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“We live in a time of great change. Thanks to technology, the rate of change around us continues to accelerate,” said Jim Whitehurst, president of IBM. Although today’s banking landscape in Asia-Pacific is proving slow to change, the springboards that could redefine banking are quickly emerging.

One such springboard is regulators issuing digital banking licenses in the region. The Hong Kong Monetary Authority, for example, gave out eight virtual banking licenses last year. Awardees include Ant SME Services (Hong Kong) Limited, Ping An OneConnect Company Limited, Tencent’s Infinium Limited, and Xiaomi’s Insight Fintech HK Limited. Depending on the country, the licenses would allow non-banking entities to conduct banking activities such as taking deposits from retail customers and giving out loans to businesses. Since such firms are not required to have physical branches, they are also called online-only, virtual, or neo-banks. Examples of virtual banks in the region that are already in operations include Tencent’s WeBank in China, and Kakao Bank in South Korea.

These new entrants, together with fintechs, have raised customers’ expectations of banking services. Recent research from independent research firm Forrester found that 77% of Asia-Pacific banking customers prefer to interact with their financial services providers on digital channels, especially in mobile-first countries such as Mainland China, India, Indonesia, and Thailand. Nearly three-quarters of them also believed that they should be able to accomplish any financial task on a mobile device.

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As the incumbent banks in Asia-Pacific are finding ways to address those changes head-on, they also need to look at their IT infrastructure, which supports and enables their business models. This is because the IT infrastructure handles the most demanding compute transactions such as trading stocks, bonds, currencies, or derivatives, or allowing retail customers to make purchases using a smartphone app.

Simplifying IT to drive better business outcomes

Established banks today are running on core systems that are often inflexible, expensive to maintain, and difficult to integrate with customer channels. Moreover, while integration is necessary, it is not sufficient to be able to create the technology platform flexibility necessary to lower operating costs, adapt to changes quickly, and optimize customer engagement. To overcome these challenges, banks in Asia-Pacific are working to transform their often monolithic, rigid, legacy IT architecture to a more open architecture that provides the agility to deliver dynamic business needs. This enables them to:

Optimize operations by streamlining processes

Since a single customer record can have various finance-related transactions associated with it, banking systems based on application programming interfaces (APIs) can better service multiple activities associated with a single customer record. Banks can further improve operational efficiency by deploying an API integration tool, which connects externally facing APIs with the internal banking APIs and systems of record. It transforms and directs incoming API requests to the appropriate endpoint within the IT environment, allowing changes to the back-office without impacting customer engagement services.

The issuing of digital banking licenses and introduction of online-only financial institutions in the region have raised the expectations of banking services of today. With banking customers in the region preferring digital channels to interact with their providers, incumbent banks in Asia-Pacific will have to find ways to address these needs by looking at their IT infrastructure to support and enable their business model.

Additionally, banks can leverage microservices to expose individual functions, facilitating new service implementation as well as existing service updates. A microservices-based architecture can help banks better integrate their services into their partners’ platforms to deliver more services to customers. Since microservices can be reused, they also flexibly support and maintain production services by removing single points of failure in end-to-end flows. To reap the full benefits from microservices, they should be coupled with containers, which enable the portability of decisioning systems, across hybrid cloud environments.

Consistently deliver good customer experience in a standardized way despite changes in the business

Banks were initially built based on the branch office model, and were later supported by call centers and digital channels. These changes call for the IT architecture to be enhanced so that IT can effectively support new business models. However, there might be cases where IT architects missed integrating IT enhancements or new channels with existing operations, leading to data silos.

This is where standards, which can be critical for processing within the back office, can help. They are able to provide a foundation for a uniform system blueprint that gathers more detailed and consistent customer data that can be more easily combined across different transactions and banking channels. Since banks do not have the luxury of shutting down operations to rebuild, applying consistent standards across the board helps to more easily modify processing while still running and maintaining established levels of customer support. API implementation and reuse from shared catalogs can help to enforce adherence to standards and accelerate delivery.

Support business agility through continuous delivery

As change is the only constant, banks need to be able to rapidly develop and modify servicing logic, business rules, and predictive models to adapt to changing customer demands, comply with new regulations, and respond to new competitive offerings. A modern, microservices-based architecture can help banks gain that agility by enabling them to adopt continuous integration and continuous delivery (CI/CD) so that they can build, deploy and manage apps quickly.

Open source will be key to transforming the back-office

As more banks are embarking on the modernization journey to simplify IT, they are harnessing open source solutions to support customer engagement applications and deliver delightful customer experiences. According to The 2020 State of Enterprise Open Source: A Red Hat Report, 93% of IT leaders from the financial services industry globally said enterprise open source is important to their organization, and cited IT infrastructure modernization as one of the top three use cases for the technology. Respondents cited top reasons for using enterprise open source as being able to gain access to latest innovations and achieve higher levels of security.

Thailand’s Kasikorn Bank (KBank) is one bank that has benefitted from enterprise open source. It tasked its tech arm, Kasikorn Business-Technology Group (KBTG), to update and optimize its IT infrastructure to ensure that its mobile banking app is feature-rich, user-friendly and reliable even as the user base grew. KTBG did so by deploying Red Hat’s open source solutions, including Red Hat Enterprise Linux, Red Hat JBoss Enterprise Application Platform (JBoss EAP), Red Hat AMQ, and Red Hat OpenShift Container Platform.

Coupling the tech deployment with DevOps and agile methodologies, KTBG achieved the speed and scale KBank needed such that it can now handle 5,000 transactions per second. The open, modern IT architecture also enabled KBank to easily connect with its business partners’ systems to deliver more features on its mobile banking app, and provided a responsive, reliable application environment that reduced application development time from one month to two weeks. All in all, the changes that are reshaping the financial services industry offer established banks in Asia-Pacific opportunities to adopt technology that can increase their competitiveness and agility. In response to this, banks in the region have enhanced many of their customer-facing front-end operations with digital solutions. However, the front-office experience only makes up a small part of the entire process. Most of the servicing happens on the back end, often using numerous manual touchpoints that are rarely exposed to customers. Having a digital banking platform built on enterprise open source can help banks simplify IT and break down barriers between the customer engagement and back-office teams. With a stable yet flexible platform that can scale and adapt, banks can deliver a streamlined and frictionless customer experience that meets their expectations, therefore cracking the code to becoming successful digital banks that can compete effectively with new entrants.

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.

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Cracking the Code to Digital Banking Success