You're listening to “Core Modernization with KPMG,” a banking podcast series dedicated to helping banks become future ready with digital transformation strategies that work and executions that deliver.
Hello. My name is Mark Ricci, and I'm KPMG’s Banking Consulting lead partner. In my role I meet with the top U.S. banks and what I am hearing over and over again is the desire for insights around banks’ digital transformation agenda. The banks are asking me a series of questions when I meet with them. They include:
“We know we need to accelerate our digital agenda, Mark, and modernize our core platforms. Can you tell us if we are behind or ahead of our competition?” Second, “How do we measure the value of our investment needed?” Third, “How do we keep up with changing customer and regulatory demands?” Fourth, “How do I align all the stakeholders internally needed for a successful internal transformation?” And finally, “How do I ensure adoption of these new digital capabilities by both my associates and my customers?”
My response to these questions is typically, “Take a deep breath because you are not alone or unique.”
All the banks I talk with are facing multiple—and when I say multiple, I mean maybe three to five—core modernization and digital transformation efforts that are very costly but necessary. Failure or procrastinating is not an option. Why? Simply put, if banks don’t embrace digital transformation and modernization quickly, they will fall further behind and won’t be able to compete. As we know technology is moving very fast and today’s leaders can be tomorrow’s dinosaurs unless they continue to invest in the areas that will drive real business results. And digital transformation should be considered the top of that list.
Having said this, I’d estimate that approximately 50% of the banks that start this journey fail to deliver the business case results they set out for. We recommend that everyone invest in their future wisely to modernize their core and scale their infrastructures, not only just to survive, but to thrive in the future-ready, customer-centric bank.
Today I am kicking off a series around digital transformation which will be a series of podcasts. And today, I going to be joined with KPMG’s top digital strategist, Celeste Diana, and our top digital architect, Mark Shank, to discuss the challenges that banks are currently facing, and how to begin and devise a roadmap for success.
So to kick us off, Celeste welcome. Can I ask you to share your perspective on who do you think are going to be the winners in the digital banking transformation race? And what will they do to be winners?
Thank you, Mark. Let me start by saying that the first component to winning is acknowledging that digital is not an initiative with a start and end date. It really is a vehicle that is driving us into the future of banking.
Now, when we start to unpack that, and when we say “future of,” we do not see it as being dominated by just banks. It is a competitive chess board involving any company that has the technical ability to support the consumer's desire to grow, manage, and move money. And we start thinking about the entrant of Apple in the car business, or others such as Google that have publicly announced their ambitions to the be in the banking business. These are organizations that have a history of winning consumers, and they have the technology chops to figure out banking. So, considering that, and coupling it with a tremendous momentum that we are seeing around consumer experiences anywhere becoming their expectations everywhere, we really need to think about how we are competing in tomorrow's market. Now, these organizations that are winning are well on their way to the future. Those that haven’t even started yet are in danger of losing ground. The level of effort might seem overwhelming when you start to think about modernizing an entire bank, and this is where we hear the most questions around where to start.
The short answer is you need to start with the foundational elements. The foundational elements may take you some bit of time, but they give you the greatest returns and position you for success. Core modernization, at the top end is one of the top agenda items that we're seeing across the C-suite of leading financial institutions. They all recognize that this is a method to unlock things like product innovation, and speed to delivery, and real-time processing. Core modernization is really a definitive movement away from monolithic systems of the past where everything is tightly coupled together and a herculean effort to make changes, to things like a modular architecture where you have modern language, configurability, cloud data capabilities—which Mark Shank will speak to a little bit later on.
Being modern today means being able to keep pace with change and having the flexibility to shift what you want when you want it. The winners realize that core monitorization is the pathway to nationalization and experiences that matter to consumers. We’ve seen many approach this modernization effort as really a way to jumpstart to their overall enterprise modernization efforts. Now, banks today have the competitive advantage based on their experience and knowledge of banking in general. So, that means they're in a good position to lead what that “future of” is going to look like, but they really need to start running down that path of modernization today so they can scale and really compete at market speed.
Again, modernization includes everything from the business model down to the operating model. And when you start to think the things like core modernization, you need to have started it already. These are really high stakes types of initiatives. Banks can't afford to fail. And the winners are going to be those that are enabled and powered by partners that have done this before. Partners that have seen the successful patterns, know the path forward. They know what good looks like, and they know how to help get you there.
Thank, Celeste, very helpful insights, and I'd like to add on to your perspective of successful partnerships and partners to drive these efforts. I often share with our clients that digital transformation/core modernization efforts are similar to having a major surgery like a heart transplant. And if you were facing a heart transplant for yourself or your loved one, you would not want a novice, inexperienced doctor performing that surgery. So what I tell our clients, its paramount that for your digital transformation and a future ready state, that you hire partners that have the experience and expertise. We usually see with our clients that they align with a group of experienced partners in all of the large transformation efforts we're a part of. These partners have experienced resources with the platforms and technologies, and the ecosystems being implemented, and leverage proven accelerator, assets, and methods to help the banks move from current state to future state. The other insight I’d share is that the supply of these experienced surgeons, or resources, is not enough to meet the market demands of all the banks going through digital transformation. So if you don’t hear anything else, pick your partners early and get the top resources locked up.
Mark Shank, welcome. I'd like to change the dialogue, and I would like for you to share with our listeners how our clients are approaching their modernization and transformation efforts from a technology and architecture strategy standpoint. And what are the foundational imperatives that we are seeing in these efforts?
Thank you, Mark. It's great to be here. So first let me introduce myself as the leader of our cloud architecture practice at KPMG, and personally I do a lot of work in the banking space, and I have worked on several core modernization efforts over the past four to five years. The number one imperative for the success of your technology initiative, whether it’s something as mission critical as a core modernization or a medium risk item like your API strategy, is to have clearly defined business goals that your technology architecture is in service of. So Celeste, how many times have we been brought in to help with an API strategy after they built the API platform? I can think of at least three for me personally. It’s kind of ridiculous, but the technology team they want to play with the new frameworks, the new design patterns, all the cool new tech. They build a API platform. It has portals and keys, and then they don’t really understand why no one is buying them. The business doesn’t really care and for something like a core modernization effort it’s even easier to go out and get lost in the weeds of one of these implementations.
It’s actually super frustrating in those kinds of situations. You have to break it down and bring it back to to square one and have them focus on those API strategies first, and then the platform.
You are absolutely right. So, Mark, let me flip the script a little bit and ask you to tee me up with a business imperative. Are we talking about what would be driving this core modernization effort, right? So are we talking about time to market? Are we talking about scale? Partnering strategy and ecosystem?
Alright Mark, I guess I’ll bite on that without being sarcastic and saying, “All of the above.” Often time to market comes up. Banks often talk to us about needing to be both agile and nimble.
I think you picked the one that we definitely hear the most. And they often talk about it that they want to be agile, and as technologists we have a particular definition of agile it’s about process. When banks talk about being agile at a product level. They want to be able to change direction; they want to be able to partner with disruptive fintechs, and the key architectural principle your technology ecosystem, that will enable this agility, enable that nimbleness is “composability.” Technologists love to appropriate words and they stole this one straight from the symphony. We want to “orchestrate” our services in a “composable” architecture. What it really boils down to is simply to having each component being as anatomic as possible, scoped down such that it can function on its own with a given input, produce a given output. For core modernization that means not doing what all your vendors pushing you towards and buying up all of their modules. Instead try getting the most out of interoperability standards like BIAN, and separating operations like pricing or others away from your core debits and credits.
Mark, I love it, “composability.” Definitely a new term I have learned today. So, you’re telling me that I shouldn’t try to buy everything the vendor is selling me?
Yeah, I know. Maybe not the sagest advice ever given, but the temptation is very real. The core vendors are making this pitch, “I’ll take this component off your hands. Yeah you’re concerned about this core implementation and the roadmap—and you should be—so let me make it easier for you, buy this module off of us, buy that module off of us.” And so it is more tempting than maybe it sounds, and you have to be able to resist it because it comes with the cost of your ability to be more nimble, be more agile in the future and what you’re doing is recreating that monolith that got you here in the first place.
So Mark, if I’ve got the most modern architecture that does all those great things you are espousing to, am I’m good to go? “Nimble banking here I come, baby?” But I can’t believe it’s that easy.
No, you are right. It’s definitely not. I would go so far to say that the architecture is the easy part. The biggest challenge for being agile is having a horizontally integrated team. You can no longer have the daisy chain from requirements, to design, to dev, to test, to security to ops. That needs to happen as one team; one automation tool chain that takes you end-to-end, functional to non functional. You need to have those security and compliance stories in your development sprints, being groomed during the build phase. You need to have your policies and controls translated as automated tests in your dev ops pipeline, but most importantly, you need to get these people to break from their legacy teams which aligned by function and align themselves with the product so that they are thinking about the product first.
Well said again, so Mark, let me be clear if I have a customer who got this far, did their homework, did their composability, ate their vegetables—even their broccoli—how can someone listening to this leapfrog them? What mistakes can they not make in their race forward?
It’s a great question. What have we learned from the early adopters of cloud in banking? I would lean on two anecdotes of expensively learned experience. For core modernization, any truly future ready core is still being built here today in 2021, so you really want to pressure test their roadmap, get engaged with their roadmap, and influence it to any degree that you can. All of these sales are a really big deals. You have a lot of influence. There are not a ton of banks that they can sell these things to so everyone is precious to them. We’ve seen it more once where it takes a client bank—they have to get their fingers burned in the fire a little bit and they get some features that are late or incomplete from their vendor it screws up the bank’s timeline and they are having to explain things up the chain and really it was just driven completely by this dependency.
Second, when it comes to the cloud and the modern technology stack that you are putting on top of your modern core—and you absolutely should be thinking about the modern stack that you are putting on top of your core—do not be afraid of cloud native managed services. Most banks think multi-cloud or hybrid cloud means cloud portable architectures, but we have seen with the early adopters, as they get more mature, they realize the cost in human effort of that approach. Cloud managed services require fewer hands on the wheel and that is really the limiting factor in your ability to scale these implementations and your ability to build out all of the infrastructure and services that you need to enable the agility and time to market, etc. So the path to giving you more bandwidth and more capability is cloud native managed services, and it takes everyone usually a couple of years to figure that out.
Thanks, Mark. Extremely informative. Celeste, I know you’re usually this quiet, so I am going to come back to you on your thoughts to the question that I danced around on the beginning of the podcast that we hare from the the C-suite, “Are we behind? And if we are behind, how far, and how fast should we be moving with our efforts?”
That’s a great question, Mark, and the short answer is, “Yes,” especially in two areas. The first area is in being behind on delivering experiences that consumers expect. The second area is being behind in keeping up with the plethora of players out there that are not weighed down with the same business and technical debt as banks. The window of opportunity to catch up is closing and pretty soon it is going to be just too darn late.
Catching up requires three basic, but critical steps. And those are Plan, Commit and Start. Let me repeat that: Plan, Commit and Start. Planning a core modernization is really complex, especially when you consider the sheer size of the ecosystem. Every aspect of the ecosystem will need to be touched in some shape or form and poor planning is a guaranteed recipe for disaster.
As for Commit, we have seen an incredible amount of programs fail due to lack of commitment alone. Commitment really happens across the enterprise, starting with the C-suite and going all the way down to the talent that is delivering the program. Starting today, or in some cases continuing, is really paramount to catching up. This is a multi-year journey and every day you don’t start is a commitment to your past and not to your future.
Now the final aspect, Start, there is a lot to do to catch up. It’s important to note that you are not alone. As you have said before—what you were mentioning earlier, Mark—the patterns for a successful core modernization have already been established. If you haven't started today, now is the time to get started. And the risk of not starting or being under way will impact your ability to keep up or move forward.
That’s great and very helpful, Celeste. Plan, Commit, and Start. So, in my words what I see banks do is Ready. Fire. Aim. And what you are saying is no, Ready. Aim. Fire. Plan and Commit is really important before the Start. Again, it’s not like the perspective of it—we would share with the audience—as we work with our top twenty clients in this space, all banks are undergoing or contemplating three to five of these core modernization efforts with all the complexities that Mark talked about, and the ecosystems span that you talked about, Celeste. Why do I say three to five because we know is such areas as as deposits, consumer and commercial lending, mortgage lending, payments—which would include areas such as real time payments, payments hubs, wires, and ACH—and on top of all of those, lastly financial systems transformation.
That list is the list that everyone is modernizing around, and again every bank we talk to is contemplating three to five of them. So the body of work we're talking about on this podcast is massive, and that’s an understatement. It’s massive and expensive, so it’s going to take them multiple years to achieve that. Anything to add to that in terms of the insights, Celeste, of what we're seeing to define the scale and scope a little bit better for the audience and the journey they must go on?
Well it is a lot as you put it, Mark, and there are many ways to architect how you're going to go about it. We're seeing the most activity today in the deposits and payments space. And while the priorities tend to shift around every few years these two are leading priorities across many banks as this really touches the highest number of customers and they are core—if I can use that word in this context—to the financial strength of the future. Closely following payments and deposits we then have finance transformation. Those are really the three major areas of focus. The other areas in the core space have been well underway for many years and we are almost to the other side on a few of them. Mortgage and commercial originations, for example, have been the focus for the last five to seven years. So we are now at the point where we are ready to modernize our most complex and highest impact systems. This is really why it is critical to work with a trusted advisor. You need to be able to accelerate you efforts and avoid failure.
Very well said, Celeste. Thank you to and to you as well, Mark Shank, for your comments. As we have shared this is obviously a very important and complex topic and we’ve only scratched the surface today. Therefore, this is going to be the first in a multi-part podcast series from KPMG where we are going to hand-pick industry titans that will provide a deep-dive perspective into topics such as deposits, commercial and consumer lending, money movement, mortgage transformation and much more.
What I would say in closing, wherever you are on your digital transformation journey, KPMG will help you accelerate it with a ‘one bank’ approach to modernize your core platforms while scaling your infrastructure. So, you can and must unite your front, middle, and back offices, to equip your workforce, and create seamless interactions that strengthen the connection with your customers, as a digital-first, future-ready bank. We certainly hope that you found today’s conversation informative. We offer you to reach out to any of us if you would like to further the conversation. Thanks, and have a great day.
Thanks for listening to today’s episode of Core Modernization with KPMG. We look forward to hosting you again on future episodes where we'll dive deeper into key areas of the core infrastructure.