The way banking is being conducted around the world is changing, especially with customers who are always connected through mobile phones and with 5G not far away in many places.

Coupling that with the rising levels of wage growth entrepreneurship and government policies for financial inclusion, banking’s traditional customer journeys and distribution models won’t scale nor reach the average consumer, and will be significantly cost-prohibitive for the average bank to service. The idea that a consumer needs to visit a branch doesn’t even come into their equation.

Moreover, the consumption of banking products from FinTechs, including unsecured lending, peer-to-peer payments, merchant payments, and business credit, is on the rise. Providers like Ascend Money and Rakuten are fast, simple and digital-first. Simply put, they engender customer satisfaction.  

To catch up with those competitors, many banks have embarked on digital transformation in an effort to transform their customer experiences. However, while many banks have — to some degree — a maturing “front end”, their middle and back offices are often made up of fragile and inflexible applications and data systems. Since such systems limit the bank’s ability to scale and adapt to change quickly, it prevents the front office from running efficiently, which in turn hinders banks from delivering innovative customer journeys.

Furthermore, as net interest margins will likely stay very slim, the continual pressure to make these middle and back-office systems operationally efficient is becoming a higher priority in CFO’s targets.

What are we seeing in the middle and back office in banking?

The prioritization to modernize the back-office applications, databases, and platforms in order to be agile can help re-engineer the customer journey and lower business as usual operations and change management costs. To achieve that, banks need to focus on the following areas:

• IT infrastructure modernization, as most banks are still running on legacy IT systems that were deployed in silos. With business functions isolated from one another, it can be difficult for banks to deliver a seamless and consistent customer experience across various channels and services.
• Digital process-driven application modernization. Many banking processes still rely heavily on manual or clunky processes to ensure compliance with policies and historic procedures. Credit adjustments, credit disputes, loan approvals, case management, fraud event management, for example, require human reviews and hand-written approval signatures. When coupled with KYC (know your customer) as a principal operating model, integrating this into manual or clunky processes is a must-have for improving customer experience.  

The keys to improving operational efficiency

Taking the application and infrastructure design lessons learnt from the digital front-end services — such as being API-oriented, able to be deployed on a Linux container architecture, can scale horizontally, and have updates delivered rapidly through a microservice architecture — and applying them to the middle and back-office systems can help deliver the desired operational efficiencies.

Most banks, however, have decades of IP, rules, and processes hardcoded deep into the system, or have multiple clunky expensive business process management middleware workflow tools, each with their own proprietary extensions and interfaces. As such, modernization can be a difficult task, especially when they don’t know where to start.

Examples of success

BBVA — which operates in 30 countries with their associated regulatory jurisdictions and serves more than 72 million customers — was one bank that faced legacy issues. The bank managed to overcome these by modernizing the middle office business process and rules centric applications to be API first, easily extendable, globally reusable with consistent developer experience, scalable, container-based and open.

Capital One undertook a similar exercise with its middle office systems. Since the bank was initially using multiple case management process tools (each with their own interfaces, runtimes and toolsets), it decided to standardize and simplify its case management processes to improve its operations. By implementing an open source, API-oriented, easily scalable, and changeable case management and process management layer, Capital One managed to speed up delivery and drive down costs.

Speaking of APIs, these have typically been utilized as a software design principle for digital front ends in banking. However, having middle and back-office systems and data with an API layer across these can drive much greater operational efficiency. With customer journeys or compliance services increasingly demanding back-office systems to be integrated, what better way of connecting those systems than to leverage APIs?

The trick to doing so successfully is to design and modernize middle and back-office applications with useable and scalable APIs to integrate the digital and front office systems of engagement with.

Moreover, as these applications and databases become updated with APIs as integration points, the use of microservices can be important in improving transactional and operational efficiency. This relates to the lowering of IT infrastructure costs and driving down the cost of IT delivery year on year.

As applications are modernized with APIs and a microservice application architecture, they are often deployed on Linux containers. For the product and customer support managers in the bank looking for ways to make constant variations to their systems — either to improve the back-office process, enhance a customer experience or meet compliance — having these systems running as small componentized microservices gives their IT team the ability to roll out updates to their system without taking down the entire application. This can give the bank a higher degree of agility, while helping to save cost because it can take significantly less time and fewer people to release an update.

All in all, providing exceptional customer experiences may call for banks to transform their digital experiences beyond impressive user interfaces. APIs, microservices, and other open source solutions can help with back-end processes that are highly integrated and streamlined. With more efficient back-office operations, banks around the world will be better prepared to provide the seamless user experience that customers expect.