Key Insights From This Interview
- The future of banking is clear. Banks will not own the technological infrastructure or operating platforms they use to deliver services. Customer focus will mean delivering services customers want, not being constantly in touch with them. And change – whether for customers or compliance – will be cheap and instantaneous. That is the meaning of digital transformation.
- Established banks currently struggle to embrace total digital transformation because of fragmented legacy technologies; the need to fulfil commitments to existing clients without interruption; investor expectations of rising shareholder value; regulatory obligations to remain resilient and secure; and fear of a TSB-style debacle. This may be a strategic mistake.
- As a result, most digital initiatives by banks have concentrated on improving the customer experience (UX) through apps and web interfaces while leaving core systems and processes unchanged. Banks are now running into the limitations this superficial approach imposes even on the customer experience, notably in relation to Open Banking and embedded finance.
- Other reasons banks cannot postpone digital transformation any longer include systems falling out of joint with digitised national and global economies; a rising generation of senior bankers more comfortable with digitisation; the fact that the cost and risk of change are both lower; and regulators pressing banks to invest in more powerful and flexible systems.
- Regulatory pressure to invest in digitisation is novel but the inability of regulated, established banks to support Open Banking, automate Pandemic lockdown measures (such as mortgage payment suspensions) and compete with embedded finance providers has highlighted for regulators the gulf between what is technically possible and the actual capabilities of banks.
- Regulators are also no longer regulating banks purely by diktat. Instead, they are nudging banks to construct a future that is better for consumers. This is especially evident in Australia, where the central bank (by rebuilding the central bank money settlement system) and the government (by giving consumers ownership of their data) is forcing banks to change.
- Increasingly, banks understand the limitations of their existing technologies and the transformative power of digitisation. They have learned how to derive value from using data in real-time and sharing it to create new products rather than trying to own it. What is still lacking at some banks is imaginative leadership to do something creative with the knowledge.
- Reasons for lack of creativity include forms of opposition internal to banks. When 80-90 per cent of budgets are used to maintain existing systems, it provides an excuse for inaction. Some bank CTOs also fear loss of power, prestige and control, tend to blunt the impact of third-party software and harbour a conceit that they can digitally transform the bank themselves.
- Counter-intuitively, banks are not yet alive to the human cost of digital transformation. Switching to a fully digital operating platform will disrupt the jobs of employees that presently link different systems and data sets together. Bank leaderships need to educate themselves on up-skilling and redeploying employees whose present roles become redundant.
- New, low-cost, high-speed, self-updating, Cloud-based technologies show that the classic dilemma over migration to a new operating model – should it be incremental or a Big Bang?- is bogus. Instead, banks can prove both the technology and the services required to support, say, banking-as-a-service, without touching any of the existing technology platforms.
- Although banks are more comfortable with the Cloud today than they were a decade ago, resistance is still evident, especially in North America. However, regulators concerned about bank capabilities and resilience have in some jurisdictions become advocates of banks transitioning to the Cloud, subject to assurances about disaster recovery.
- Banks now understand that they have lost control of the timing of the transition to a digital future. That now belongs to their customers and regulators, as well as to their competitors. Importantly, those competitors are no longer just start-up FinTechs but incumbent banks that have grasped the potential of the technology and the size of the opportunity.
10xbanking is not your average provider of Cloud-based banking Software-as-a-Service (SaaS). The company is the brainchild of former Barclays Group CEO Antony Jenkins, who has since leaving the British bank in 2015 embraced the idea of transforming the industry by full digitisation of its infrastructure and operating platforms. 10x has raised more than $252 million to its Series C in June last year, giving it the capital backing (and in some cases the business) of BlackRock, J. P. Morgan Chase, Westpac, Nationwide Building Society, Ping An and the Canadian Pension Plan Investment Board. If 10x can succeed in its ambition of digitally transforming major incumbent banks its management believes it cannot fail to deliver for the neo- and challenger banks that have used their freedom from legacy technology to chip away at the revenues and franchises of long-established financial institutions. Dominic Hobson, co-founder of Future of Finance, spoke to Leda Glyptis, now Chief Client Officer at 10x, but who was previously CEO of the 11:FS Foundry and a veteran of digital innovation roles at BNY Mellon, Qatar National Bank and Sapient.
A full recording of the interview is available on this page. A transcript of the interview, which follows the questions below, is also available if you click on “Read the Transcript.” If you click on any question you will be taken to the exact point in the recording where the question is asked and answered.
What is the story of 10X, including the founders and the funding?
In working with 10X, how important is not having a legacy?
Established banks have up to this point mostly “faked” their digital offerings. Is that no longer an option?
Do the financial market infrastructures (FMIs) have to digitise their platforms as well or can banks digitise their offerings without taking FMIs into account?
Are challenger and neo-banks – banks without a technological legacy, but possibly also without customers as well – attractive as clients for 10x?
How big an obstacle to genuine digital transformation is the TSB debacle? Has it reduced the appetite of banks to risk changing their core systems?
Are legacy systems of incumbent banks the main reason Open Banking has failed to grow as fast as expected?
What does “data” mean for a clients of 10X – have banks changed their views about the value and use of data compared to, say, ten years ago when they were all envious of Facebook and Google?
You are working with Westpac in Australia. How much does the opportunity there owe to actions by the central bank (namely, the New Payments Platform) and the government (namely, the Consumer Data Right Act)?
10x is working with Westpac on transaction banking as well as retail banking-as-a-service. Is what you are doing with Westpac a single digital platform in embryo, spanning both wholesale and retail business?
Is the transition to a new digital operating platform of the kind delivered by 10x a gradual migration or a Big Bang?
It is said that banks spend 80 per cent of their technology budgets on running the bank and 20 per cent on changing the bank. How big a constraint is that for 10x which is, after all, advising clients to change the bank?
How much resistance do you encounter from Chief Technology Officers (CTOs) when trying to persuade a bank to change its operating model?
How big an obstacle to the digital transformation of a bank is the question, `What are we going to do with all the people whose jobs are replaced or displaced by the new operating platform?
Are regulators helpful or unhelpful in encouraging the banks to move to the Cloud?
How concerned are banks about competition for their business – are they afraid of losing their business, not just to the digital arms of established incomers and neo-banks and challenger banks, but even to telecommunications companies and social media platforms?