throw the baby out of the bath water” regarding legacy systems. Instead, it allows them to nurture and mature that system to meet the demands of today’s modern banking customers.
About the author
Dharmesh Mistry has been in banking for more than 30 years both in senior positions at Tier 1 banks and as a serial entrepreneur. He has been at the forefront of banking technology and innovation, from the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He founded proptech start-up AskHomey (sold to a private investor in spring 2023) and is an investor and mentor in proptech and fintech. He also co-hosts the Demystify Podcast.
Follow Dharmesh on X @dharmeshmistry and LinkedIn.
Read all his “I’m just saying” musings here.
