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Episode 3
Breaking free from legacy systems: advancing banking through core modernization
In this episode of Banking Blueprints, we explore the intricacies of core modernization initiatives: the challenges they pose, the rewards banks can reap, and how you can avoid the most common pitfalls when upgrading your legacy core. …
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Welcome to Banking Blueprints by Zafin, where we navigate the future of banking. Each episode is dedicated to demystifying the industry and offering strategies that empower you to shape your banking future. Join us for knowledge, inspiration, and transformation.
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In this episode of Banking Blueprints, we explore the intricacies of core modernization initiatives: the challenges they pose, the rewards banks can reap, and how you can avoid the most common pitfalls when upgrading your legacy core.
Join host Dharmesh Mistry and special guest Shahir Daya, Chief Technology Officer at Zafin as we discuss how to mitigate risks through a variety of modernization strategies, simplify integration processes in a multicore environment and, finally how banks can minimize disruptions to ongoing operations by implementing vertical slicing to grow incremental business value.
Transcript
DM: Welcome everybody to the Zafin Innovation Beyond the Core podcast.
This week, I have a very special guest, Shahir Daya, who is the CTO of Zafin.
Shahir, would you like to give our audience a little bit of background on yourself so they get to know you a bit before we get into the topic of legacy modernization?
SD: Yeah.Thank you so much, Dharmesh.My name is Shahir Daya and I’m the CTO of Zafin. I’ve been with Zafin for just over 11 months.
Prior to Zafin, I spent 27 years at IBM. I was an IBM Distinguished Engineer and the CTO for the financial services consulting business and have gone through several waves of technology, everything from developing mainframe software to client server to cloud and decided to join Zafin at the beginning of this year.
DM: Fantastic.
I mean, you have a career very similar to mine. I started off on the mainframes, but you look way younger than myself, so that’s fantastic.
I’d just like to understand a little bit more about your background because it’s fascinating that you spent 27 years at IBM. What drew you to Zafin?
SD: Yeah, that’s a good question. A couple of things. My IBM career was very focused on consulting client after client. And I did spend most of my time in the financial services sector and a lot of my time at banks doing modernization, and I wanted to try out working with product, building a product and Zafin had the perfect product, cloud-native, SaaS, in the financial services space, great company, great vision, and the timing was just right for modernization, core modernization and Zafin’s point of view around core modernization was in line with what my thinking was and it was a perfect fit.
DM: Fantastic, fantastic.
I mean look we know the topic of this conversation is legacy modernization, but I want you to break that down into 2 halves.
Firstly, for the general audience that isn’t technical, maybe just define what you mean by legacy. What’s a legacy system?
SD: Yeah, so Dharmesh, that’s a very good question because people usually attribute legacy to mainframe and that’s not correct because the mainframes are extremely modern. The technology within mainframes is state-of-the-art and what those mainframes can do is just unbelievable. So the legacy part is nothing to do with the fact that it is running on the mainframe. It’s actually to do with the software itself, right? And if you think about it, I’ve dealt with core systems that are literally 4 decades old, right? And they were built 4 decades ago using architectural styles and patterns that were very popular 4 decades ago. And those things have changed. Programming languages have evolved and using the right language for the right task at hand and so on. And if you think about having a core system, every time the business needs something, you look at it and you’re like, OK, I’m going to make the change in the core. So you continuously make changes in the core, normal adaptive maintenance, new feature request fixes, you keep evolving and changing the core. And it gathered so much technical debt over the decades and to the point where now it’s a drag to make changes. So old architectural styles, old programming paradigms, scarcity of skills, all of those things make these cores legacy.
DM: Fantastic. So let’s get on to the meat of the topic then.
I’ve been in a core banking software company and we sell core banking software.
So literally we’re telling people you need to replace your core. But recently I’ve been hearing, not only from you guys but other players as well about this kind of terminology.
‘Well, look, changing your core is a bit like changing the engine of a plane while it’s still flying’ or other analogies like, ‘It’s like having open heart surgery while the patient’s still awake’. It’s so risky, it’s dangerous, right.
But newer players are now and Zafin are promoting this concept of modernization.
So what does that mean, versus rip and replace of your core, right, right.
SD: So they’re actually right.
I mean core replacement, ripping and replacing: very high risk. I don’t, I don’t think you’ve seen anyone do it successfully without actual problems, right?
It is one of the big challenges with a core replacement is all around feature and function parity.
How do you achieve that before you can cut clients over? And core modernization, if you look at what comprises a core, it’s really three big boxes, right?
There’s the ledger, the subledger, there’s product and everything that comes with product, things like pricing, fees, rates, suitability, eligibility rules and so on.
And then there’s the customer master, right?
And if you think about the challenges and Dave spoke about these challenges right around Agility. If you think about the challenges we are trying to address and all the banks are trying to address, trying to become more agile and we know the legacy core is not agile. It’s very cumbersome, very difficult to make changes because of the regression testing and the languages and the architectural paradigm and so on.
So “hollowing it out” or you’ve heard the words “hollow out”.
You’ve probably heard “strangler”, “the strangler pattern”, “strangling the core”.
There’s many ways of terming it, but pulling these big capabilities out, if you pull the product catalog out or you pull the whole rates and fees out or you pull the customer master out and pull them out and go towards a more modern solution, you start becoming more agile in those areas.
So, if product pricing is an issue, pull out the product catalogue, pull out the capability to a more modern stack.
DM: Yeah, yeah, yeah, I get this.
So it’s a bit like, one of the challenges of the legacy cores that depending on the vendor, but the older the vendor, the more components that they actually have, which is great if you’re a small bank, you can get everything out of one box, but it means that you’re like a Jack of all trades and a master of none.
SD: Yes.
DM: Like you know that you’ve got everything there, but it’s not the best of one thing, it’s not the best credit risk module or the best customer management module or the best ledger.
It’s everything but not the best individual pieces.
And what you’re saying is that you can take out individual pieces and then replace them with something that’s much better. Is that right?
SD: You’re absolutely right. You hit the nail on the head.
That is the exact strategy: let the core be what the core was meant to be, which was the ledger and use best of class, best of breed products for all of the other components and stitch them together in a very tightly integrated way.
DM: Fantastic. And this sounds great, right? Because it means that I’m not doing a big rip and replace exercise, which is fraught with danger, right?
But I’m just going to take a small part of this and now pass that capability somewhere else.
Is that easy to do?
SD: It’s not easy. Nothing in that space is easy to do. But it is a lot easier than trying core replacement.
The risks are minimized and the way you do it.
And because you know the technology has evolved so much that you can achieve coexistence and so on right. So as an example, pulling product and pricing out of the product catalogue out of a legacy core is not that difficult because once you pull out the product and pricing and now you’ve got a modern solution for product and pricing, you’ve got modern APIs and so on.
There are techniques that you can use like bridging the API calls from the legacy to the more modern one and that minimizes the amount of changes that you have to do on the bank side, right? Because the bridge is providing an API that’s exactly what you have today and it’s doing the necessary translation to the more modern one.
And these are temporary solutions.
It’s a transitional state architecture as they actually start modernizing and moving the APIs to move to the modern stack and so on. So there’s techniques like those that really help with minimizing risk and accelerating the timeline.
DM: Oh, that’s fantastic. I mean, what amazes me. The product catalog is such a good example because no bank has a single core anyway. Typically a bank has a different core for its accounts and loans versus it’s mortgages versus credit cards.
You know, there’s three there anyway, right?
And so you know, in the old world each one of those cores would have its own catalogue and now you’ve got 3 catalogues now rather than 1.
So it’s no wonder that we had this problem with the single customer view.
But externalizing it makes it much more sensible because you’ve now got the single customer view and you’ve got one way of defining the products rather than three different ways and you can do it in one system.
So I can, I can see lots of benefits here.
So if a bank wants to do modernization, like how do they start, what are the things that they have to consider before they get engaged in a project like this?
SD: Right. So I think just modernization programs are massive and everybody knows how risky they are. So proper planning on their side is extremely important. And what are the actual pain points we’re trying to address?
It’s very important to understand what are the pain points the bank has that we are actually trying to address. And the other piece of advice is start small, pick an actual use case and go using a vertical slice approach, right. So don’t do anything that’s going to be horizontal.
Always do something vertical that touches the clients because you want to deliver client value, business value incrementally, and that is one of the most important things in a core modernization point of view is yes, we want to modernize the core, but we don’t want to put a pause on innovation and tell the business,
“You know folks, you need to hold on for a while we modernize or get to a new core and that’s going to take us 2-3 years and don’t do anything innovative until the” — that doesn’t work. We need to incrementally deliver value.
So picking vertical slices that have incremental business value is the approach.
DM: And just for my benefit because I should know this I guess, But can you give an example of like a vertical slice? What do you mean?
SD: Absolutely. I’ll give you an example of a vertical slice.
So when you look at the business capability at the top and you look at the technical stack that it needs to call, typically you’ll have a user experience, you’ll have layers of APIs, you’ll have a system or record and so on. I’ve seen banks think that we’re going to build this layer of enterprise APIs and focus horizontally and we’ll build all these APIs and we’ll build them and they will come.
And I find that in some cases, yes, that works.
But in many cases, you’re spending so much time building this horizontal layer of enterprise APIs that you are not delivering business value at the same time. So if you do a vertical slice, you only build the pieces that you need to deliver that vertical slice in the business value associated with that vertical slice.
And you go vertical slice after vertical slice and your horizontal starts to take shape and get filled out.
DM: Right. I mean that makes a lot of sense to me.
Clearly, it’s like if there was a big cake that was the bank.
I’m just taking a slice all the way through and then at some point I finished the cake. So absolutely, and you know I’m a foodie so I had to get a food analogy in there somewhere.
So in terms of pros and cons, I mean it I can see the some of the pros, right?
For example, because you’re taking a vertical slice, you’re going through the entire software stack but not the full breadth of its capability.
So you’re containing its scope but still addressing all the layers. So I can see that lower risk than trying to do an entire horizontal thing like you mentioned about the APIs.
Are there any other positives around the modernization?
So it’s lower risk which means that it can be done quicker, right, with less manpower, What else?
SD: Yeah, it basically risk and incremental value are the key things, right. And incremental value is so important, you want to get the business excited early on as you go on.
And there’s so many strategies that I’ve got when you’re getting the product for a catalog up, for example, you don’t have to move control of all products to whatever new software immediately, right? You can deposit products and checking products and so on.
And like you said, there’s multiple cores, right?
Yes, deposits, credit cards.
And you want to externalize products from all cores to the same place because of the value you spoke about, right?
The whole being able to have the 360° view of the customer, all of the agreements they have with the bank, right.
So there’s just so many advantages, so many ways to do it.
And if you, if you think about it, integration and orchestration becomes the single most important thing, being able to integrate and to be able to then integrate incrementally so that I’m only concerned about this one thing.
Everything else remains the same and I want to be able to keep switching things on as we progress in our modernization journey and orchestrating across the different cores.
We know we are a multicore, we’re going to be in a multicore situation.
So orchestrating across the cores is very important as well.
But risk and incremental value are two of the biggest things that we need to focus on.
DM: Yeah. I love that incremental value thing because when I think about kind of core replacement, I just think risk, risk, risk cost, cost, cost, cost, it’s going to take a huge amount of time and several years later I’m going to get a brand new system that allows me to launch products quicker, etcetera, right, blah, blah, blah.
But it’s well at that time I’m thinking it’s like so much time before I’ve got any value back.
But this thing about giving a little bit of value quickly and often and repeatedly, I love that concept.
I mean, clearly, you’re coming from the consulting background, so you kind of get that very well.
So I love that. OK.
So, I know you want to pitch that “modernization is the way forward”, but are there any downsides to modernizations that you can think of?
SD: There has to be a reason why you’re doing it right?
You don’t want to modernize for the sake of modernizing, just because everybody else is doing it.
You know the pain points on agility are important.
If you don’t have the luxury of going with a new core that’s modern and cloud native and all of those things, again, you are going to modernize from certain standpoint because like you said the core you know they want to focus on everything, they want like a bank in a box, but they’re not going to be good and deep at everything.
You know they need to focus on the ledger and they have to be great at the ledger and leave product pricing, customer master, leave those things to others that are focused on those specific components, right?
So you can expect to see a modern cloud native core that’s built recently that’s still leveraging another component for a customer master, another component for product and pricing and so on.
And it’s focused on the ledger, right. So I see modernization happening whether it’s a legacy core or some of the newer cores. You may not specifically call it modernization because what are you modernizing, right.
But you see the idea of externalizing and using best of breed products and stitching them together to achieve what you need to achieve.
DM: Yeah, I mean I think again, I still love this point about the incremental value because I can see that one of the downsides could be that the overall replacement of a core might take longer because you’re actually releasing on a bit by bit basis, right?
I don’t know if that is the case, would it take longer or could it be quicker? Because obviously one’s a deeply complex project and you’re trying to eat this elephant in one bite whereas the other you’re trying to chop it up into smaller pieces and that’s even more manageable.
But would it take longer or not. I mean what’s your experience?
SD: The thing is if I saw one that actually was successful, I could tell you if it would be longer or not.
It’s very difficult to guess at that. You know trying to eat the whole elephant in one shot is very problematic. You know and there’s different banks have done different things, right.
We’ve got banks that have a legacy core and they stand up a more modern core and they try to coexist them. Coexistence, but having a solid coexistence layer and then you know introducing new products on the new core and then having an experience that’s stitched together.
So I could have products in the old core and the new core, but completely different products, not migrating the products over and that’s a start to try to get value quickly.
But you know, you have to ask the questions is that the right approach for a particular bank and there’s no one-size-fits-all right. Different banks are in very different situations.
DM: Yeah, definitely, I mean what you said about standing up another core alongside your existing, you know, my experience has just taken too long before the old core actually made, got made redundant at some point.
You might as well have migrated the whole lot because it’s been there. It just ends up being another core as opposed to a journey to replace one in its entirety. So I think you’re right on the, standing up one.
But another one that I’ve seen also is where they literally create a new bank, under a new brand typically called the Speedboat strategy, let’s create this brand-new organization and let the customers migrate to the new brand.
I mean again, I’ve seen that you know being done.
I haven’t seen, have I seen any of that as successful, maybe one that’s been successful but not too often. And again typically the new brand has kind of come out, it’s on a modern new platform is able to innovate, but it just didn’t get the customer traction and they didn’t launch enough products soon enough, right.
So it it’s a difficult one, that one as well, right?
SD: Yeah. And that’s the, that’s one of the advantages of the legacy bank, right.
The legacy bank has the accounts, right.
They’ve got the balance sheet, they’re the ones that if they can just innovate fast enough in terms of product and propositions to the clients, they can grow those accounts significantly, right, and attract new clients, right.
So you know the hollow out strategy hollowing that core out and pulling product catalog and customer master, pulling those things out and making them more agile so that you can actually innovate faster in my opinion is a better strategy.
DM: So, so you’re advocating basically that don’t ‘replace the core, build around it with better capabilities.’
And typically you want to innovate around the customer experience, manage the customer separately.
You want to innovate with new financial products, manage the product management separately to the core and maybe just leave the core to the ledger, right.
SD: Yeah, absolutely.
DM: Wow, fantastic.
SD: You can introduce a new core at the same time and just as long as the product catalogue and the customer master are shared across the two cores, you could achieve that as well.
DM: OK. So, all right let’s say that I’m like a bank that has successfully put in a brand new core banking system, it’s cloud native, it’s got micro services, I can do daily releases, it’s got APIs, etcetera, etcetera.
So I’ve got this new core.
Would I benefit from modernization as well or would you say that it’s a job done?
SD: You know if it truly is as you explained it is, then I don’t see what you would be modernizing,
DM: I mean I’ve seen one of those.
SD: I’m curious to see it myself, right?
DM: I think you have to explain what the problem is and if you may, I’m going to, I’m going to answer that one for you because I know where you’re coming from which is basically no bank has achieved putting all of their products onto a single core. So typically, they’re in a multi core scenario and they may have replaced one, but they still got the others to go right?
SD: Absolutely.
DM: OK. So what’s the problem with that?
So let’s say they’ve got a brand new core and when they want to do some new products, yes, they have to run some legacy products.
What’s the problem with that? I mean is there an opportunity for modernization on that?
SD: Yeah, there is.
Absolutely there is, right. And you know if I look at product and pricing and all of the different capabilities, when I was in consulting and when I think about banks or when we think about banks, are we all bank, right?
We think about banks and you think, “Oh it’s a product, it’s a checking product, OK”.
“These are the fees I pay, these are the different ways I can avoid the fees, What’s so complicated?”
And then when you look at Zafin and how we do product and pricing and what’s involved and monitoring behaviour and it is complicated, it’s very complicated, it’s not straightforward, right.
So a new core, a new more modern core that might come out that might have a product catalogue and have product and pricing to match some of the capabilities that banks expect today?
You know I’d be very surprised if anyone could come up with that you know right out of the gap with a new core.
So for some of those capabilities that you just don’t exist in in in cores or that a new core may not have you know your best option is to externalize it to a best of breed product.
And when you think about this idea of a lot of banks are doing this right? They’re externalizing everything and picking best of breed products for all of the moving pieces because it’s a better strategy.
And they’re abstracting them away so that if later on they decide “Hey, what I picked for, anti-money laundering is not a good fit, let me switch it up with something else.”
They can switch it out, right?
DM: So one of the things that I’ve seen and I’ll be interested in your perspective on this is that there are standards like BIAN in Europe that standardize the interfaces between the banking components so that you can take out the ledger or you can take out the credit risk module and you know replace it with something-Yes, you might not get every single parameter matched, but it’s close enough that will minimise the effort for swapping in and out component.
And then you get to what I think the industry is calling a composable architecture, right, where you can mix and match much more like Lego bricks than you could do in the past.
Is that, is that what you’re talking about?
SD: Yeah, absolutely. And BIAN, we’re a big proponent of BIAN. We are BIAN-aligned as well. And so when you externalize and you settle on BIAN as the standard for the interfaces and the data model to replace a component as long as it’s BIAN-aligned becomes a lot easier, right.
And that’s what I’ve seen banks do is they want to externalize, use best of breed products and stick a BIAN layer above them so that if I need to replace them, I know BIAN, the vocabulary is the same and so on. BIAN is also very handy when you think about, Dharmesh, when you think about coexistence.
I have an old core.
If I get the data out and BIAN-align it, and I have a new core, I get the data out and I BIAN-align it.
I have BIAN-aligned data. It doesn’t matter which core it came from, right? The experiences and all don’t know where the data came from.
The BIAN layer abstracts all that away.
DM: Fantastic.
A couple of things surprised me because I didn’t know that Zafin actually was BIAN-aligned. I just mentioned it because it’s an area that I’ve been looking at recently under the banner of Composable and Coreless, right, but also I thought it was much more a European thing.
So it’s quite interesting that you as a Canadian/U.S. company is already BIAN-aligned, that’s fantastic.
SD: Yes.
And there’s there’s a lot of North American banks that are very much focused on BIAN, right.
DM: Right. OK, cool. So what about in terms of adoption, have you seen much like this, this is the space that you’re in, you’re facilitating an aspect of modernization, right? What’s the adoption like and the success, right? Compared to a core replacement, maybe that’s a giveaway answer there, but, what’s the adoption like globally?
Where are the countries or regions that are most open to modernisation versus replacement?
SD: Personally, I think, I’ve seen it across the board, yeah. And across the globe.
Like, I think everyone has come to realize that core replacement is not an option. It just isn’t, right?
Maybe in the last 11 months, I’ve encountered one client, one bank that is thinking that they’re going to replace the core and put everything on hold. And I think they’ll come to fast realization that that is not the right approach for them.
All of the others are very focused on core modernization. They’re all focused on hollowing out the core and many of them are doing it differently, right?
Some are doing it without picking a modern core. They just want to hollow the existing core out and go with best of breed products for the different components and leave the legacy core as the ledger and others are standing up another more modern core and want to coexist.
And so the coexistence becomes important, but with the coexistence again, it starts with hollowing out, get the product out and share the product catalog across the two cores, get the customer master out, share the customer master across the two cores, right.
So even the hollow out strategy and the coexistence going from 1 core incrementally to another core, the idea is still very, very similar in externalizing these big blocks and using best of breed products for these big blocks.
DM: Right.
It’s for some of the banks. I know because I was in one in the 90s roughly when you were doing the mainframes, I was also doing the mainframes and I was involved in a project where we put the customer file into the mainframe as a separate kind of application.
And everything to do with maintaining a customer record was done in one place. And prior to that, we had a few different cores and they had a customer record in each one, right.
And we quickly saw the problem that, hold on one sec, we’re not only duplicating customer data, but all the processes around managing a customer were separate according to each core, right? So it kind of made sense to me and we spent, in the mid 90s, we spent a billion dollars just on creating a customer database and admittedly you know that was in a big mainframe, it was at the time the largest customer database to be sitting on DB2, right?
But the logic stands up to what you said, it was about taking out a piece of functionality and making it so that it’s separate to the core itself, right?
For me that made sense. And later on, when I worked in a core banking software company, I was surprised, I was surprised that the customer record was in the core.
I could see the necessity for it, right. But one of the first things I did was to create a plan to kind of separate it out and we created a digital platform for managing the customer record and the interact customer channels like Internet and mobile etcetera, right?
So that all made sense to me because it was part of that picture.
But the penny never really dropped until I started speaking to you guys about the product catalog and how long has this been going on that people are wanting to centralise their catalog and pull that out of the core.
SD: How long?
DM: It makes sense-
SD: It’s been many years I think, or it’s in five plus years at least that people are trying to centralise the product category
DM: relatively new then, right.?
SD: Yes.
DM: And is that because they’ve seen the problems of having multiple cores and the different catalogues and the different ways of defining products in different systems, right. Any other reason why it’s been later?
And I can create an account at a bank depending on the amount of funds I have in the bank across different accounts, I could move from 1 tier to another, and it unlocks different capabilities.
Everything from like a Netflix account or when those kinds of capabilities start showing up and you realize, well we cannot do that in our existing core and our competitors are doing it. What, what are your options, right?
DM: Yeah.
SD: So externalizing products started to be a very important aspect because of innovation in the market and what customers demanded, right. So Zafin’s been around for a long time, but over the last four or five years, things have really, really taken, taken off.
DM: Yeah, I can see now, I put some of the very first banks online in, 97 to 2001, right. And then that was the beginning of the Internet era and we were talking about like the high street’s been shrunk into a 14-inch screen. That is how big our monitors used to be, right. But, when you have that, you can do the comparison on these products, so much quicker, so much easily that actually the product definitions are now have become far more important than they were, pre the Internet and pre-mobile, right?
SD: Yes!
DM: Really, although we talk about the Internet banking starting in ’97, ‘98, right? It really only took off after the smartphone in 2015, right? Well, not 2015.
But 2015 was like the year it kind of really hit over into the mass market. More than 50% of clients, of banks clients were using Internet banking, right, because of the accessibility of things like smartphones, right?
And now, what you are saying is well, fintech’s added another pressure because not only was everything much more comparable, but they were innovating faster than the banks on the stuff that customers wanted to compare, right. So that makes sense now, why you want to have a catalogue now and a single way of defining products separately?
SD: Absolutely.
DM: Have I summarized it correctly? Am I not putting words in your mouth?
SD: No. You absolutely summarized it really well.
DM: OK, good, good.
Going back to the previous question though which was really about like the spread, is it global or is it more localised? I asked that because when I was, I guess I am more focused on Europe, and in Europe, I see a lot more projects started not always finished in around core replacement but in the US, I just do not hear core replacement being even muttered.
It’s almost like there’s no point in mentioning because nobody wants to do it.
Is that kind of right?
SD: That is absolutely right. Like, no one, none of the banks that I am dealing with in North America are even thinking about a core replacement. Everyone is thinking about core modernization. Some are thinking core modernization with a new core.
Some are thinking core modernization without a new core, but no one is thinking they are going to do a core replacement and they are just overly complicated.
DM: OK. And just to, again, I’m sorry, I’m taking a slightly different tack as well. On the modernization topic, we know that Zafin can help on the catalogue and the product definition side of things, right?
You also mentioned that you could go to another vendor for the customer management side of things. Is there any other kinds of modernization that people can do?
SD: Those are the first two starting points.
DM: Yeah.
SD: Yeah, the first two starting points are typically product catalogue and that means you know product, pricing, fees, and rates and offers and rewards and all of those capabilities and then the customer master.
Those are the two big blocks that I see most clients are, most banks are going down.
DM: And what about anything small?
I mean it’s funny because with tech companies they want to jump on a bandwagon, but they provide very niche components.
But I saw a company the other day that do market data distribution, right.
And they are essentially a layer on top of the Kafka, the messaging layer and they scale it really well and they take pressure off the legacy system. So rather than every single request going to the core banking system, they cache some of the data and they stop it almost at the edge of the network, right, and distribute from there.
And they have started talking about modernisation as well. And I am thinking, actually that is a form of modernisation.
It’s not a business modernisation like you’re talking about, like the catalog for the customer management, but it’s a technical modernisation of well, if the core can’t take all these new requests that are coming in, let’s take the pressure off and do it at this edge layer, which I thought was fascinating, and it kind of means that, there is this, it’s almost like CRM is a given for every kind of company.
It’s like modernisation is looking to start to be part of every kind of bank, I guess.
SD: Yeah, yeah, I’ve seen some of those as well and I have probably implemented some of them as well in terms of, when you think about the number of core systems a bank has and it is quite a few. And those systems of record are data silos, right?
The data is locked up in those different systems of record, and unlocking the data and streaming it out of those systems of record and making it available for querying for reading as a high performance cache after it’s streamed out and you could move all your reads from all your legacy application over to this new high performance cache.
You know moving reads off the legacy, especially mainframe, right? Moving reads off the mainframe and putting it against a cache that is near real-time has been a strategy that has been used many, many times, right. And it does work well.
If you are modernizing a customer master for example, you typically want to start by let me create a proper replica of this customer master in the modern state and I will coexist the legacy customer master and the modern customer master.
I’ll keep them in sync and then I will start by moving the reads off. Now I have all the reads are going to the modern one and I will see how things work and then eventually I will move the rights over, right.
But that progressive modernization of getting the data and saying moving reads over then slowly moving writes over mitigates risk because you could flip back and forth if you needed to, right?
DM : Great. And maybe one last question and we are going to drop into the technology now, right? Because I do like to try and appeal to as many people as possible, but I do love my technology too, right?
So when we talk about modern software versus legacy software, what does modern software look like?
What is it to be cloud native and APIs and what are the things that they should have a modern piece of software?
SD: Yeah, so a modern piece of software. Typically, you hear the word ‘cloud native’ very often, right? And what cloud native means is that I can run in the cloud and not just run in the cloud.
I take advantage of the cloud, right. And the cloud has a lot to offer, right?
It’s not just about “hey, I’m horizontally scalable and I can take advantage of the on-demand elasticity and I can horizontally scale up and down”. But it’s also about taking advantage of the services that the cloud offers.
If you look at Azure, you look at most of the clouds, they have a marketplace of services.
You want to take advantage of those services which are fully managed that you can instantiate with a click of a button. You want to leverage those services, so you don’t try to build those yourself.
DM: What services are those?
SD: Whether it’s a database, you mentioned Kafka, whether it’s Kafka, you want to use fully managed services that you turn on with a flick of a switch and not waste time on doing those things that are not critical to what you do, right?
DM: Right.
SD: So being cloud native is important. Microservices architecture and an event-driven architecture are also important. Microservices obviously you do not want to be a monolith. You want to be able to deploy multiple times a day. You want to give them squads that are developing the software, the freedom and full end-to-end accountability to manage their product and so on.
And people think about microservices and it is usually a technical discussion, it is actually less about technology, it is more about the how and the people and how you structure your teams and so on. And event-driven, because everything is moving to near real-time now and obviously Kafka played a big part in doing that and how you build software is so important, right.
Just like I said, microservice is more about the how, how you structure your team full stack squads into an accountability, use pair programming, use test-driven development.
Those are all aspects of modern software engineering that we need to adopt, right.
DM: So, I am going to try and summarize this for kind of business people.
Being cloud native means that you can take advantage of expanding the hardware for scalability and performance as well as the software for scalability and performance as well.
It means that you can take advantage of the facilities that are in the cloud, things like databases and stuff like that easily, right?
SD: Yes.
DM: Microservices mean that you are not writing one huge piece of software so that even if you make the tiniest of change then you have to ship the whole thing again.
If you ship the whole thing again, really you should have to test the whole thing, which means that you only do changes you know once a quarter at best. Sometimes once a year, right?
So it allows you then to deploy on a daily basis if you want to, right?
So changes can be much faster, but you are only making, you know, a small change means one component gets shipped not, the whole suite of software.
And then one moment, have I missed anything?
SD: No, I think event-driven?
DM: Event-driven, yeah that’s key as well because we’ve come from a world when people used to come into branches or they ring, but now literally they can get notifications and it’s a two-way conversation in real time that’s happening on your phone or any other device and therefore we’re doing more of it, right.
SD: Absolutely.
DM: So that has more pressure on the systems, but it literally means we can’t afford to go down.
And for people that are old as you and I, we know that some banks are still having to switch off their mainframes at night. So, they do their reconciliations over a batch window. I mean that this is just mind blowing for me that banks are still having to do that.
But yes, that happens that ledgers are being reconciled overnight and so therefore in that period, they cannot do anything really. People have come up with solutions that allow you to switch it off and then carry on temporarily on the outside, right.
But yeah, so this event-driven architecture is also really important for real-time world that we’ve kind of moved into, right?
DM: Absolutely fantastic. I feel like we have covered so much ground. We have defined legacy, we have defined modernisation, we have discussed some of the challenges of modernisation, and also the pros and cons behind it, the different styles of modernisation. We have talked about why banks, even with a new core, could benefit from modernisation.
And then finally we talked, really, about or defined what a modern piece of software is. What a valuable podcast you have helped me create. Thank you so much for your time!
SD: Thank you so much, Dharmesh. It was a lot of fun chatting with you.
DM: Absolutely.
DM: I look forward to the next one.
SD: Absolutely. Thank you so much.
In this episode of Banking Blueprints, we unravel the complexities of modern banking systems, where innovation meets tradition and shapes the future of financial services. Learn why banks must reimagine their products and pricing strategies today to ensure the future of their banking operations and provide new value propositions for clients.
Join host Dharmesh Mistry and special guest Charbel Safadi, Group President at Zafin, as we discuss how banks can unlock new capabilities and uncover the strategies that will define banking success in the digital age.
Transcript
BW: Welcome to Episode 2 of Banking Blueprints! In this episode, we unravel the complexities of modern banking systems, and engage in a thought-provoking discussion about the delicate balance between customer experience and product innovation.
Learn why banks must prioritize product innovation and reimagine their products and pricing strategies today to ensure the future of their banking operations. Join host Dharmesh Mistry and special guest Charbel Safadi, Group President at Zafin, as we discuss how banks can unlock new capabilities and uncover the strategies that will define banking success in the digital age.
DM: Welcome everyone to the Innovation Beyond Core podcast hosted by Zafin.
And this week I have a very special guest, Charbel Safadi, and I’m going to ask him to introduce himself and just tell us a little bit about his role in Zafin.
Welcome.
CS: Well, thanks a lot. I’m not sure I’m that special, but name is Charbel Safadi.
I’m the President of Zafin. I’ve been here since the 3rd of January this past year.
And prior to that I spent 20 plus years in consulting at IBM, working in financial services and many, many other industries. And my role effectively today at Zafin is to lead a lot of our product and client delivery initiatives across the organization. So quite excited to be here with you and to spend some time talking about product innovation.
DM: Fantastic.
Look, in this episode we’re going to discuss why you think customer experience is not as effective strategy as product innovation.
And you know, just a caveat on this is I’ve been doing the web and putting banks online for far too many years. It’s well over 20 years. I think the first bank I put online was in 1997 and since that time it’s all been about customer experience as far as it goes from like a web or a mobile perspective.
You know, banks have been told consistently that they have to focus on the customer experience.
A poor experience means that you’re going to lose the customer, blah, blah, blah.
But tell me your perspective on this, right?
CS: Well, hopefully we don’t start a big, you know, a big debate in the market around what, whether it’s customer first or product first.
It takes me back to when I went to Business School around what comes first, strategy or structure, structure or strategy. But you know if I if I think about it and the way we’ve been thinking about it from it’s not even as a from perspective it’s a Charbel perspective.
I think customer experience has been the area of low hanging fruit for the past many years, right. If you think about the advent of the web and then mobile first capabilities, a lot of the organizations gravitated to creating and constructing experiences. If you think about it, it kind of makes sense in terms of where the market started and where bank started. Because even though you could construct product innovation, if you can’t deliver those products in an experience that customers can consume in a very simplistic way, then the product construction, the product innovation and the product dynamics don’t really come to life. Now having said that, there’s also complexities on how to construct product innovation.
So I would argue that customer experience has been easier to support and bring to market, whereas product innovation is very, very complex and nature of that is how banks, as you know, Dharmesh, they’re actually been structured over the past 20-30 forty years. They’ve been vertically structured, right. So each product sits in a vertically aligned part of a P&L within a bank and then the underlining systems associated with that are also vertically structured. So, so I would say product innovation is something that banks and financial services organizations are very much focused on. But it’s much more difficult than creating an experience layer that allows them to consume and abstract a lot of those product systems that have existed for many, many years, if that makes sense.
DM: Yeah, yeah, it does. And you know, like we, we in the previous episodes, we kind of discussed a little bit about the things that hold back the innovation, right.
Largely to core banking systems, right. That’s really what that’s been the holding them back from driving some products innovation, right.
CS: Yes.
DM: I mean I have to defend the customer experience side of it a little bit because
CS: –which is good, I’m good, I’m good with that.
DM: I only say that. I only say that because where you said it was easy.
CS: Easier, easier!
DM: OK, OK. It’s easier to kind of address the customer experience than to change your core banking system to drive innovation. That I totally agree with, right. I mean, there’s no dispute and I don’t think any bank is going to dispute that, that they–
CS: Oh, I don’t think so.
DM: –Drive, you know, a better experience or work on the experience better than they can on their cores, right. So that’s not disputed. The tongue in cheek part of this is really that I still see banks you know struggling with customer experience. I’m like, by goodness sake, just copy somebody else’s great experience.
CS: But they’re much if you think about it right, they’ve gone as far. I mean, we’re generalizing for the most part. But if you think about the mobile first era, you know post the web era, they’ve gone as far as they can with the limitations that exist around how the products actually are designed today, where they sit, how they live, all the constructs behind the product. Like if you think about a product, a single product within a bank, if you go into the DNA of that product and this is, you know, I talk a lot about the DNA of a product.
There’s over 200 dimensions and attributes of a product within a bank.
And you multiply that around 4 to 500 products across an organization that are active and probably another 2 to 3000 that are either dormant or you know a grandfathered in, you start to see the web of complexity that that make up the product ecosystem within a financial institution.
So when I say easier from the experience layer perspective, yes, as in terms of presentment, being able to show a unified front and be able to browse the various capabilities of products, that’s been accomplished or being accomplished.
And the various degrees of success are dependent on the bank and the right strategy and right execution of that strategy. But we’ve we’re coming to a place where there’s only so much more you can do at the experience layer, right?
There’s only so many origination workflows and ecosystem workflows that could stitch things together. It’s getting to a point where product innovation fundamentally has to change, like the way products are structured, both from a technical dimension perspective, but also from a business orientation.
The way the business model is executed in a bank, the way the P&Ls are structured, the way you start to think about loyalty and horizontal capabilities around product design and product construction to serve the client through an amazing customer experience layer is the era that we’re entering into which unlocks a lot of I would say value to both the end customer to the financial institution around stickiness, loyalty and wallet share.
But it also introduces a dimension of regulatory complexity and understanding the presentment, the suitability, the eligibility and how these products are brought to bear.
But I would say it’s a necessity now, right. We’re reaching a stage in our match where the product innovation, the product transformation, the business model evolution in banking is now a necessity, no longer an optionality.
In my mind.
DM : I’m going to come back to that because that’s a really good point. But you know, just going back to the experience side of things, you know, we, we, we love to talk about Uber experience. So great.
DM: You know, I don’t have to carry any cash and I can see where the cab is, etcetera, right.
And you know, I even I’ve written several articles on Uber-izing banks and stuff like that, right.
And then you know, lo and behold, literally every kind of taxi company has somehow managed to cobble together an exact same experience. You can, you know, load up your, your cards, you can see where the cab is, you can order one, choose the different types of cars that they’ve literally copied the Uber experience. So the experience is no longer the differentiator, right? And that’s, I guess, you know, one of the weaknesses of experience is that it’s not very defensible, right?
Like, you know, as soon as it’s out there, like every bank.
Now you can—not every bank–
CS: –but the vast majority of banks
DM: — from the fintechs, right, that you can on board somebody without them having to physically go into a branch and and provide a physical signature or physical copies of their passport and things like that.
You can do it all online in, you know, a matter of minutes, right. So you know, once somebody has, you know, created a compelling experience, it’s actually the, the problem with that is it doesn’t last for too long, right. So my point on the product innovation is, OK, so is product innovation as easy to copy? You know, what makes it more defensible than the customer experience?
CS: Yeah, no. It’s you’re making a very valuable argument in terms of where we are from an industry perspective, right?
The experience layer, it can be easily replicated.
It has been easily replicated and continues to be easily replicated and you reach that.
You know, a lot of these organizations have reached the me too mindset, right?
They’ve all from an AML KYC verification to origination to onboarding.
It’s pretty much the same, right? Anybody can open an account in less than 5 minutes. That claim to fame was great in 2010, 2012, 2013, but absolutely now we’ve reached a place where what’s next?
And it’s your point, product innovation is not an experience layer there.
There is a lot of sophistication and complexity that if banks do it right, they have a competitive advantage both from a market share perspective, but also in terms of competitors copying that dimension. You think about, you think about, you know, changing a product. It’s not creating a new mobile app capability. It’s fundamentally going back into the deep part of the organization both technically as well as structurally in terms of how the business model operates. And you’re effectively re-engineering a lot of the processes and the technology aspects. And to the point of the taxi cabs, you know, you think about those organizations, they effectively have one core right.
Whereas in banking, you know, credit card is a core, mortgages is a core, deposits is a core. All these products sit in these different systems and all the business units operate, you know, independently.
Yes, it may all surface up to 1 leader who runs for example, retail banking. But structurally the way the P&Ls are oriented, the way they’re effectively measured in success is individual product dimensions versus the notion of reimagining products to become more horizontally aligned.
And that’s where the banks that actually are spending the time, effort, energy and focus on this and money are going to be in a very competitive advanced positioning than the organizations that are still thinking about it. And the advent of a lot of the fintechs is they don’t have that history, right. People think that the fintechs are constructing phenomenal experiences.
The only reason why the experiences are phenomenal is because they don’t have the complexity on the back end. So they can’t construct these very unique product propositions that are very much horizontally aligned, that create the notion of depth and loyalty where you’re rewarded for net deposits and total deposits and they start to unlock capabilities and features across our product sets.
That’s something that they can do that effectively creates this phenomenal customer experience. But the experience is constructed on the back of product innovation, not purely from an experience layer perspective. So they’re symbiotic in my perspective that we’re reaching a stage where you can no longer create transformational experiences without product innovation.
DM: 100%. Yeah, no, 100%, I agree with you. I mean, you know, a lot of the banks, you know, I can feel the frustration in some of the banks, right?
CS: Yes.
DM: Because the fintechs have come in with no legacy systems, with no legacy business, you know, into an environment that’s, you know, purely digital. So they’ve been able to do things far quicker, far cheaper and you know, far more easily than a bank.
It’s not because they innovated necessarily. Banks have had these ideas, but they’ve been held back by their systems. They’re as you say that you know the different course, each one of them has their limitations on how quickly you can put change out, right.
But the fintechs haven’t had that.
And you know the other advantage that a fintech typically has, it’s a monoline products, right?
It’s one product, it’s not mortgages, credit cards, accounts that are there, right.
So, so I think you’re absolutely right.
You know fundamentally, you know the defensibility is those that have the power a system to allow them to define products easily, right, are going to gain competitive advantage against the banks that are still sitting on old cores with old ways of defining products, right.
Because I would agree.
DM: You know the case in example is like when I talk a lot about like product innovation, how bad banks have been at it. But I know the reason it’s because of their systems, right.
CS: Sorry to interrupt but the reality is a lot of the innovation ideas come from the banks like they know like the reality is, you know, you get consultants and I was a consultant.
You know I’m a recovering consultant and we go into these financial institutions, these banks and say oh you got to do this.
And they’re like, yeah we thought about this. We know this, right? We know that we need to do this, but what’s holding us back right is, is, is to the point that you’re making, is history. And you know, incumbency is, is a competitive advantage. But it’s also it could hold a lot of organizations back and the organizations that innovate during incumbency and reimagine the way they think about their product models or product designs.
And what we coined at Zafin, as an example, is this notion of a new product architecture, right?
It’s ‘how do banks think about the bank as a product’, right, in its entirety. And the capabilities of the products unlock themselves based on the experience of the client with that financial institution.
And we’ve been spending a lot of time, effort and energy in our organization trying to create that layer for banks to give them the opportunity to start to construct these new product architectures that fundamentally leapfrog them in the marketplace.
And that’s where I think a lot of organizations I’ve spent time with over the last six, 7-8 months having these conversations around how do you really get to new product modeling? How do you get to new product architectures?
How do you start to get to a place where products are looked at horizontally and served to the individual from a client experience layer perspective.
But, effectively, you’re absolutely right.
The next generation of client experience will only be derived, from my perspective, through product innovation. There’s only so much more tweaking we could do at the experience layer, at the UX layer, at the UI layer, at the orchestration layer.
Everything else now needs to come back to what is my product, what is my value proposition and how do I individualize that product through an amazing experience to that customer.
That the notion of ‘segment of one’ as you know has been discussed ad nauseam for the past 20 plus years. But the ability to serve that means that I could serve products unique to that individual not serve a new UI with colour schemes to that individual, yes.
DM: Yes, so I mean I guess you know this in answer to the question of, you know, is product innovation defensible.
CS: Absolutely.
DM: The reason it’s defensible is because everyone else isn’t able to create the parameters or the product as easily in their in their older systems, right?
CS: Correct.
And you know what, what’s interesting, it’s like you don’t even have to really innovate, right? More recently, if we look at, if we look at the very basic fact that inflation has driven interest rates up, right and now savers are expecting higher rates.
Yet in the UK the only players to increase their savings rates, right, which is beneficial not only to the end customers but also to the bank themselves, have been the new banks like the Monzos and the Starlings, the peoples that are on modern core banking systems been able to make that rate adjustment very easily, right.
So even at that level, a simple change is going to take, you know, six or seven months, right? And that’s why it’s defensible, right?
CS: Well, that’s why it is defensible. 100%, right. It’s a simple change.
DM: If you want to do something brand new like BNPL, well, how many banks have got that? Because that’s a whole new product set, right? It’s not, you know, tinkering with a rate or a charge anymore–
CS: Correct. You think about the deposit outflows right to the point that you’re making right if Monzo or even you know in Canada, Wealthsimple as an example, it’s everywhere, right? These fintechs giving you 5% interest for example, on your checking account. Think about that right, in Canada, on your checking account. On your payroll deposit, the money that comes in from your payroll that lands in your payroll account, the current account is earning you 5% interest right now how do you square that away if you’re a traditional bank? The argument is fintechs don’t have incumbency, but what they’re doing is they’re chiseling away, right?
I envision this big boulder and what they’re doing is just chiseling, chiseling, chiseling and these moments of high interest rates are giving them the opportunity to chisel a bit faster than customers, right. And once, once customers make that pivot because the notion of switching is a very difficult proposition for a lot of these clients, but when they make the switch, the ability to bring them back becomes a much more difficult proposition.
So I would argue it it’s defensible, but it’s a necessity at the same time because you have to have an outlook of the next three to five years, right, not today: outlook of three to five years. Because if you don’t start to create these compelling product capabilities, these innovative products, these products are cut across the verticals. You’re effectively putting yourself in a non-competitive landscape of organizations that are chiseling away at the customer base.
And at some point we’re going to reach that tipping point where if you haven’t innovated, your ability to compete and survive become a very difficult proposition. I know a lot of people say, oh, that’s a, you know, that’s we’ve been saying that about banks for the past 20 years with the advent of fintechs and Open Banking that effectively the incumbency will diminish.
But it is. It’s diminishing, right?
And it’s about looking at the long term, making changes today to support the capabilities that clients expect today, but also the next three to five years. Because if you’re not prepared, we’re going to reach this tipping point where it’s going to go from left to right very quickly.
DM: Cool. I mean, I so you know, I’ve made note of a few questions etcetera, and I think that’s kind of all of them… You know why haven’t banks focus more on product innovation and I’m like I’m guessing you know the core of this answer is because of their legacy cores right, because they’ve been haven’t been able to?
CS: Yeah.
DM: Anything else?
CS: You know to give you some perspective, you know every conversation I’ve had with Head of Retail, Head of Lending you know our conversation we’re having with our corporate commercial client base, they’re all thinking about this. It’s become a priority, right.
But I think that the way you’ve answered it is, is, is the area of their concerns.
So from a business perspective they all need, they know they need to innovate.
What’s good of what’s happening in the marketplace is the need to innovate on product has become a top priority.
The question is how? How do I innovate? How do I reimagine the product design?
How do I see what my competitors are doing?
And then how do I make the fundamental changes without waiting for the next three to five years to replace a core system that will allow me to innovate.
Because innovation cannot wait five years from a product dimension perspective, it needs to happen now.
So, I would say we are seeing the interest spike. We are seeing it become a priority and become part of the strategy of a lot of these organizations. I think what they’re trying to figure out is how do I accomplish that and make that a reality in the short term, in terms of bringing value to clients, but also create a sustainable innovation life cycle around product design that allows me to continue to sustain product innovation because fundamentally product innovation, you think about any, any, any industry, right?
You think about this, Dharmesh, you think about, you know, the electronics industry, you think about our phones, right? Imagine any one of these providers just stopped innovating their products, right?
Imagine that.
Imagine Apple decides that we’re stuck on iPhone 15 for the next six years, right.
What’s going to happen? There’s maybe competitive pressures. They’re eventually going to go out of market. Their market share will come down significantly.
So I would say we are seeing the advent of product innovation as a priority at the board level and at the most senior executive levels of a lot of organizations we’ve been spending time with.
The question they’re asking is how do I accomplish it with speed?
DM: Yeah, Yeah. I mean, it seems like on the electronic– The thing is you brought up the analogy.
I’ve looked at some of those companies like your Samsung’s and Apples, etcetera, right. But they not only have a road map for their products, they’ve already tested features and functions and they’re holding back the innovation. I mean like the innovation that we see on a new release is only what they’ve decided that they want to put out this time round.
And if you know, three months down the line, Samsung has issued a phone with a new, let’s say, GPS device, etcetera, you can bet your bottom dollar that Apple has probably been sitting on that innovation thinking, right, OK, we’re going to launch that in our next phone.
CS: But if sounds like we have a library, it’s like we have a library of innovation. It’s ready to roll, right?
DM: And this is where banks need to be, right, is we’ve got this roll call of stuff that we’re going to put out on a regular basis, right. But we’re going to, we’re going to be in control of it, not held back by anything else, right.
CS: I think you just hit on the point where you know when you started the conversation around customer experience, I just believe product innovation is the new frontier for customer experience innovation, right.
A lot of these financial institutions, these banks spent the last 10 years in innovation labs, digital entities. They’ve constructed all these sidecar initiatives. But to the point that you were making, they were all focused on innovation at the mobile layer or at the experience layer, right, Which is understandable because you know, customers were expecting that level of simplicity.
But I would argue, you know, the focus now needs to be to the point that you just made, which is deep product innovation, the core of what they do, you know, a bank is 2 things, its customers and its products.
I always say this, right, two things. That’s all a bank is.
It’s the customers and the products they serve those customers.
Everything else is a supporting cast.
And if you’re not focusing on the customer experience, which you know, a lot of money and time and effort and energy has been spent there, and you’re not focusing on product and product innovation, that means you’re not focusing on your business. I just still adapt to that simple level of one side of the coin is the customer, the other side of the coin is the product.
Now we’ve reached the place where if the product innovation isn’t heavily invested in and it’s not focused as a priority on a continuous basis, then you’re always going to be you know, one step behind, not one step ahead.
And this notion that a banking product needs to stay idle and dormant and the way it’s been structured for 10 years, I think we’re well past that notion. And for any organization thinking they could get away with that and then when a customer needs a different product they have to do with this crazy product switch mindset.
I think they’ve lost the plot. So fundamentally, I’m well-aligned with the way you positioned it and I do think product innovation must be the top priority for a lot of these organizations.
DM: Yeah, I mean, again, you know, I’ve written about this before where, you know, I’ve said, look, you know, an 18, like a child, an 18 year old, a 35 year old with a family and a 70 year old, you know, that’s retired, all probably have exactly the same current account. You know, if they went to the same bank, they all probably have the same account, no differentiation whatsoever.
And that’s got to change because, you know, our needs as consumers are totally different in each of those life stages, right. Yes, there are variations that you can get, but they ain’t too great, you know?
CS: Yeah, but let’s be clear, right? Like our perspective is product innovation doesn’t mean it’s just purely financially constructed, right?
A lot of the technical investments that banks are making in technology, those features can also be attributed to a part of a product design, right.
So, so if you’re if you have net deposits of X as an example, not only do you get this interest rate and these benefits and these features, but they also unlocks technical capabilities like you know, dynamic tagging or analytics, complex analytics or third party ecosystem capabilities.
You got it, you got it. So, so you know the bank spent a lot of time thinking that we are tech companies with a banking license.
No, no, let’s get back to being a bank that you know has products that serves its customers but also is technology-centric where the technology investments can also be monetized as part of the product modeling.
And I would even go one step further. The customer experience layer, right?
The ability to call into a contact center, the level of prioritization ties back to the value chain.
And you know who’s done this really well?
Airlines have done this really well. Right? Well, that’s not to say the airline experience is outstanding, but if you think about the loyalty dimension and the way they’ve monetized every dimension of their product model within an airline, they’ve done an effective job about creating stickiness, loyalty, right, as well as monetizing all dimensions of the product modeling.
So, So I’m not to say, you know, banks are an airline, but the notion of creating that loyalty, that stickiness and this continuous product innovation is going to be a necessity for every bank we foresee going forward.
DM: OK. Look, I’m going to play devil’s advocate on this question, right? And see how you bite.
CS: It’s all good. All good.
DM: Right. So like an account is an account, It’s got rates, it’s got charges, you know, it’s got maybe some reward points, etcetera. I mean, how much more can you innovate on a basic product like that? Yeah? I mean is, is there really opportunity for innovation on all these financial products?
CS: Well, individual, so you make a very, I like where you’ve opened this up and you and I did not rehearse this. So this is wonderful.
I would argue if you look at one product and that product that stands on its own and it’s a current checking account, whatever type of account it is, there’s only so many dimensions of attributes of value you can construct around that, right as a stand-alone product, as a product of 1.
So yes, you could give it, you know, loyalty points, maybe you could do six ATM withdrawal fees or maybe unlimited.
You can maybe create priority support. But where the value starts to come in is when you start to look at products as an end-to-end value chain across all product dimensions, right.
If a bank is trying to win on a checking product, they’ve lost the plot, OK.
Winning a customer is not about, you know, we’re all consumers and we don’t bank with a bank because we want one product. We need many products to live our lives.
We have families, you know, there’s tuition, there’s investments, there’s mortgages, there’s all these different things that we need. And banks play a very important part of our lives in multiple dimensions, from our lives to our partners’ lives to our children’s lives to our futures.
So if you think about it from that dimension, there isn’t a significant amount of product innovation that needs to occur when you start to bring products together.
This is what we coined the new product architecture. It’s effectively decoupling all the features of a credit card, of a mortgage product, of a savings product, of an investment account and be able to bring them together and start to design a proposition that’s unmatched, that’s unique to Dharmesh or unique to Charbel.
And that’s where we see the product innovation pivoting to, but to achieve that you need to be able to start having the capability to innovate on that checking account because you can’t even innovate on that simple checking account. Then how are you going to do everything I just said which is this multi-dimensional new product architecture that really focuses on the experience of the consumer through product innovation?
DM: Right, right, right. So let me backtrack a little bit on this.
So what you’re saying is there is, you know, I mean if you’ve got 200 odd parameters around a single product, that’s a lot of factors that you can control anyway. But when you start to combine that with other products, so let’s say behaviour on your deposit account and your current account, affects rates or rewards on your investment account, those combinations create a new product behaviour, right?
But, from one product driving behaviour in a different product, that’s what you’re saying, right?
CS: That’s exactly what I’m saying, which is now we’re focusing,
DM: I love that!
CS: But it goes back to how we started the conversation, the customer experience, right.
So, so you are no longer creating an experience that is you know one to many, you’re now creating an experience that’s behaviorally driven which means the product innovation, the product capabilities across the horizontal dimension of the bank start to unlock the value proposition to the behaviors of the individual.
So the more I engage with the bank, the better the bank engages with me.
The more experiences that I get, the more value that I get from mortgages to lending to deposits to all the dimensions of my financial well-being as a as a consumer.
And that’s, that’s the competitive advantage.
That’s where, you know, the fintechs are not encumbered with the past where they can start to think that way, construct that way and model it that way. And not only that, the notion of a new product architecture is that everyone starts at the starting point, OK? But your behaviors, your investments across all the product sets start dynamically unlock capabilities
So as you engage more with the bank, you, you, you create more loyalty with this institution.
The institution is more loyal to you, it gives you more and it creates more value for you and it helps you live a better life and it focuses on your well-being, versus treating everyone equally, the same.
It’s not about treatment of the individual, but more of the way the product model is structured that the product capabilities start to dynamically adjust themselves based on the engagement of that consumer.
So that’s where we think and we fundamentally believe and I fundamentally believe that product innovation, this notion of a new product architecture is going to be the competitive advantage and the banks that achieve this or begin the journey to achieve this will be lightyears ahead of any of their competitors
DM: Yeah, yeah. I mean it’s interesting because you mentioned earlier on and I’m big fan of you know the one to one marketing side of it. But what’s actually happened in the decades since that book was launched is people have kind of like, oh we’ll have, you know I’ll tell you what if it if it’s a Platinum customer, we’ll you know change the content, we’ll improve the layout, the colours, whatever–
CS: New logo!
DM: –personalized the experience. Well, great. What you’re talking about is personalizing the products.
CS: You got it.
DM: –dynamically based on what they already have.
CS: I mean the holistic products, all of the products and they all work together in the in this dynamic way where my engagement with the organization gives me a unique product proposition that’s unique to my behaviors, my engagement and my commitment to that organization,
DM: OK, I mean that sounds compelling to me.
CS : It does.
DM : How does the bank do that if they’ve got multiple cores?
CS : So, so the reality, the way we position it, you know and I’ll use my Zafin hat just for a second and—I tend to give you my opinions, my personal opinions, but what we’ve been spending a lot of investment in R&D and our product development teams is the ability to take product and pricing out of every core.
So, so we we’re working with organizations that have 18 cores, 17 cores.
You know that they use you know hosted credit card core, excuse me, and our on-prem deposit core. What we’re doing and we’re starting the journey of this notion of core modernization to product innovation is by externalizing product and pricing outside of these cores into our Zafin SaaS platform.
And by doing so, it doesn’t necessitate or require the core replacement.
But what it allows for is these dynamic product experiences that we’ve just been talking about to unlock and start to be able to provide these capabilities and allow the CIO’s office and the CTO’s office to begin their progressive core modernization journey, while the business is effectively being able to create these unique product architectures today, not two years from now, five years from now, but today.
So two things are happening.
We’re taking product and pricing out of these legacy cores and we’re centralizing them in a next gen SaaS platform. And by doing so, it unlocks the progressive journey for the technology teams, but it also creates the value proposition for the product teams that are responsible for the P&L’s of the business
So we’re creating 2 motions, happening at once and that’s what, you know, from a Zafin perspective, we spent a lot of time doing this and we’ve launched a bunch of tools around this tool called Product and Price index as an example, where we go and we pull the top 250 banks marketable products off their websites and PDF documents using AI.
And we start to, every evening, we do this every day, every day and start to provide insight on what your competitors are doing and what their rates are and what their structures are. So we’re starting to bring that research capability to our clients so that they can understand what the market conditions are.
And we’re also doing this internally, the ability to bring data in and allow them to understand the DNA of all their internal products and then unify that to be able to construct and design propositions of the future in these new product architectures. So, to bring that all together, you know we launched this thing called Zafin Studio which is effectively the co-creation and the tools required to be able to start to think about new product architectures end to end. So that’s the plug on the product. I appreciate the ability to plug that just for two, two minutes there.
But, but fundamentally we’ve been spending a lot of effort, time and energy on the new product architecture capabilities for the business, all while still managing our SaaS capabilities that allow us to begin the progressive core modernization journeys for our CIO and CTO partners.
DM : Yeah, I mean, I’ve been speaking to your team quite a bit and you know, the revelation to me on the modernization piece was the ability to actually hollow out the core so that it essentially becomes a ledger. While you know, a platform like yours starts to handle the product lifecycle from researching what the product needs to be, look and behave like to defining the product and then publishing the product in its own lifecycle based on the modern stack. Which means it will be done much easily and more cheaply, right?
CS : 100% you, you succinctly, you succinctly positioned that much better than I did. So I appreciate that.
DM : I mean, look, I just try to simplify stuff. That’s what I need to do, right. So, but in all of this, it all sounds good to me, but the reality is in the bank, right, some guy, no matter how quickly you define the product, you’re still going to have to get through the product in terms of you know, regulations, does it comply, compliance, you know, audits, documentation, risk management, etcetera.
There’s a whole lot more to product definition in a creation than just the product features and its behaviour, right.
So you know can that be accelerated as well?
CS : So thank you, thank you for keying that up. You think about today, you think about the regulators around a regulator coming to a bank and asking show me, show me how you’ve done controls around product eligibility, product suitability. You have, you offered Dharmesh this product two years ago.
What controls were in place for this offer presentment or product presentment and was Dharmesh suitable and eligible for this product.
And you’d be quite surprised to hear a lot of the answers in terms of how long it takes to just investigate that type of contextual insight. So, so as I mentioned to you, this notion of the DNA of the product, these attributes that make up a product.
What we do inherently as part of our platform is around this notion of trust, transparency and fairness and banking and inherently as part of designing a product all the suitability and eligibility conditions are all constructed within our platform. So we become the notion of this immutable capability that gives us the ability to present in real time to whomever that needs to understand one during product construction, what was the risk rating of the product, when was the last time the product was updated. So we have all the auditability of all product dimensions in the life cycle.
But two, when it’s presented to a customer, whether a product is presented or an offer is presented or a proposition is presented, what were the conditions of that presentment and what were the behaviors that we’ve tracked that made that become a reality, the eligibility dimensions?
So all of that is immutable within our platform. We capture all that data, and we have all that data and all the reporting mechanisms to ensure that, in fact, you accelerate the compliance dimensions of what the regulators are expecting of a financial institution.
So by shifting to this notion of a new product architecture, product life cycle management within our platform and innovating new product modeling, you get the benefit I would say out-of-the-box that gives you the suitability, eligibility and the regulatory constructs around that information to be in compliance.
So in fact, you’re putting yourself in more compliance, in a position of compliance by shifting here then you are by having 16 cores all have their own suitability and eligibility dimensions and trying to track and trace that data for a single customer that cuts across the lifecycle in the current model today.
DM : Yeah, I mean, yeah, I can see how this pans out.
And you know what actually is amazing about this is that the more complex of product, it’s like no more complex to have all these, the compliance and regulation etc., because it’s actually just the standard way that it works. So it doesn’t matter if you create something more complex and dynamic and highly personalized, you just create a vanilla product. It’s all built in.
Therefore it just handles naturally.
CS : I mean that’s it handles naturally. It’s part of the logic of how our core engine operates, right.
It’s part of the logic. And not only that in some organizations what we’re doing is we’re creating what we call transparency capabilities that exposes and emits the, the, the transparency data, which is ‘why was Dharmesh offered this product’.
DM : Yeah, right.
CS : So they could not only that. You know, when we think about fee presentment, why were you charged a fee? Why was a waiver condition applied? All that data can now be put on a digital statement or through online banking. So a customer could understand why a fee was charged at the end of the month or why they weren’t charged a fee. Both ways. And all that data, because it exists within our platform, becomes another layer of presentment from an experiential perspective that does two things.
One, it gives them the confidence of the consumer didn’t say, you know, the bank is looking after me, They’re providing transparency and fairness data.
And two, it reduces cost because customers don’t need to call into the call center or the contact center to inquire about why was I charged this fee or why was this discounted.
That level of transparency becomes very important and if you could show that end to end, then what you’re doing is you’re creating a lot more trust in the organization. And then from, I would argue from a compliance and regulatory perspective, you’re providing that transparency data even further, showcases that, that a financial institution has the controls and mechanisms in place to ensure that trust, transparency and fairness is being applied equally to the consumer base.
DM : Yeah, I mean, I know we like to beat up the banks sometimes, but what you said to me earlier resonates because banks have been thinking about this for a long time and I go back to like my time in Lloyds Bank. I was there between 86 and 94, right. And in that time, I was involved in working inside the business.
So you know I moved from IT into the business to work on a few re-engineering projects and I remember in one of those we discussed personalized products, how do we get to personalized products and the big challenge then this was pre-the Internet, right? So you know the big challenge then was really like well, OK, firstly how do, how we will find this in our system and even if we could define in our systems, how do we get to train the staff and produce the material. And you know get this through, you know the compliance teams especially if it’s dynamic, right.
But things have changed now. We’ve got the Internet, we’re not necessarily selling through the branch and the call centers and brochures anymore. It’s done digitally.
So you know the audit trail is built into the process, right?
CS : Correct.
DM : And then second thing is obviously with a technology that isn’t monolithic that is you know like micro-services based or component-size now you can start to get the flexibility that you need to make these you know personalizations much more of a reality.
So you know, yes, you know technology changed, times have changed. But that’s why it’s–I’m seeing now that’s why it’s kind of possible now and it wasn’t you know, 25 years ago like you say banks have been thinking about this. It’s just not necessarily been possible for them before.
CS : Right. And you’re 100% correct.
And I would, you know, I would argue every time I go meet with a bank and their product teams, they have a list. You know what we talked about you should have innovations, you know, ahead of what you’re releasing. We have you know an extensive list of product innovations and capabilities.
But every time you ask them you know why haven’t you done it, it all goes back to the ability to do it from a technology perspective, it all circles back to the inhibitors which is why as I mentioned to you today for us as an organization we’re in the era now of product innovation and we’re in the era of helping banks execute that product innovation through simplification of the technology architectures.
So, so we’re in the right place at the right time, I would argue, with the right technology that we’ve invested significantly in over the years and that we continue to invest in from an R&D perspective to really you know to really show up and help these organizations effectively transform their business models through technology modernization.
DM : Fantastic, Charbel. Look, you’ve been very eloquent in in explaining this to me. I am, I am a convert. I am a believer of innovation. And I understand, I mean, more importantly, I understand you know how it’s possible, why it wasn’t possible before and you know why that you know, banks can do it now, you know, and why they should be moving towards this. It’s become really important. Thank you so much.
CS : Oh, thank you. I appreciate it.
DM : Definitely love to discuss this topic a bit more with you in terms of like examples and case studies of innovation, but you know, let’s save that for another day.
CS : Let’s save that for another time. And it’s retail, corporate, commercial banking, it’s all the way through. So we’d love to spend some more time on those use cases.
DM : Fantastic. Thank you.
CS : Thank you Dharmesh. Take care. Bye, bye.
Join Head of Marketing, Bhavna Wadhwa and Season 1 Host, Dharmesh Mistry on the first-ever episode of Banking Blueprints, brought to you by Zafin. How do you know when it’s time to update your banking platform, or what to upgrade to when you do? And how? Here to help discuss the biggest obstacles to banking core modernization is Dave Revell, Chairman of the Board at Zafin. Join us as we discuss impediments to growth caused by aging technology, navigating modernization efforts, and how to speak to tomorrow’s needs even if you’re using ASM or COBOL.