Banking Blueprints
Welcome to the
Banking Blueprints
Podcast
Where we navigate the future of banking
Latest Episodes
In our final episode of Season 1, our host Dharmesh Mistry is joined by John Blicq, a 2-time author and an Associate Director of Innovation at National Australia Bank.
They talk about emerging technologies like digital twins and spatial finance, and how it can impact the banking industry in the years to come.
Transcript
DM: Welcome to Banking Blueprints, a podcast with Zafin, and me, your host, Dharmesh Mistry.Throughout this inaugural season, we’ll delve into the realms of banking innovation, exploring strategies for breaking free from traditional constraints, and innovating beyond the core.
This week, my special guest is author, multiple author John Blicq from NAB in Australia.
So welcome John. Can you give the audience a little bit about your background?
JB: Yeah, absolutely. Thanks for having me, Dharmesh. I’m super excited to be here.
So yeah, I’ve been working in the banking and the world defence of industry for the past for the past decade largely in innovation roles where I’m focusing my time on understanding what are the disruptions that banks and insurance companies are going to to face and what are the capability gaps that needs to be addressed in order to in order to be prepared to respond to disruption.
As you mentioned side projects on mine is authoring books, the two books in domains that I’m absolutely passionate about the space of digital twins.
I know it’s a passion of yours as well, Dharmesh, and how is that going to disrupt the financial services industry. And the latest one was on Metaverse and how do banks operate in the Metaverse whether that things become reality or nonetheless the thought of a Metaverse is really disturbing if you work in a bank.
DM: Fantastic. I mean, I love the first book. I’m still to get through to the second and I’m going to have to play catch up. So now you’ve got a third on the way.
But for anyone that hasn’t read the Digital Twins book, it’s a must read because we’re literally like embarking on that journey right now with banks starting to drive like real digital twins, cities creating, you know, their own digital twins, etcetera.
If you don’t understand it, you need to understand it because it’s going to be pretty transformational going forward. But this is the reason why I’ve got John on the show is when we start to think about kind of new products, it’s good to kind of think, well, OK. What we see at the moment largely like 99% of the time is incremental kind of products that you know, we change the rate, we change the charges, we might bundle something like a bit of insurance, etcetera.
Nothing really too innovative, right. And I think the real innovation comes when we start to think like a 10X approach, you know, which is 10 times thinking what’s the wildest thing that we can think about.
And John is absolutely the man to start thinking wild. So this week’s show, we’re going to focus on like what can banks do to, you know, to think beyond their core banking constraints and what’s the wildest products that they should be thinking about. I mean where would you like to start John?
JB: Yeah. So, so to be I, I reflected quite a lot on your brief Dharmesh, because I was also into think all right, if I had a wild card and carte blanche to do whatever I want to do in that bank, what would that stuff be?
And because we are so constrained by the operative environment of the equities. You know everyone knows hyper-regulated capital constraints and tech constraints.
So you have to think within this box. And my work and the work of my colleague is to try to break down those walls and force the organization to think incredibly long-term and think in a world where the competitive landscape is completely different.
And so there is a space which I would love thanks to start operating or at least start thinking and communicating on. That’s good. That’s very controversial, but it’s spatial finance and fundamentally how do you bank in space?
The, you know is that science fiction is that not science fiction. We have very strong signals that this is going to happen.
Space exploration started in the 60s and we sent people in outer space, we sent people on the moon and then there will be missions to Mars and there’s already tourists going to going to space. So this is probably the next iteration of the next situation of mankind and it’s been in collective psyche for an incredible amount of time.
But one of the questions is to ask yourself if you operate in the banking world is if this is the direction where humanity is going to go, how do you, how are you relevant in that world?
If people go on a very long journey to space or start colonizing other planets or the systems, how do you fulfill your mission as a financial institution and enable them to acquire whatever they need to acquire along that journey and transact whatever they need to transact on that journey?
And you literally need to think about what are those key capabilities that are replicable and the ones which actually aren’t replicable and that you have to build.
How do you send money on incredibly long distance where it’s light year’s distance and real time payment? How do you do that on light year, light year distances?
Like you have to understand physics. You have to, you have to be freaking good at finding the right materials, the right, the right mechanism to do this.
Where is value, Is value in a currency, a digital currency? Is that backed to physical stuff, digital stuff? So how do you do all those things and what will people value in those long extraterritorial terrestrial journeys?
Big question mark, right. But unless you start thinking about this stuff now and that’s probably what, 50 years ahead, 100 years ahead, unless you stop thinking about this now, you cannot literally pave a journey to get there.
DM: So I mean the exact that is amazing. You’re actually thinking for the bank 50 years out. I didn’t think this goes on in bank.
JB: Well, you know 50 years I’d probably be retired. I hope I will. But yes, we have this duty to stop laying the foundation of that intellectual journey to make sure that the bank is resilient.
So day-to-day we’re not working on this kind of projects that it’s like it’s very difficult to, it’s very difficult to justify but like we have the duty to actually bring that sort of thinking and distill that kind of thinking to the organization. But that’s an example of what you could do from a retail perspective.
But depending on the profile of of the bank National Australia Bank is not a big retail bank, it’s a significant business bank.
Another example of that thinking could be businesses will go on those we go, we go to space. How do you accompany them there? Same reflection, what will they need? What are their financial needs?
Think about a scenario where mining company cannot operate on earth anymore and has found that the biggest the biggest deposit of rare earth or whatever is hyper-valuable to mine kind is on the moon and they have to set infrastructure, set operations, send people on the moon to start operating on the moon.
How do you do this? Like it will require tons of funding. Require it will require infrastructure, We require tech. It will require you know how do you price risk for this if you’re about like we have no idea.
We literally have no idea. But you need to start thinking this way.
DM: Amazing. Amazing. I mean what about. I mean, let’s just explore a few other ideas because you had some in your Digital Twins book and you know, for those that are listening in, Digital Twin is really a data replica of something, right.
And that could be, you know, you as an individual, it could be your business, it could be the industry that your business is in or it could be an entire city, it could be anything really that has data behind it.
And the idea very much is that you run simulations. So, you know, I wonder, you know, it does wealth management itself kind of change because there’s a digital twin of Dharmesh Mistry. And with the data it predicts, you know, when I’m going to retire, what kind of income I’d like to have based on my lifestyle choices, blah, blah, blah.
I mean, where does this go, John, with digital twins?
JB: Yeah. So you could literally empower your digital twin to make decision on your behalf. And you could say you could sit with 70-year old Dharmesh and ask 70-year old damage to teach today’s Dharmesh on how to manage money, how to invest, how to adjust income and expenses. What are the good decision that today’s Dharmesh should be making in order to force 70-year old Dharmesh, to have the lifestyle that today’s Dharmesh has already strived for?
So all that can be modelled, all that and that. That’s actually one of the power of digital twins. You can model pretty much anything from it.
DM: But actually you mean like how? How does it account for like societal trend changes? Is that is that a different data set that applies to, to my Oh my gosh.
JB: Absolutely, absolutely. You could literally take a demographic data set, you could run economic models, you can, you can run inflation models, you can run all that sort of stuff.
So that 70-year old Dharmesh can tell that today’s Dharmesh. Hey buddy actually you know what like there is chances that we’re going to be on the high inflation and already environment for the next five years.
So you get a ramp up your saving practices by 5% to offset this or and so all the sort of stuff could be could be done.
DM: And and we’re not talking about like today’s kind of I do a report you know Dharmesh asked the question you know a few hours later a report comes back to me and says you know well this is what you need to do.
We’re we’re talking about real time, aren’t we?
JB: We’re talking about real time. We’re talking about real time. And I think the other beauty is that you don’t know what you don’t know. And how do you ask the relevant question if you don’t know the answer, like, and that’s where your digital twin can actually start informing you around.
11:54 Actually you know what, Dharmesh. I’ve downloaded a wealth management module and your digital twin becomes a wealth management expert and start prompting you the way you should be thinking about money management in real time and that’s incredibly powerful and that’s pretty key differentiator with the system we do operate within at the moment which are not real-time. It’s not real time.
Credit decisioning is barely really real time. So yeah, so fascinating. Yeah.
DM: Yeah. I mean, I I like this idea that I can speak to myself in the future and it’s almost like this kind of like hindsight, but it’s here and now. So it’s a kind of foresight, right?
And I get to ask it anything I like, but I mean, I think the whole idea or the concept of other data sources to feed into the picture of your own digital twins.
So today, you know, banks are only dealing with the data, the financial data of Dharmesh Mistry, right?
But when I start to apply, you know what’s happening in the medical field, what’s happening with my diet, my exercise, etcetera, it can then start to predict like, well, OK, based on your diet and your lifestyle, you’re going to live not till the average age of 82, you’re going to live till 97.
Now you’ve got 15 years more pension to cover, right? Today you’ve taken a fairly risk averse approach thinking you’re going to be retiring soon and you’ll only need the money for X years, but you need to cover an extra 15. So you still have the capacity to do that by taking a higher risk portfolio or sourcing more income to go in etcetera, you know what I mean?
So I think I like this conversation I could be having as long as it’s getting other data, right. I mean that’s fascinating in its own right.
What about, let’s take the Metaverse, I mean I’ll be, I’ll put my hand up right. I haven’t quite seen, you know what the Metaverse brings to kind of banking as such.
I get the digital twin aspect of it, like you know, I could be my twin could be in the virtual world simulating you know, stuff that you know is going to happen to me in the future etcetera.
So it kind of visualises stuff. But beyond that what else is there in terms of product innovation for banking in in the Metaverse.
JB: So the cruel reality is that at the moment not much like or barely anything and you know you could base this on experiments which are being run that can be mocked to a degree.
The most famous one is the JP Morgan virtual branch on the metaverse where you get tigers and flying tigers and all that kind of stuff. This you can’t blame them. You can blame the delivery of it, but you can’t blame them for actually trying and exploring and see what works and see what sticks to try to understand what type of people go there and what would they want to experience.
There’s another use case from AXA which I found quite interesting where they used the virtual branch to showcase who they are as a brand, what they do for society and what kind of talent is actually needed to enable them to fulfill their purpose. Which I find actually quite smart because they what you read between the line. The key assumption is that tech savvy people would spend some time on the Metaverse and that’s a way to connect those skills which are in shortage with a big old brand like AXA who’s desperately in need of tech resources.
So I think that’s kind of an interesting, that’s an interesting approach to it. But apart from that in terms of financial products available on the Metaverse at the moment, I’m not sure there are any.
But what I think is actually really interesting and and that’s what banks and insurance companies to another degree needd to start thinking about is business will happen on the Metaverse.
Like it’s just a question of time and if you are a bank, you a business bank, you have to support businesses and you have to go where your customers are going.
So the key question again becomes how do you apply traditional banking and insurance mechanism from the physical world to the digital world. What how do you connect this how do you transfer value? How do you allocate capital, how do you allocate protection mechanism which can go back and forth from digital world to physical world?
And again, like you need to where your customers are. You need to be. So you need to deeply start in understanding what drives people to the metaverse. And if the answer is at the moment, well not much outside of a gaming use case or an education use case, then you need to start thinking about what will drive people onto the Metaverse or the Metaverse is that’s another rabbit hole.
DM: Yeah, yeah. I mean I get the gaming aspect of it and I can also see that social media moves from 2D to kind of 3D environments. And you know you have a much more dynamic social experience there. And therefore, you know once you’re in that social environment, then in comes the retail piece where now suddenly, you know I’m not only chatting to join in my virtual world but I also find some shopping that I want to do etcetera.
We had Kam Chana on the show and she talked about, you know, being able to instead of like actually going out and spending real money on stuff that you didn’t really need the bank encouraging you to spend in the virtual world. Right. And virtual dollars.
So you scratch the itch of buying this designer handbag or whatever it was that you wanted, but you didn’t spend your actual money doing it. And that, I thought, was an interesting idea as well.
You know that that we can push some of the responsibility of the things that you we can behave responsibly in the real world, but in the virtual world we can be a bit more flamboyant and, you know, take a few gambles with our digital cash because it’s not the real money as such.
JB: That’s a really good idea.
DM: Like with all things, John. Yeah. I mean like with all things, John, do you think a lot of these, you know, we’ll take the individual things like let’s say crypto, let’s say Metaverse, let’s say data science and generative AI, all these as individual technologies.
But then when you start to combine them, you get some new possibilities. I mean is that something that you also look at?
It’s I guess, you know, I always talk about the smartphone effect. It wasn’t one thing that led to the smartphone. It was a better screen, cheaper memory, faster processing power, you know, and the Internet enabling apps to be, you know, downloaded, right. So lots of things came together to make the smartphone a reality.
And do you think the same thing will happen with some of these other things they’ll combine to give us a better proxy and service?
JB: 100 percent, 100% I think there is. I’ll go on to a slight different territory than Metaverse, Digital Twins, and Spatial Finance.
But let’s go on to something that is close to all of us and that’s climate change. The question is, if you’re a bank, the question is how do you operate in a climate out of the world and how do you enable your customers to operate and be originate in a climate out of the world.
So you have this traditional 3C’s of banking being credit collateral character and there will be a fourth C being climate. The reason why I go into that territory is because we will soon be in a position to do incredible stuff in the space of business resilience. Personal resilience with the climate lands on.
If you start thinking about science, technology, generative AI and banking and you throw all this into a big pot, all of the sudden you can have banks and insurance company playing a major role in informing their customers on what is their own exposure to climate risk?
What are the unique and bespoke transition options and how do you start embedding finance into those transition options so that their customers are more resilient than the rest and resilient customers are resilient businesses are the one which are going to attract talent, attract capital and attract and attract clients.
So there is a massive vested interest for banks and insurance companies to heavily invest in that space and leverage new technologies to augment science and bring those insights to their customers. Because fundamentally at a customer level you don’t have the ability to get access to the insights.
But banks and insurance companies have such scales and are so predominant in developed economies that they can actually serve those insights to their customers.
So the answer is yes, there is new forms of products, whether it’s banking, whether it’s insurance or experiences which are going to be brought by the connection of those different trends.
DM: Yeah, I mean I love this whole aspect of the climate thing because I’m always going to start calling it embedded climate because in the finance world you can absolutely see some companies starting to use climate data to look at customer behaviour and start to price products based on you know how net neutral they are or how net neutral their business is or how net neutral the businesses they buy from are etcetera.
You know, so we’ve seen some early carbon calculators based off banking data, but I think that’s the very, very early days of this and fundamentally they’ll be products priced around your behaviour towards the planet, right. So I think that’s coming.
JB: It’s, it’s coming in that’s no doubt.
DM: Any other areas John that you know we haven’t, I mean like literally we started off going out to space and into virtual worlds. So what other areas do you think you know would be interesting to cover?
JB: Yeah. Look, I think probably that if you zoom down that notion of spatial finance and you take it from space and you bring it down to earth, one of the possibility and again, if like you are unconstrained by your core banking and all the let’s assume you are unconstrained at all spatial finance for people like you and I, how do you start understanding customers, movement, customer behaviours, customers, physical world? Because banks understand customers from a data perspective or a credit perspective but don’t necessarily understand the physical world they operate within.
So now you can access geospatial, geospatial data, hefs of observation data, meta data, meta location data, movement data, and you can start forming a picture of what is. How is Dharmesh uniquely connecting with his environment?
How is John uniquely connecting and operating within his environment? What patterns do we see? Can some of those patterns be augmented by banking products?
I’ll give you an example. I’m on my way back to work and I stopped by this. There’s a real estate agency just downstairs from where I live.
Imagine that I just stopped by and I have connected lens or whatever or an AR experience where I’m looking at a place and all of the sudden the characteristic of that place, the location of the place, the risk profile of this place is known in real-time by my bank and I received a message hedge on you pre-approved for this property you could go and bet for it.
That’s the sort of possibilities that you can start playing with when you connect geospatial data, asset movement data, earth observation and banking data. But again this is so technically it’s actually not science fiction but at least science fiction for a bank because you are not allowed to operate within those sort of those sort of the sort of environment.
DM: I mean I think there’s two constraints that we see clearly from the banks. One is that they don’t necessarily source non-financial data externally and they source very little external data as such anyway. And 2nd is much more about you know their core banking systems, you know tied to kind of you know basic capabilities around finance, right.
So doing things like dynamic or real-time pricing is not possible because like I think over 50% of core banking systems are not real time today, right.
We think they are because you know sometimes we can get a balance etcetera or transact overnight but that that doesn’t make them real-time, it just means that they’re doing something while the batch job is still running, right.
JB: Exactly, exactly.
DM: But I I like the idea, I mean you know so a couple of themes I think are coming through. One is that you know more of the banking products or services coming in the future will start to rely on external data, different data sets. Secondly, you know things are becoming much more real time and dynamic.
Things that we thought we could only do offline are now becoming real time actions. You know like you say you know you’re walking past an estate agent, you immediately have been pre-approved for an offer. I mean both of those things the, the credit analysis and the real time offer weren’t possible before but they’re absolutely possible right now.
JB: I think it’s just going to accelerate and that’s probably going to sound a bit naive, but one of the biggest threats that the banking industry is actually facing is not coming from other banks. It’s coming from tech companies who actually already have those capabilities.
They know how to deal with orchestration of various sorts of data analysing and bringing intelligence real time. So the competitive landscape is going to change dramatically and we force them to stop thinking like tech companies who happen to be in the business of allocating funding.
DM: That’s a brilliant point. And you know maybe not the topic of this conversation, but it’s worth bringing up because you know when we come to kind of product innovation we typically look at what’s going around right, oh somebody wants to buy now, pay later and how few banks have actually been able to launch the same because actually the business model is totally different to their loans, right.
And their core banking system can’t handle them, right. So innovation beyond the core is absolutely key for things like that, right. But I think you know looking at a broader data sets and kind of real time
processing is a fundamental kind of aspect of big these big tech companies that they’ve got the broadest data sets, they’ve got the biggest computers, they’ve got the best technologies.
Now I guess you know in that question is, do we, do we actually think that they’ll get into banking actually own the licences or will they just capitalize on distribution?
You know, so fundamentally the plus being underwritten by a bank and all the rates are being handled by a bank, whereas they’re just owning the customer relationship.
JB: Yeah, yeah, look that’s my assumption, that’s my assumption. If I were a tech company wanting to play in that space, I would not want to have to deal with The Reg. I would just want to own the customer relationship layer where the value is.
It’s not about manufacturing products, it’s about understanding the customer. So yet you create an ecosystem of relevant offering to that customer and you orchestrate this. So that’s where the value is.
So my bets, my money would be on partnering with an underwriter but being becoming the orchestrator and distributor and this interesting signals coming from the UK you probably heard that Alphabet has taken a serious investment in Monzo last week. So maybe this is the plan and I’ve been looking at Monzo, I’ve been monitoring Monzo with great interest since 2017.
So I’m very, very pleased to see how they’re progressing and the fact that Alphabet is betting on them is probably a testament to their success. But that might be the scenario that you and I just described.
DM: Yeah, I mean I think both, I think a few interesting players in the market right now. One is Monzo where you know they they’ve actually turned the ship around in a spectacular way, right.
Not only are they, you know, in profitability, but their growth rate is phenomenal, right. So it seems like there’s a broader strategy at play obviously to hit some different countries, but you can’t ignore Revolut in that aspect either. You know already, you know, 40 million customers in 35 countries, you know, and still growing. Literally. I interviewed them a couple of weeks ago and in two weeks they had grown their client base by globally by two million.
I mean that’s crazy.
JB: It’s insane, it’s insane. And they just arrived in Australia, by the way.
DM: So and do you know what’s similar between Monzo and Revolut? A brand new core that is not tied to 1 jurisdiction and can handle any product. Right.
JB: Interesting. I didn’t know that.
DM: And it’s project in one country. Yeah. Yeah.
JB: I didn’t know that. That’s really, really interesting.
DM: Yeah. And This is why, you know, like product definition outside of the core is going to be quite important because you can’t be held back by a core that is limiting what you do versus your competitors. Forget about big tech, even if we just take, you know, styling Monzo, those challenges that have managed to scale. Yeah, that sort of thing.
Fascinating. Any last thoughts, John? I mean, we have literally gone out of this world into virtual worlds as well. But any last thoughts on product innovation?
JB: A comment more than a thought, like just never stop exploring, because when you think you understand that space, you probably just don’t. So yeah, never stop exploring. That’s it.
DM: That’s good advice from probably one of the first digital explorers in financial services that I’ve ever found. But thank you so much for your time, John. It’s been really interesting conversation and I hope a lot of people take heed of your visions and future understanding.
JB: Likewise. And thanks again for having me, Dharmesh.
In this episode of Banking Blueprints, our host, Dharmesh Mistry is joined by Kam Chana – Head of Product Experience at LSEG, and ex-Temenos, Barclays, and BlackRock.
She shares her insights on how banks can drive meaningful growth through a customer-centric approach to innovation. They will also cover the rise of digital nomads and the need for inclusive solutions.
Transcript
DM: Welcome to Banking Blueprints Podcast with Zafin and me, your podcast host, Dharmesh Mistry. Throughout this inaugural season, we’ll delve into the realms of banking innovation, exploring strategies for breaking free from traditional constraints, and innovating beyond the core. This week’s special guest is Kam Chana, who has made a successful career out of driving innovation in financial services giants like BlackRock, Fidelity and Barclays. And I’ve had the great pleasure of working with Kam at core banking vendor Temenos and have to say her passion and focus on innovation is extremely inspiring.
So I’m really excited to have her on the show and discuss how banks can drive innovation, what holds them back and everything around innovation. But firstly, I’d like Kam to give you guys a bit of an introduction about herself and and say a little bit about why you focus on innovation so much, Kam.
KC: Good morning, Dharmesh. Thank you so much for having me. It’s genuinely a pleasure to be here and to be in a conversation with you of all people. I do listen to a lot of your podcasts. So it thrills me and I feel very privileged that I’m now your guest, which is very exciting. So gosh, my story in innovation. It feels like it feels like a long, a long devotion to innovation. Throughout my entire career, which started way back in the.com boom, where I very luckily landed on my feet at a company that was just smashing at the time, Charles Schwab, and learnt very quickly how important it was to put the human at the centre of everything you’re doing as an organization.
And that really was where I cut my teeth as someone who understood how design worked with business objectives and worked with technology objectives and worked with the general growth of an organization.
I got trained in design thinking back then but was never brave enough to call myself a designer and I used design as that bridge between business and tech and it worked so well at Schwab.
I used it as a framework throughout the rest of my career when I moved to Fidelity, BlackRock, Barclays, RBS at the time, NatWest now a small hedge fund in Switzerland where we’d had some really, really good fun doing amazing things.
But it’s always been the same framework and the same approach to innovation, which is putting the human at the centre of what we’re trying to do as an organization. Right the way up to more recent history where we met at Temenos where we did some great work together. And now more recently, I’ve been educating on design in financial services at the RCA where I’m still currently a visiting lecturer. But over the past couple of years, I set up a lab which looked at where we really need to focus our attention when it comes to innovating in financial services which I can talk to later.
And now to continue my journey into innovation, I’m at the London Stock Exchange Group where I’m focusing on the product experience around delivering tools around analytics and AI. So the journey continues. It’s a it’s a lifelong devotion by the sounds of things for me. And I can honestly say I’m as thrilled to be in it now as I was back in the early or late 1990s, early 2000s.
DM: I mean, I genuinely say that it’s inspiring that even in what little spare time you must have, you’re spending time on innovation, you know, and bringing the students up to speed with the process.
Because I mean, you’ve got an immense amount of experience in this space, and I generally don’t know anyone that’s done more on innovation than you. So it’s a real honour to have you on the show and, you know, to cover this topic and who’s the best expert I could think of? Well, it was you, right?
So my first question really is, is really, I mean, I think I know the answer to this. But I’m going to ask it anyway, which is, do you think banks are held back on innovation? And if you do, then you know, what do you think holds them back?
KC: I think it’s a, it’s a fundamental question that we should really sort of pause and think more about. And I
think if I may take a step back first and just talk about the word innovation, because I think that in itself is a little bit problematic.
Innovation is such a misunderstood term and such a loaded term as well. You know, you ask half a dozen people in your network what they mean by innovation and some will say, some might say AI, some might say horizon three thinking, some might say disruption, some might say just getting the basics right.
And they would all be, they would all be right because the reality of innovation is that it’s growth. So if you replace the word innovation in every organization with how do we grow as an organization, then it becomes real, then it becomes tablestakes.
Whereas a lot of the time, innovation feels like it sits in a in a different team, in a cool part of the city with people wearing cool clothes and talking into the design language that nobody understands. And that’s not really what innovation is.
Innovation is growth first and foremost. Grow your product, grow your offering, grow your, grow your value.
And how do you grow that value? You grow it based on what people need, what your target market that you might have chosen two years ago or 25 years ago, what is it that they need and how has life changed and how has business changed so that we can adapt to what they need.
So I think based on that definition I think a lot of banks are missing a trick on how to grow and a lot of innovation can be seen as theatrical, can be seen as nice to haves, can be seen as theoretically interesting. But in the real world this it’s never actually going to generate revenue.
But I think there’s so much opportunity for banks to innovate that if innovation as a concept and growth as a concept isn’t integrated in the day-to-day, then I think it’s such a lost opportunity for so many banks.
DM: See, this is what I love about you is that you know, even something like innovation, which we all think we understand, you actually explain it in a really simple way. And I like and it’s really precise because I like the fact that you focus on growth because you’re right.
You know, a lot of us, you know, tend to think of innovation as doing something that’s kind of new and funky. It doesn’t necessarily have any benefits to anyone, right?
It’s just doing something different. So the focus on growth is really good because I think also you know banks sometimes tend to shy away from innovation, not seeing any benefits from it. So you know if the benefit is growth then absolutely they’re going to do more of it. So I guess you know once we understand what innovation is, how should a bank go about driving innovation and doing it properly?
KC: Now there’s a loaded question. I could possibly start with how not to do it properly. And that would be to go off and think about the Tech 1st. And I and I say that with great love and admiration for all of my tech colleagues around the world.
But I’ve seen it over and over again that a lot of the time innovation starts with there’s some new tech out there, there’s the Internet, let’s do something with it, there’s mobile, let’s do something with it and now there’s AI, let’s do something with it.
And that’s great and that could be that’s a really nice starting point sometimes for innovating.
But then you’re effectively that hammer looking for a nail, you’re looking for a use case and then you know we’re sort of out hunting for use cases for a particular technology and that’s fine too.
But it’s a much harder way of getting to real innovation. So I would say that the right way is not to start with the tech and it’s not necessarily even to start with trying to just find use cases, it’s to start with trying to understand who your, who your customers are like it. You know Simon Sinek talks about the big why, why are we even here? Who are our customers, what are they struggling with and why are we serving them, what is it that we’ve got that gives them greater value than anyone else could?
So it all starts with the customer. And I would go, I would even strip back the word customer to the person that you’re trying to serve.
A lot of the time people talk about human centre design and I think that’s great. But the word human becomes so broad and generic, no one really knows what to do with it.
But if you strip back your business model to the person who is actually using your service, who is getting value from it? Who is that person? What are they trying to do? What’s keeping them awake at night? What’s causing them pain? What’s stopping them from getting their job done in a way that they want to do it and what does good look like for them?
We rarely ask those questions. We quite often make a lot of assumptions that we know who our segments are.
But those assumptions, as small as they might seem, are what trips us up over time because they grow like a snowball effect and then they become indoctrinated in organizations that this is the way people use our product.
We know that we understand our customers, but I would say month after month after month you should be in front of your actual users and future users, understanding their value system, their job, their workflows, their enquiries, how they’re, how they’re operating in their worlds, get their job done. That’s where we fit in as people who are delivering value in delivering a service.
So start with the person you’re serving and then start to understand the technology layers and the business layers that sit around that in order to distribute that value to them. And there’s a final wrapper around all of this, which, which my time at Temenos was, was fascinating because I was gifted the time to go away and speak to so many banks around the world and understand why their innovation wasn’t working. And there was an insight that really was so obvious that it blew my mind that we didn’t realise this sooner.
And it was culture. It was the internal culture that stopped banks and organisations in general from innovating. Because you can come up with a great you can understand your customers and your person, the person you’re designing for. You can design an amazing solution for them. You can work with product to understand how we’re going to get it to market.
But if the rest of the organization isn’t set up in a way to change the narrative on what we’re now delivering, well, then you get stuck in this sort of legacy mode. You know, a term we use often in our industry of this is the way we’ve always done things. And therefore this is the way we’re going to continue doing things.
And people might come in and try to change that, but that’s risky and we don’t like risk. So we’re going to unconsciously block that and make sure that we don’t bring in any risk in, in the way that we identify new product opportunity and take it to market.
So if I were to say what you know, what are the, the two biggest blockers to innovation from a cultural perspective, it’s this, it’s this bizarre relationship with risk, which is understandable. You want to make sure that your organization is sustainable, but it’s where risk sits.
And too often in most organization, it sits at the point where you’ve got too many people involved, too many expensive engineers involved. You’ve built stuff, you’ve made commitments, and you’ve got no choice but to now deliver something. That in itself brings in risk.
If you up streamed that and did it right at the very beginning where what you’re designing is a hypothesis and you do it in a in a design prototype, you do it in a way that you haven’t coded a single thing.
You don’t make any commitments to the market, but you really test your hypothesis before you build anything that de-risks it.
And so when we here in the market, organisations like Amazon and others talking about fast failure, that’s where they’re failing fast. They’re failing fast way upstream where it’s an idea before you put any expensive engineering or product management resource or deployment resource anywhere near it.
And that’s where that’s where the whole concept of service design is so powerful because it can take an idea and in a very short space of time it can prove if that idea has value to your end users, if it has value to the business and whether it can be built and that’s pretty powerful. So that’s the one feature of a culture that keeps tripping us up.
The other feature is this organizational structure that is always siloed. So this kind of siloed, waterfall, handy-offy kind of culture which is, you know, one party does something and hands it off to another party, hands it off to another party and that in itself creates risk of, you know, what are we handing off.
So multidisciplinary teams right from the get-go right from the very point at which we think we’ve identified a challenge in the market that we want to respond to.
Get tech, business design, risk, legal, compliance, get everyone together and discuss it and talk about it and hypothesize it together, design it together. And then once everyone has a clear understanding of what the human need is and what the challenges that we’re trying to solve for, then start to then bring in your culture of fast delivery to make sure that you can respond to that.
But by that point you’ve created a culture where everyone’s talking to each other and I was honestly, I was so lucky that I landed at Charles Schwab early on in my career because they were agile with a little A, you know, they were agile before Agile became a thing.
And I remember sort of most mornings sitting around a little table with the architect, with a business analyst, with a designer, with compliance, you know, with a developer, with all the people you need to have a sensible discussion, make some decisions and move forward.
And that works. And so it’s real nuance on those two factors.
DM: I mean it’s, you know, I’ve sat in organizations before and the media or the press or you know, the external world is saying to the CEO or AI is going to change the world, you know, therefore you must invest.
And it’s literally come straight down from the CEO, what are we doing on AI, you know or what are we doing because the Internet’s here now, you know, etcetera.
So, so I can understand that sometimes it feels like it starts with the tech. But these are the kind of trends I guess you know that have driven decisions in the past to kind of innovate on some particular technology.
I mean talking about trends, what, what do you see as the trends that are driving innovation right now?
KC: Well, I think if I can, if I can just take your statement and just unpack a little bit. I 100% agree with you that technology, these big trends coming through with technology, they are something that we should absolutely focus on and find out how to respond to.
The difference is to temper those with what’s going on in other parts of the world as well. So other lens such as what is happening with real people, what are the shifting behaviours, what’s happening globally, what’s happening around people’s movement and ageing and behaviours and shifts in the way that we see and engage with the world. You know, all of that changes if you’re if you’re a 30-year old organization, the world has fundamentally changed over and over again since you created your original product.
So to temper those technology trends with societal trends and also business trends and from and this is the this is the approach we take at the at the RCA when we talk to students. So I had a real challenge with students originally which is you know a lot of them were thinking fintech was all about tech which understandably Fintech is.
So we talked about the future of financial services and we talked about the future of our relationship with money. So we did. We worked really hard to reframe what what it means to look at financial services and we carried out a piece of research with some of our professors and colleagues at the college to identify from a very societal perspective.
And luckily none of these people had ever worked in financial services before, which was refreshing.
And so we explored from a societal perspective what are the key trends, what are the key shifts in behaviour and society that we need to be, we need to be thinking about. And they were delightfully surprising because you can often think it’s the same stuff like you know climate change and all the rest of it and yes it includes those, but it’s way bigger.
So if I can share some of those with you and your audience, I’d, I’d love to try and make all our research as open source as possible. So, so the six key trends firstly were firstly around younger people coming through.
So we did a lot of research on Gen Z broadly and to understand what’s going on with Gen Z and the biggest challenge with Gen Z at the moment around financial services and this might even pertain to other generations too.
So none of these are specific to a demographic is the lack of empowerment and the struggle to make choices around their their financial decision making in life.
So we sort of had this title, which is Gen Z and rampant anxiety and how might we build resilience and help them navigate uncharted territory, the overwhelm and confusion of the current landscape that they find themselves in?
We then zoomed in on, well, what does that mean in terms of a shifting behaviour?
They’re seeking information, that’s what they’re doing. So you know whatever whatever the use case is, Gen Z are desperate to find the right information that can help them make decisions and the resulting customer need is just help me get to the right information at the right time in the right way. What does that, what might that even look like?
You know, we’ve talked at various conferences about, you know, concierge, A concierge service, a buddy service, a financial aid. You know, the devil and the Angel on my shoulder who are sort of constantly helping me make decisions.
But when you think about AI, AI is a perfect fit for that need. So now you have a scenario where there’s a big societal shift and resulting needs and a technology trend that can actually meet it.
Another trends that came through. If I can continue to share, there’s a massive movement around migration and mobility of work. So there’s a sort of this reinvention of work life balance and work life lifestyle. In the rejection of old models of work and the traditional borders and geography based around them.
So to give you an example, currently, and this is a phenomenal number, there’s 35 million digital nomads around the world. And how often do we need as a use case? Never. Rarely.
By 20-30 there’ll be a billion digital nomads around the world.
DM: I read about this guy in Germany that’s effectively spent an entire year living on the train. He lived on a train, right?
And so he’s got no home, but he’s working as a nomad on the train during the day. Then he gets one of those sleeper trains overnight and sleeps on the train. And that’s his lifestyle. That’s what he said. Basically, I get to see, you know, more of Germany and I’m not paying bills like everyone else, right?
But it’s a lifestyle choice. I mean, it’s totally alien to us. But this is a fundamental change. You know, I think you’re right.
KC: It might be alien. It’s alien from a sort of common perception point of view. But when you think that 35 million people are doing that in some form, you know, maybe not everyone’s going to train, but in some form, you know everyone’s, you know there’s a there’s a 35 million person cohort that they’re doing this.
And it’s there was a really interesting survey where it said something like 8% of us want to be digital nomads, but we’re not entirely sure how.
So that in itself presents an incredible opportunity when you think about what are all the needs around people who are reprioritizing their lives, moving geographies, moving their families around, moving themselves around, working around different borders and all the complexities that come out of that. So we’ve actually spoken to a lot of digital nomads.
One of our students, Pat, she did a beautiful project on how might we serve digital nomads, which ultimately came down to a better way of identifying the creditworthiness of a digital nomads.
That’s generally the challenge. You live in the UK, you have a credit score, you move to Lisbon, you move to, you move to New Mexico City, you move to another part of the world.
That credit scoring suddenly has no value, and she and her team created this beautiful concept of a a reputee butterfly.
You know this sort of credit score that moved around with you and captured your behaviour, captured your reputation and your reputable behaviour as you moved around the world to create an alternative credit score
that could be used locally to open up the services that you need, be that renting an apartment or renting a car or whatever it might be.
So there’s another beautiful example of an incredibly large market of a now validated human need and the tech that’s available to serve it.
DM: Fantastic. Can we kind of zip through the other four quickly?
KC: We can zip through the other four. OK, absolutely happy to.
So now you know in in the theme of reinventing work and life, you’ve got this demographic shift of a growing population of older people. So, that that sort of cohort of people over 55 are now the biggest living cohort in I believe it’s more sort of Western Hemisphere rather than Asia.
So now you have a scenario where almost a third of your population is over 55 and they’re getting younger. We’ve got this concept of the 100-year life, we’re living longer.
You know 50 is the new 40, 60 is the new 50. We’re reorganising our life priorities at later stages in life, getting married again, moving again, starting up a new business at 50 or 60 or even 70, working longer, choosing not to retire or not being able to retire or retiring and setting up a business anyway.
So, so, so this category we generally call living again because it feels so empowering for older people to sort of be able to make, to make choices.
Now what’s really interesting here is that lives are becoming more fractional. So I’m not retiring at 65 or 70.
I might retire at 50 and but I might reorganize my life so that I can start work again and then I might have another mini retirement when I’m 60 and then another mini retirement when I’m 70.
So this kind of fractional living is a trend that that we notice coming out of this piece of research and the resulting need there is this connectivity for that fractional and re-evaluated living. So meet me in my life and help me streamline my life choices is becoming a pronounced human need.
Area 4 is financial well-being. Now this you know the cost of living crisis is sort of fits into this And generally what we found in the research was this lack of financial resilience to weather economic shocks and instability.
So it’s not that people don’t have an income, it’s the fact that majority of people aren’t sure about whether they’re able to weather any more shocks and instability.
You know, whether you’re even financially secure, You haven’t quite figured out if there’s a if there’s another Ukraine war, if there’s another, if there’s more political instability, can my current income actually deal with that? And the large majority of us just aren’t sure.
What that actually means is that we as a society needs to become more agile. We need to be get more comfortable with agility and be able to smartly navigate those choices and shifting norms.
So if the land beneath us is going to shift more consistently than we’re used to and comfortable with, how do how do we deal with that? And how can banks help us to deal with that, knowing that no one’s getting married at 25, having children at 30, living in a house for 40 years and retiring at 65?
That’s just that’s just not how it works anymore.
So the overriding need that comes out of that trend is agency enable me to regain control. It’s not. It’s more than control. It’s agency give me give me some control back.
The 5th area is super interesting and it can only come out of an academic institution because I thought it was going to be climate change, but they surprised me and the trend is actually this conflict, it’s a very human conflict between values and identity.
So I identify as someone who cares about the environment, but I also value having my holidays every year. I also value being able to jump in a car and see my parents if I want to or take my kids to stuff over the weekend, even though I could probably cycle them.
So there’s a complex tension between ourselves, other people and the planet. And that’s a very deep trend that we’re seeing. And the resulting shifting behaviour is a protection of your identity and your assets.
So how can I feel safe? As I’m having to balance my choices and do the right thing for myself, others and the planet, navigating these choices is becoming increasingly not only hard but politically laden.
You see this on social media playing out in in the sort of the comment sections of anything around climate change. So what’s the resulting need?
Security, you know, enable me to feel safe on a complex in a complex and often threatening world, help me to make the right choices so that I can continue to live by my own values and identity, but also by the collective values around protecting the planet and sustainability.
And then the final one, we’ve done a few projects on this. So we’ve got some really nice examples of innovation is around normalizing inclusivity.
Now this, this actually is pretty broad and we really toiled over this one because we thought it was about neurodivergence, then we thought it was about equality and diversity and gender balance, but it was really all of those, it was all of those.
So we sort of took a big step back and realized that what’s required is some element of repairing the damage of living in a system designed for everyone else.
So this is gender, age, ethnicity, sexuality, physicality, your neurotypes, everything. Within that. We sort of deep dived into Neurodivergent, which is a hugely trending area in terms of people’s behaviours.
And the numbers are pretty surprising that almost 30% of the UK, this is just UK example, we have other other stats for around the world, 30% of the UK population are now considered to be neurodiverse.
When you look at Gen Z who currently are up to about 29, 30% of those are ADHD and a third of those have compulsive spending disorders. I mean the minute you narrow this down people’s relationship with money, it gets super interesting.
And then when you think about regulatory developments such as consumer duty, you start to think, well, hold on a second, there’s an opportunity to innovate here. If a third of, if a third of the population are neurodivergent and the challenges we’re having is in being able to deal with systems and sequencing and the way that information is presented to us, then that’s low hanging fruit.
Let’s get all over that the resulting trend around normalizing inclusivity, sorry the hifting behaviour is very similar to the one before which is this need to have agency and feel safe in in being able to navigate new services and the overall need is transparency.
It’s enabled me to trust you and the system or and this is I’m just quoting here, this isn’t me.
“Are you just another pseudo bank trying to screw me over?”, which is one we had from our research which which did make me giggle.
But you see there Dharmesh, you know there’s massive, massive trends that have got nothing to do with tech. But you can see also that tech has so much opportunity to solve those.
DM: Yeah, I mean the thing I like about it is that, you know, they’re great examples of how things are changing. And if you don’t address the specific needs of those changes, you’re going to lose those customers, right?
And it’s because they need that other thing, right?
You know, if you’re a migrant or a refugee, etcetera, you need security and identity as part of your financial services. If you’re in the ageing population, you want, better financial management, you want the flexibility to handle the business as well as a personal account, right?
So these are all like new needs that you know the account that I had 20 years ago doesn’t necessarily service anymore, right. So what I love about these trends is, is you could almost say well these, these are niches, but without any physical boundaries, these niches are, these niches are massive as you said there were 35 million in one category.
So I think you can really start a specialized set of services around this stuff and drive greater innovation. I mean, I’m sure, when you looked at these trends, you would have identified some solutions or innovations yourself from your groups.
I mean, you know, in the interest of time, can you give us a couple of examples of things that came out of that, you know, as in innovations?
KC: Yeah, I can. I can give you one that was sobering and then I can give you one that was just pure joy.
And we’ll start with the sobering one. We’re looking at gender, gender imbalance in in financial services. We were looking at women and we took a big step back and looked at, you know why, why are we in a situation where women are so disadvantaged generally around financial services?
And sort of diving into this space, the student fabulous student who took on this project identified a behaviour where most women are brilliant at day-to-day financial management.
A lot of the longer-term investment planning is done by their male counterparts, their husbands, partners, whoever. And there’s this scenario where generally men fortunately pass on, commonly a lot more before a lot earlier than women.
So there’s this scenario where a woman becomes widowed and all her long-term financial planning has been done by her husband, and suddenly, she finds herself being given this estate.
Now what’s really interesting is that everyone talks about the transfer of wealth and they talk about the transfer of wealth being from one generation to the next generation.
This is a really interesting scenario where the transfer of wealth is going from the male to the husband to the wife, the male to the woman and in that there’s no transfer of education or planning or strategy or understanding why that investment portfolio is being pulled together the way it is.
70% of widows will fire their financial advisor within the first year of being handed over that family wealth.
DM: Why is that?
KC: Because they don’t trust their husband’s IFA. The IFA is usually a male.
They find that the male financial advisor doesn’t understand what’s important to the woman and so the woman just says right, you don’t understand my needs, therefore I’m not going to work with you. But instead of there being a service to support women and what’s important to women, which again based on research is generally is generally education, family, well-being. And there’s a sort of a broader area around education.
So health, education, family well-being, they retrench, so they’ll just park it somewhere and they will no longer actively manage that investment portfolio.
So what this student moniker came up with was this service where we would work with wealth managers and identify female women IFAs who better understand like create a community around female IFAs who can start to advise women on what they should do with their new found wealth based around their needs and create some community around that so that other widows can support each other as well. And then other widows can recommend female IFAs or even male IFAs, but who understand what the female investor is now looking for.
So that you know that was one really interesting scenario and a really interesting market opportunity as well a joyful one was based around neurodivergence and these were three fabulous students and they were, they were zoning in on the challenge of compulsive spending disorders with Gen Z and they created a tool where they came up with three options.
They also identified that Gen Z, large majority of Gen Z prefer their pets over their partners.
So they created this tool where if you are sort of scrolling and shopping online they would pause your shopping and they would a little cat would appear and you can feed the cat and you can stroke the cat.
So now they’re weaving in the neuroscience of how to engage with your oxytocin and dopamine. Your dopamine is triggered by your shopping and now they need to bring some oxytocin and serotonin in by having you care for something.
So this cat appears and you feed it and you nurture it. That was option one. Option two was slightly more aggressive, which was just so amusing to see.
Option two was you. You get given a serene image of a lake and some mountains, but if you scroll away from that and carry on shopping, they blow up your basket.
So literally they run a piece of code that empties your shopping basket, which didn’t get voted very highly for obvious reasons because that would infuriate most people.
But the third was super interesting. It’s something that we would never have come up with because of the generation that we’re in.
The third option was knowing how Gen Z think and where Gen Z are living and what Gen Z are doing.
They came up with this option which I called scratch the itch option, which was they would say fine, buy the outfit, but you’re going to buy it in the Metaverse.
You’re going to buy it in a digital universe and you’re going to buy it with digital currency and or digital tokens and your avatar is going to wear it.
So you get to scratch the itch, you get to buy the outfit so you get the dopamine hit, you get to wear it, you get the dopamine hit your avatar friends get to see you wearing it. You get the dopamine hit.
The real money that you haven’t spent then gets moved into a part short-term, medium-term savings account for your deposit, for your house and your long-term pension.
Now, I thought that was super clever, really clever.
DM: Really clever. I mean, I get fairly deep into understanding what drives people to spend in the 1st place, which is the important thing. I mean, I yeah, I mean, I’d like to see a bank do that.
KC: Well, you know, we haven’t, we have those students available. They’re keen to prototype their ideas. If there’s any banks out there who are keen to try it out, get in touch.
DM: Oh, fantastic. I mean, and look, I have had the pleasure of interacting with some of your students and they are some extremely bright minds and what I loved about them is the freshness of their ideas. It’s just so like, yeah, I wish I’d had them in the bank when I was working in the bank, you know, absolutely fantastic.
Look, I’m sorry, but we have kind of run out of time and it’s, I could carry on this conversation with the rest of the day, you know that, Cam, But it’s been a real pleasure to have you on the show and really appreciate you sharing your insights with us. Thank you so much, Cam.
KC: Thank you for having me, Dharmesh. It’s been an absolute pleasure.
In this episode of Banking Blueprints, we continue the conversation between our host, Dharmesh Mistry, and our special guest, Leda Glyptis, an icon in the banking industry and author of Bankers Like Us. They continue their discussion on topics like exploring a rip-and-replace approach to code modernization, the need for a unifying architectural direction in modernization efforts, and lastly, the emergence of a gradual transformation as a new strategic approach.
Transcript
BW: Welcome to the Part 2 of Episode 4 of Banking Blueprints. Today, we will continue the conversation from Part 1 between our host, Dharmesh Mistry, and our guest – Leda Glyptis. She is an icon of the banking industry and the author of Bankers Like Us.
Dharmesh and Leda dive into how to navigate the ever-evolving, complex landscape of banking technology and discuss the replacements of banks’ cores in detail.
We hope you enjoy the 2nd part of this conversation!
DM: Yeah. I mean it’s fascinating really because I think, normally organizations kind of get kind of global, global when I say enterprise-wide kind of buy in on something that’s new and exciting. But core replacement isn’t new and exciting. It’s scary and hard, right, Because I do, I mean I was part of a business process reengineering project in the heyday of that, kind of trend, but it was new and exciting.
LG: I remember those.
DM: Yeah. I mean, it was, it was fun because you were actually told, you know, reinvent how we do things, make it better, faster, cheaper, you know, let the technology do the work so we can spend time with the people that are there, Right.
So we had, you know, representation from across the bank and, you know, you feel special to be part of the project. You’re excited about changing the bank. And then suddenly it fizzled out because, you know, actually, you know, some of the big changes that we wanted to make, right, were deemed risky or they were deemed extremely hard or very expensive.
And all of these things came into in the way of actually doing, the one thing that this project was set out to do was to reinvent the bank, right? And it wasn’t for replacement directly, right? What I’m saying is…
LG: This resonates, yeah, resonates so much right now. I, I started life in a, in a process business process for engineering function. And it was a revenue protection function, right?
So institutional clients when they’re unhappy with how it works, it’s not like I leave my High Street bank and they don’t even notice, right. So the share of wallet that each client represented meant that it was, it was so important to understand how we can use people, process and technology to be compliant, but also to do a better job for them.
And then once you fix it, when you rolled it out to the others and as you say, it was an honour to be a part of it, you had everyone’s eyes on you.
Because of course, clients are it’s clients and regulators, right? That these are the two sets of people you have to keep happy.
But as I said at the beginning, the minute your solution started hinting towards core replacement it, it fizzled out. You were always encouraged to find a different way to the extent possible.
And sometimes you would create a parallel infrastructure in order to service these needs. And of course, that adds operational and cost complexity to your technology estate. And Fast forward 10-15 years on, because you and I have been doing this work for quite a long time, right?
Every time we didn’t touch the core, but created either a workaround or a parallel database or a parallel infrastructure that would always plug back in and reconcile into the general ledger but would create these like these alternative intraday reality.
We added to the complexity of what needs to be changed now.
DM: Yeah, yeah, yeah. So I mean, I guess look, you know, so far we, we kind of agree that core
replacement is something that’s complex, is something that’s scary when you’re involved in the project. You know, we know it’s expensive and we know it takes time, etcetera, right?
Is there any other avenue that banks can take? You know, do they just have to bite the bullet and just say, look, we’re going to have to rip and replace this aging technology or can they do anything else in your view?
LG: So I think even the language of rip and replace is aggressive. And, and I think the key to, to this is exactly what we were talking about earlier. You never replace the core from a standing start.
You never, you know what we should do this year, Dharmesh? We should rip the, the core out.
It’s always in the context of pressure, either positive pressure, ambition, geography, expansion, new verticals or uncomfortable pressure, regulatory pressure, something going wrong your competitors getting ahead of you in the game.
So, in the context of that pressure, there will be a strategy that will entail quite a lot of detailed views around where the architecture and the infrastructure needs to be.
So in that journey, I firmly believe that there is no choice but to have a very different core infrastructure in 50 years time. And you know, I hadn’t said COBOL yet, so here it is.
There are components of our bank’s infrastructures of like almost 50% of all transactions are carried out on technology from the 60’s. As we move to a real time world with real time liquidity management requirement, it is not designed to be able to do that.
So there is a world where we’re going to have to move to a a different set up. But let’s let’s be honest with ourselves, why are those mainframes still here?
Because in terms of built in redundancy, they’re the cheapest way of securing ongoing service and they work. So only a fool would rip it out to replace it with something rashly. But we also know that only a fool would believe that we will be able to have non-real time reconciliations across the board in 25 years’ time.
So how do you get there? The first thing is you let your business drive, your business drivers drive, the geographies you play in, the verticals you play in, the types of services will you play in will dictate what you need to do imminently because you’re not going to be compliant or you’re not going to be competitive.
And the things you can do more slowly. The second piece is accepting you need to get there. What does your broom look like?
Because nobody will replace everything all at once, and no organization replaces nothing in any given year. So how do you sequence it?
And how do you manage both the risk and your risk appetite in that journey?
And for some it is parallel running of different cores with the intention of switching something off. For others, it’s hollowing out. For others, it’s modernization around the core.
I heard people Speaking of mainframe as a service and at first, I laughed to be honest with you. But then it’s like actually it just shares the load of that transition with your chosen providers. You know what, well done you.
I think the, the realization that we can’t hold on to what we have forever, in fact, yeah, for a pretty short time frame of a decade and a half, two decades is, is sinking in the ways there need to be aligned to your budget, you risk appetite and the realities of your market.
DM: Yeah. I mean, it’s interesting, isn’t it?
I mean, we, there’s some analogies about, you know, core replacement being like, you know, replacing a heart while the patient’s still awake. But, but actually, if you have a heart attack, you know, a major crisis or something, then what you actually do is improve the heart. You don’t replace it.
You actually put in some new valves or whatever it takes, right, or, or a pacemaker to bit make it beat better. But very rarely does somebody actually get a full on heart transplant if they’ve got a heart problem, right?
And, and what you’re saying and then you know…
LG: Yeah, it’s a very valid point. And I think it’s fair to say that. So I, I’ve just spent a couple of days in ICU because my cousin had emergency surgery this weekend. So this is all very fresh, right?
And the thing is that it’s always about the alternatives, right? He would have died. The alternative was major surgery. We’re grateful for it.
If your systems have had, I mean I worked on a system years ago that had a double failover.
The double failover meant that neither the clients nor the regulators nor frankly our own decision makers inside the band were willing to underwrite staying with the existing system.
So we had to make to have we had emergency surgery like my cousin in that when we had contained the problem, we went down an accelerated path of vendor selection and migration because it was the equivalent of emergency surgery.
If you don’t have emergency surgery, but you need an elective, then you manage your business affairs and your family affairs so that you go into surgery having lost a bit of weight and at the time of year where your family are most able to look after you, right.
The bank equivalent is you manage your other projects so that you risk managing and manage the cost. If somebody says to you, you’re in perfect health, you need to carry on having a healthy lifestyle, not smoking, exercising and eating well to avoid surgery, then you’re on a different path of keeping at what you’re doing, which the banking equivalent would be continuously modernizing, creating an evergreen infrastructure where you don’t let anything age so much as.
So, the reality is you don’t choose which one you are necessarily because we would all love to be the person who never has to have any intrusive procedures, but the reality is you don’t choose that.
So, without pushing the medical analogy too far, because I’m sure that someone will call in and go, you’re an idiot and you know nothing about medicine and you stay away from it.
I think if we think about it in terms of those 3 buckets, some of those choices might be taken away from you by a crisis situation. But even if you never find yourself in ICU, you will need to accept that you will continuously be changing and modernizing your stack.
Because we live in this era of unprecedented technological creativity and our regulators all around us are savvier than they’ve ever been before. And they will expect the service providers to do the best they can with the best there is.
Which means that the expectations of ever greening your infrastructure are there. Question is, will you do everything in your power to be in that third bucket that never needs surgery, knowing that it’s not always in your control?
DM: Yeah. I mean, it’s. To me this is fascinating because, you know, we get to this realization also that actually people aren’t really replacing anything that and it’s as you say, they’re modernizing, right.
And I worked as you know, in a, in a big core vendor too. And you know, the projects were only ever about replacing, right?
Never once did we think, you know, or is whether we thought, no, I don’t know. I think, you know, never once was it discussed, but actually, instead of taking out, you know, the core, what about adding new capabilities that may, that got rid of some of the other problems that they had in the organization, whether it was, you know, oh, we’ve just been fined for KYC AML. Let’s just, you know, get a better version of that. It’s built into our core, but let’s let’s upgrade that bit because that’s the problem or I can’t 100%.
LG: But like, as you were speaking, I had this flashback of 10-15 years ago, a very large chunk, if not the vast majority of business decision makers inside a bank wouldn’t actually know which core banking system they’re on.
It was an IT decision, didn’t know, didn’t care. And when I first started on the vendor side, I would speak to senior bankers and describe what we were trying to do when they were like, why is that special?
That makes sense. It’s like, but do you know how it works now? And I would find myself drawing diagrams not of what we did, but of the system they had in place.
So, I think if we accept that that was the reality we were in, the understanding of why core doesn’t can’t be taboo and shouldn’t be taboo and what does it do and how does it do it, He’s actually fairly new outside the IT people and the core banking vendors.
So, the conversations would have been about replacement because chances are the business people weren’t in the room for a very, very long time. That doesn’t happen anymore. The business people are now in the room.
The understanding of both what is possible and how much of it happens in the core, is actually helping a lot of these conversations. We won’t be able to talk about modernization and aligning the risk you take, the benefit you have to the business outcomes. You couldn’t have that conversation without the the business in the room, right?
So, this is definitely changing. I think it’s fair to say that. And I know you talk about modularization and essentially having a pick and mix approach, which is not the word you use, but I like food. So it’s always about food.
I don’t think that option existed before. So one of the things that we’re definitely seeing in in recent years and has made this job so much more fun, actually this is the fun is that the business are much more aware, educated and savvy about what is possible.
I’m frankly hoping that this will force certain discussions to take a different shape because we haven’t spoken about the, the, the true elephant in the room, which is that when the time comes to start creating cloud native, truly responsive infrastructure, the very big banks are always tempted to build it themselves because it’s fun.
That part is fun. The build is fun, right? It’s not the goal life and the integrations and the testing that’s fun.
That’s stressful, but the blank sheet of paper, daunting as it is, is fun. And all of the people who’ve lived in the same bucket as I did when I started my career, who’ve been constrained and restrained.
The temptation to build it yourself because it’s fun is huge. But it’s also the wrong instinct because it is a utility and it will take you a very long time to build something that is absolutely essential but not differentiating. So having those business-people in the room who speak the language now, who understand the art of the possible, who can overlay their business objectives, it will have three very salutary impacts.
The one is that it will contextualize the core conversation into a wider business strategy. And that will be good for everyone, frustrating as it will be for the core vendors, because you want to be at the heart of everything.
But the reality is sequentially, it might not be the first thing they need to do, but in the long run, being part of a sustained and aligned tech and business strategy is where you don’t have any of the problems we were talking about earlier, right?
They won’t get distracted because the whole organization is pointing in this way. It can’t be a side of desk project. It can’t be a hedging project. It has to be fully aligned with where the business is going.
DM: Yeah, yeah. I mean, we have kind of talked about, the core projects being difficult. We’ve talked about actually what really happens most of the time and actually successfully is kind of modernization is do you think at some point though, you know, replace, I, I think you’ve answered this one already.
Actually we, you know that at some point ageing technology will have to be replaced anyway, right? Like you know your COBOL programs.
LG: I do, I do. I think that everything has a lifecycle and we can’t anticipate that people that anything will live forever. And I do think that as I was describing before in my medical analogy, externalities might accelerate that.
But I think if we accept that no part of our technology is forever and approach the estate as the way we deliver against the business strategy, that business strategy and risk appetite, which is part of the business strategy will determine how much you change when and how.
You don’t need to change everything. And at the end of the day, you don’t need. I remember when I was working in my BNY Mellon days and you know the digital connectivity and, and of real time, everything was top of mind for everyone.
I remember talking to my boss and he was like, you don’t need real-time custody positions. They don’t change enough. It doesn’t like when the world is real time for everything. Sure, that will be real time too, but that’s not where we begin.
And that is the healthiest approach. There are a lot of things that a custodian does that it helps if they’re real time. The actual custody positions isn’t one of them.
And so, what does your business look like? What are your priorities? What are your needs? And what like those needs are important and what’s your risk appetite?
Do I think that if we had this goal in 25 years’ time, some banks will still be holding on to technology that by that point might be 100 years old?
Yeah, for sure. But there will be fewer of them. Yeah, because the reality of the economy is moving in a different direction.
DM: I’m going to give you a different analogy from a past experience as well, because I had similar kind of problem when I worked in NatWest, where, I was looking at this as state of technology. There were five different business units within hours, and each one had its own technology scratching.
And this didn’t make sense. Right. And you talked about the elephant in the room. So when I looked at this architecture, it looked like this like humongous feast of a thing with, you know, lots of things hanging off it, etcetera.
And I sat in my room one day and the head of delivery was in the room. And I literally sat and stared at my whiteboard for about 2 1/2 hours.
And then I wrote, you know, presentation logic data. And she said, is that what you’ve done after 2 1/2 hours? And I said, well, that’s how I think. That’s my Technology strategy. This is my job, you know, to redefine the epic.
What, what do you mean by presentation logic and data? And I said, well, look, you know, these are the kind of three layers.
We separate the layers and then in between, we can change things more easily. How are you going to change hundreds of systems?
And I said, well, you don’t eat an elephant in one go. You only set the table and eat it in one go. You chop it up in little pieces and you define, you know which you’re going to eat when. So first thing is, you know, you don’t eat the elephant in one go, you eat it in bites.
Second thing is you choose your bites, right? And so, you know, we migrate to this kind of layered architecture, which is going to be over time distributed, bearing in mind, you know, this is like pre Microsoft D com and things like which were the early distributed architectures, right? But we could see that that this is what was where the technology landscape was moving.
But we couldn’t wait for that. We had to get ourselves ready for it. And what I said is that look, when we buy a brand-new system or when we build a brand new system, it has to have 3 layers, very distinct, right?
They have to be like stuff that we can change at any level. Yeah, if we make a modification, we see if the modificate. Modification can introduce a separation, let’s say between the data and the business logic or between the business logic and the front end.
So, we kind of improve it. We don’t necessarily replace it, but, but eventually we’ll have taken enough bias that most of the lens looks like it’s gone, right. But you never seek to replace the whole thing in one go.
LG: And that’s 100%. And that’s unifying directional logic is frankly what a lot of the banks have missed.
And, one of the, the things that I bang on about a lot, particularly obviously since I’ve been outside of a particular vendor is that ultimately the reasons why you need to be disciplined about these things are very mundane. And they boil down to unit economics and cost to serve and operational complexity.
Because what you just described as an IT strategy actually helps you manage your operational complexity. If you allow things to develop in fiefdoms, you end up with an extremely unyieldy estate.
I remember many years ago I was inside a bank still and we had these two RFPs running.
One was inside retail payments and the other one was a unified payments hub across retail payments, credit cards, which were not part of retail payments, corporate cards, which was a separate division, and corporate payments.
Now, retail payments and corporate payments have slightly different needs, right? But they all sat together, frankly. But we had two RFPs.
We had two RFPs for payments hubs that were running separately with separate budgets with enough overlapping the committee’s to be confusing for us and so much overlapping the communities and in the requirements that the vendors were at times confused as to which person they were talking to about what.
But that is extremely common. This was not that particular bank being dysfunctional. This is extremely common.
And those two projects went ahead separately, creating a lot of redundancy in the process, a lot of wasted effort, a lot of wasted money, mostly for political reasons, frankly.
And the reality of it was that fast forward to now where you have some new regulatory requirements for payments and you have two systems that need to be updated, not one.
Now imagine how many times a day that happens across the estate and without the unifying architectural direction that you talked about from a strategic point of view, you are pointing in all different directions as well.
That unifying view is actually still quite rare.
DM: Yeah. I mean, listen, when, when, when I explain this to, to, to the head of delivery, she was like, I can’t believe you just spent 2 1/2 hours doing that.
And, and, and what couldn’t be seen was like the bigger picture. It was too simplistic a view. But anyway, we digressed slightly.
But I guess, we come to a conclusion or an agreement that most banks are modernizing anyway when they do this stuff.
But why isn’t that like the term modernization I’ve only been hearing in the last couple of years anyway, right? But, but this realization actually that look, you don’t have to do this big scary project.
You can start to address individual business needs as you require them. Like if you want to launch products faster than get a new product management suite, you don’t have to replace the Ledger. The Ledger just sits at the bottom of the products, right? Or if you want a new AML, get a new AML solution.
You know this, this approach of modernization, why isn’t that a general strategy when the banks, why isn’t that discussed more do you think?
LG: Big question. I think there are there are three reasons.
The first one is that the language was used elsewhere at times, right? So modernization was often language that was used by transformation teams. So it was associated with a whole host of things.
So we’ve been flying under the digitization banner, which actually isn’t wide enough.
So I think reclaiming the language of modernization really opens the box and goes, look, this is about how your business can operate in 25 years. It’s not about your core as such, it’s about everything. So I think part of it was reclaiming the language.
The second part is that, and we touched on it briefly, is that slow realization that the core isn’t a thing apart, that actually you need to have the right core infrastructure for the type of business you want to be. It’s not a, it’s not an objective answer, it’s not a standardized answer, it’s not even a static answer. So the fact that the core is not untouchable, it’s not a big scary thing out there, it’s actually an integral part of your strategy. Again, that is an emerging realization.
And I think the third thing that is an emerging realization is The Big Bang isn’t the only option, because we had Big Bang as the only option. And then in the last few years we’ve had the idea of experimenting, particularly with Neo cores on the side with a view of having a migration and switch off, which hasn’t happened yet, right?
I think there are a couple of instances out there that are close and we’ve had a lot of neocore go lives, but we haven’t had a neocore go live and switch off, which is the real test. And I think So what with those two options got a lot of decision makers going – “I don’t fancy either. I don’t have the resources or the time or the risk appetite for either”.
So that language of gradual transformation where you will end up with a new broom at the end of this, but you will manage the, you manage the transition, you’ll manage the risk, you’ll manage the cost in line with everything else. I think that is new, that strategic understanding that this is possible is new.
And it took a long time to come to this place because we needed decision makers at the table who understand technology and business deeply. And we have that. But we also needed service providers and technology providers who are willing to be part of a different conversation.
Because the reality is that some traditional vendors would come in, in a take me or leave me with everything in the box approach. And you’re seeing players coming into the space now who are much more aligned with the risk approach of banks and go like it’s a journey and I’ll go on it with you.
And that is, you want to call, call it hollowing it out. You want to call it modernization. I like the idea of lockstep transformation because whether it’s fast or slow, it’s that alignment and the realization that a core transformation project should never be stand alone.
And the reality is that for the bank, it never is. But if you’re the technology provider, the more you understand about the journey everyone is on, the better you support it. I think it took some time for the the decision makers inside banks to develop the depth of knowledge that they now have to demand a different kind of partnership.
But it also took a different kind of player to come into the market and agree to do it. You know, the traditional core vendors wouldn’t do that.
DM: Yeah, yeah. Look, I only just realised the time and we’re massively over, but it’s been a fascinating conversation with you lately. I knew it was going to be anyway, we’ve definitely got like room to do probably another couple of days worth of this. But thank you.
LG: And we should.
DM: And we will.
LG: Thank you for having me. Yes, thank you for having me.
DM: Thank you so much.
In this episode of Banking Blueprints, we examine the dynamic landscape of finance, overcoming legacy system challenges, and unlocking the potential of modern banking solutions.
Join host Dharmesh Mistry and special guest Leda Glyptis, an icon in the banking industry and author of Bankers Like Us, as we discuss how to navigate the ever-evolving world of finance, how to tackle the hurdles of legacy systems and the limitless possibilities of neo-core solutions in banking modernization.
Transcript
BW: Welcome to episode 4 of Banking Blueprints. For this episode, we’re doing things a bit differently. Today we will cover part one of the conversation between our host Dharmesh Mistry, and our guest Leda Glyptis, an icon of the banking industry and the author of Bankers Like Us.
In today’s episode Dharmesh and Leda dive into how to navigate the ever-evolving world of finance, how to tackle the hurdles of legacy systems, and finally, the limitless possibilities of neo core solutions and banking modernization.
Enjoy part one and we will soon be back with Part 2.
DM: Welcome everybody to innovation beyond the core. And this week is my special friend, Leda Glyptis. Hello, Leda.
LG: So good to be here with you today, Dharmesh. Thank you for having me.
DM: And so I mean, look, let’s for the benefit of the two people in the world that don’t know you later, can you give us a tell us a bit about yourself and your experience in banking?
LG: Absolutely. Hello, 2 new friends out there who don’t already know me. I’ve described myself as a recovering banker for a long time, partly because I fell into it entirely by accident and I found my calling in a way that embarrasses me to this day.
And partly because even though I have been outside traditional banking for the last few years, working in the core banking space, sort of on the technology vendor side, I still say we and mean bankers. I even wrote a book called Bankers like us, accepting that my, the way my brain works is still very much that of a, of a, of a banker rather than a service provider.
I think it’s fair to say, and it will touch on some of the things we’re talking about today, that I came into banking at the worst and best time possible.
I actually got my first banking job in 2007 just as the financial crisis was picking up immense speed. And I have only known the industry in the time of crisis. I have only known it in the time of stress, anxiety and profound change. Both positive change like the fintech wave was picking up speed at the same time and frustrating change through challenges, regulatory and market pressures. And it has been an amazing time to be doing technology work in banking.
So, although at the time it felt like the most counter intuitive decision anyone could ever make, it has been an amazing journey since then, having come from a sort of public policy and defence background, falling into an industry that was about to set my transformation journey that actually isn’t anywhere near finished. So, I’ve held some traditional tech transformation operation roles inside banks and then moved to client facing technology and innovation as we called it at the time.
In the last few years, I’ve worked in core banking, which has solidified our friendship Dharm because on top of everything else, we can geek out together.
DM: I mean, look, firstly you made me feel really old because you came in a banking when I’ve been there like 20 years.
LG: It wasn’t my first job though. It would, it should feel, it should make you feel old. If it was like I finished high school and entered banking, it wasn’t that at all. I did work in, as I said in in defence and I did some technology and M&A work in defence, which was mind blowing for all the wrong reasons. And it does, it definitely makes me feel old when the thing that is my second career I’ve been doing for 20 years.
DM: Right, right, right. Wow.
LG: See, see that’s old now.
DM: OK. So, can you say a little bit about your experience in the core banking space itself? You know, because you work with modern core vendors, right?
LG: Yes. So, I would say my experience in core banking is a, is a story in three parts, right? The first part is a tale of frustration because I spent the first 15 years of my career inside banks.
And as you know very well, because you’ve had the same, the same journey, anything you want to do inside a bank, particularly if you’re trying to implement any data first initiatives and no matter how big or small, very, very quickly you will come up against someone senior in either compliance or IT who will suck their teeth and go core can’t do that.
And that’s the end of the conversation, right? Because core replacement core transformation has been such a spectre of career limiting choices for senior decision makers over the years, because historically changing the core has been expensive, has been long drawn out, and it has been career ending for the CTO that signed off on it. So, I spent so many of my so much of my career having to work around the limitations of the core.
And it was an extremely frustrating place to be inside banks where you always had to clip the wings of the ambition of the organization to fit it in the box of our legacy technology, whichever shape that might have been. So, the first phase was one of frustration. So, you can imagine that when I, I got the call to come back to Europe, because I was living in the Middle East at the time, to work in that joint venture between 11 FS and D&B, their biggest bank in the Nordics, to build from scratch blank sheet of paper, a neo core.
I had a million questions in my head about whether that was the best way to go about it and whether that was the best thing for me. But the loudest voice was blank sheet of paper go and I have not looked back.
To be fair, I spent two very happy years at working with DMV and Foundry.
And then as things started shifting with the beginning of COVID, I moved to 10X and got to really scratch that itch of seeing customers go live under sort of my watch and my care.
So, the next phase, phase two is five years of building and, and seeing clients live onto neo cores with all the challenges and, and, and joy that comes with that.
And phase #3 started recently when I left 10X to go independent. And now you have all the scars of both sides of the fence, and you can, because you’re not picking a side anymore, I guess is the, is the reality.
You, you look at the landscape very differently. Still very, very close to my heart. There was a very long answer to a very short question.
DM: No, no, no, but it’s a good answer. And I mean, you know, just on that blank sheet of paper, because I find that bit fascinating is that, you know, when you’re in a bank, you kind of think if we could just start again, you know, and have this blank sheet of paper. But when you’ve got it, it’s quite a daunting kind of task to take on, isn’t it?
LG: It is, it is quite daunting. And the reality is that, particularly if you’ve got the scars of having been frustrated and limited in the past, you, there are a couple of things that you come in and you’re really opinionated about.
You’re really strongly because you know the reasons why the other thing didn’t work. So, I remember we all went in and was like, OK, we know what we want our data architecture to look like. We know what the sort of messaging and event streaming ethos of this thing needs to be.
And we also know that in order to prevent ourselves from becoming a monolith or as one of my clients named it a modulith in down there. A modulith. What a good word, right?
We knew that we had to create the sort of asset agnostic architecture where the Ledger didn’t care if you were dealing insecurities, FX chickens. And we sort of we created the sort of trigger-oriented architecture. Great. But then you come across a whole host of choices that become extremely important that that you don’t have lived experience on.
And there’s more of those than the others, actually. And sometimes you default to going. You know what? Not everything about the way we’ve always done things is wrong. And that’s a big mistake that actually a lot of us make when we’re building something new.
You try to move away from the old ways of working and everything. That’s your why quite a lot of it works. That’s why it’s still where it is.
And then there’s a whole host of things where you’re like, you know what, I don’t have a view on that. I don’t know, I don’t care. So, you have to go out there and do quite a lot of research and find that the market doesn’t care as long as it works.
And that’s where some risk enters the equation, and you make some good choices, and you make some terrible ones. And sometimes the terrible ones you can fix and sometimes you have to live with them.
DM: Yeah. I mean, I’m, I’m a big believer of this thing where, you know, not everything needs to be scratched, you know, otherwise, yes, I’d be redundant by now. But as not being a young man anymore. But anyway, so, so what’s your experience? I mean like when it comes to the implementation side, right? What’s your experience of like core replacement projects? How much fun were they? as they happened?
LG: As they happened, not at all.
DM: Not fun though, right? LG: As they happened, not fun at all, to be honest with you. Which was a very disappointing realisation to make, I think. Particularly as the core replacement project that I’ve worked on were either under duress. So, inside the bank something had gone terribly wrong and we needed to migrate some functionality at least onto a new infrastructure.
And the fact that it was under duress meant that the kind of scrutiny we all had on that work was anxiety laced. And then the go lives I’ve had on the neo side, there’s a lot riding on them because they’re early for the market, they’re early for you.
So, every little thing is again, anxiety laced.
So, I wouldn’t call them fun, but I would say that the journey of implementing a change like that, he’s so rarely or rather the vast majority of the things that you’re worried about and working with and dealing with have nothing to do with the core itself. And it’s all about the organization, the politics, the business priorities, the estate you’re integrating into, the stakeholders that need to be kept informed and comfortable. And depending what situation you’re looking at, that could be a regulator, which is never a set of comfortable conversations, right? Or it could be a board or it could be just business stakeholders.
So, that the yeah, it’s never fun, as it turns out. As it turns out, it was a lot of things fun wasn’t one of them, right, right.
DM: Right, right, and that’s like your is that is that perspective, both from working within the bank and also working for a supplier of a core is that it’s never fun to do these implementations.
LG: Yes, yes, yes.
DM: I I guess it’s not fun.
LG: It’s, it’s brilliant. And once it goes live, the feeling is amazing, particularly if it goes live with nothing or wrong, like the feeling is amazing. Although the reality is you never get that moment of triumph like you see in movies because chance supper the time it’s gone live, you’ve moved on to the next thing.
DM: Yeah. Yeah.
LG: So, you don’t even have the time to celebrate. But I think it’s fair to say that it’s creative, it’s interesting, it’s engaging. You do get an amazing sense of accomplishment. But the stress that goes around it because of everything that rides on it being successful. Fun is in short supply.
DM: I mean, in terms of the implementation, how does it? I mean, how does it vary between is it easier for a small bank than a big bank? I mean, small banks don’t have the resources to do these things. So pretty much reliant on a vendor or a partner. Big banks have all of the resources, right and tons of very smart people. So, you know, is it easier for one and harder for the other or is it all the same?
LG: So, in my experience, the factors that the lived experience of doing something this in a very large global bank is its own animal and doing it in a smaller organization is its own animal. But like harder or easier in my experience so far and it has been a surprise had more to do with why they were making the change and what the nature of the change was rather than the size.
So, for instance, in a very large organization that is launching a new initiative, say on a new call, and I’ve had this experience a number of times, some went live, and some didn’t.
The biggest danger when it’s something new and it’s not something that is already part of the critical infrastructure is that the organization could get distracted.
So, though the organization is big and kind of forwarded and there are a lot of other people around you will, if it’s not on fire and it’s a nice to have or a business enhancement, it is the biggest danger is the organization getting distracted. Whereas a small organization, for better or worse, will not get distracted.
But then I had a project that hasn’t gone live actually, so it’s not public many, many years ago change leadership. So, they didn’t get distracted. They just midway through a project like that, change of leadership and old steam leaves the engine, wind leaves your sails. So, that that is a danger you have in any big organization.
If you’re doing something new, if you’re replacing a piece of critical infrastructure that is already live and running and you have a migration from existing business in an existing geography, then that is not a danger. And then the realities of doing it in a big bank or a small bank are less about size and more about drivers.
So, I’ve worked on a couple of projects that were because of like disaster recovery, failures of a previous system or regulatory pressures.
The minute those words are uttered, it doesn’t matter what the size of the organization is.
DM: Yeah, I mean, you’re absolutely right. And that’s kind of mirrors my experience as well is that worked on the Tier 1 implementation it was really important to the bank that was very clear, right, because of the problems that they were having and you know, the position they were in their market, etcetera, right?
And so, you know, this thing actually did survive three different CEOs, right?
LG: Amazing.
DM: Yeah. I mean, in in five years, I mean, it was, I think some football teams have had fewer managers, right, in that time frame.
LG: Not Birmingham City DM: Not Chelsea, but anyway. So, yeah, I mean, I think I think that’s absolutely spot on. But you know, for a tier one bank, right? I mean, like typically the smaller banks, tier 4-5 banks, you know, they tend to go to a vendor that has the spread of functionality, you know, so that, you know, they’ve got almost one throat to choke as such, right?
But for a tier one bank, any one of them has got hundreds of points of integration. Is it realistic that they’ll ever replace their core? You know, will it ever happen or will they just kind of like build around it and add a new one?
LG: It’s my general view when it comes to any type of tech infrastructure inside a big organization. And I’ll get back to the small organization because I heard a brilliant story recently that you will love.
But in a big organization, it’s a bit like, you know, you have this broom and it’s your grandmother’s broom, but you’ve changed the handle four times and you’ve changed the broom brush 30 times and you’ve changed the binding and the is it still the same broom?
DM: Yeah, Yeah.
LG: And for all intents and purposes, it is still the same broom. And, and I do think that we need to think of technology infrastructure inside banks exactly like that because the reality is there isn’t a single year inside an organization of any size that some material technology change doesn’t happen, but it happens at a pace and in a prioritization schedule that is in line with their risk appetite, their resources and whatever else is going on.
And one of the things I am guilty of and I think all core banking vendors are guilty of, it’s because you’re so deep in this and you know how important it is. You forget that any decision about what you’re going to do with your core is contextualized inside the bank in terms of ambition, other projects, regulatory shift.
So, you see a lot of heightened activity in regulatory jurisdictions that are about to move into the cloud for the first time. You see a lot of activity then what the competitors are doing, but also what other projects are in flight because there are dependencies you want to risk manage exposure, right?
So, why am I saying this? I’m saying this because it would be naive to think of it as a binary thing. Although when you’re inside the vendor, you often do. They either change their core or they don’t. But the reality is they’re constantly changing things and they’re changing them in as big bites as they can take and a smaller bite as they can take at the same time. So, is it realistic that a big bank will
change its core in a big bank? No. And it would be stupid. It’ll be dangerous and they’re not going to do it because they’re not stupid.
Do I think that the vast majority of banks will have a very different core infrastructure by 2020, by 2050? Yes. Do I think they will have it by 2027? No. So, between now and then, I think it will be a case of deliberate, intentional movement in a particular direction. And by the time you get there, is it still the same broom?
DM: Yeah. Yeah. This is triggers broom from Only Fools and Horses. I’ve worked in the organization for 40 years, and I’ve always had the same broom. I’ve had six different handles, but, you know, four different brushes.
LG: Exactly. Exactly.
DM: Yeah. I love that analogy. That’s a great, great, great, great story. OK.
So, is there, is there proven, like is there one approach, a proven tested approach to replacing core that guarantees success?
LG: That’s the million-dollar question, right. I mean, the short answer to that is..
DM: Give it a wait to everyone because if there is, we’re going to make a lot of money.
LG: Yeah, actually there is. And Leda and Dharm can tell you what it is and you have to pay a billion dollars. So there, there isn’t, right? Because if there was, people would have worked it out.
Because the, the magic about core is that it is a utility everyone needs, right? It’s not a niche problem that people may choose to deal with.
Everyone needs to think about what they do here. I think there are a couple of characteristics that successful transformations have and ideally you have all of them.
So, the first one we already touched on is. Leadership continuity doesn’t necessarily need to be the same people, yeah, but it needs to see to be the same business vision. And usually that happens with some continuity in humans as well, to be fair. But you need a clear vision. If it’s an experiment to the side, then distraction is likely.
If you’re only doing it under duress and regulatory pressure, then not going all the way is also likely. So, that continuity of business vision and a realisation of where you’re going as a business helps. The 2nd, which is extremely hard to quantify, but I’ve seen it as the singularly most significant driver in my career is someone in the organization whose personal ambition and their personal view of their legacy or their accomplishment or the proof point for the market is tied to this work.
Someone’s personal life somehow ties to this project is such a such an obscure thing to be looking for, but essentially that organizational directional ambition and someone’s personal ambition need to coexist.
And then the last thing I would say that I see in those successful implementations is a properly calibrated risk management language because you need to have the hard conversations about risk management because you’re migrating data, you’re migrating live customers, you’re making the hard decision to switch things off.
So, you need to have the right language to speak to the risk teams and the compliance teams so that you’re agreeing on what is an adequate level of satisfactory stress tests before you go. OK, I’m flicking it. I’m flicking the switch. I’m switching it off now.
But equally not shying away from the one of the biggest things that I have seen as a thing that failed projects have in common is the attempt to keep as much of the work secret as possible and not bring their risk compliance main organization eyes onto this work till that’s advanced.
That’s possible. I see the urge, I get it. It also comes from years of doing innovation projects like that. So, all new technology was usually nurtured like that.
It does not work when you’re looking to migrate live customers and where you’re looking to touch critical infrastructure.
So, it’s a combination of ambition, people feel somehow personally bound to this work and the properly calibrated risk management from day zero.
You keep the risk and compliance folks out of the room long enough, you’re dead.
BW: Thank you for tuning into Banking Blueprints. We invite you to stay tuned for future episodes. On behalf of our Season one host Dharmesh Mistry and the team here at Zafin, we’re glad you’re here. Thanks again. We’ll see you soon.
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, Chief Executive Officer 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.