The Future of Retail Banking and

the Case for Digital Transformation

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Contents

Executive Summary...................................................................................................................................................................................................................................................................3
1. Disruptive Technologies in Retail Banking......................................................................................................................................................................................................................4
2. Increasing Pressures on the Retail Banking Industry....................................................................................................................................................................................................7
3. Structural Change – Disintermediation of the Retail Banking Chain......................................................................................................................................................................11
4. The Retail Banking Capability Model of the Future...................................................................................................................................................................................................13
5. The Current Reality and the Case for Digital Transformation...................................................................................................................................................................................18
6. Strategies to Respond to Industry Pressures................................................................................................................................................................................................................21
7. A New Approach to Digital Transformation Using Disruptive Technologies......................................................................................................................................................23
8. The Size of the Prize..........................................................................................................................................................................................................................................................28
Conclusion...............................................................................................................................................................................................................................................................................30
Author & Acknowledgements.............................................................................................................................................................................................................................................31

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 Executive
Summary
The widespread uptake of disruptive new technologies is exacerbating
the pressures facing retail banking today, thereby driving a fundamental
change in the structure of the industry: the digital-driven disintermediation
of the banking value chain. The COVID-19 pandemic has rapidly
changed consumer mindsets and circumstances driving banks to both
accelerate and scale digital transformation and customer experience
across complex product and customer journeys. Many incumbent banks
are not equipped for this change because of the limitations of their
complex legacy-based IT systems. Although banks have been investing
heavily in digital and cloud technologies in recent years, they have
been reluctant to embark on core system modernization. At Temenos,
we believe that true digital transformation requires banks to replace their
core processing systems progressively with a cloud-native intelligent
banking platform designed for seamless scale and digital agility fostering
continuous innovation and a cost 10X lower than today. Without such a
modern platform, it will no longer be possible to compete effectively in the
industry. The good news is that such transformations can now be executed
easily and with acceptable levels of risk, because of the Cloud and SaaS
intelligent banking platforms coming into the market, built on API-first,
microservices and DevOps principles offering automated migration and
deployment.

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 Disruptive Technologies
in Retail Banking 1
Today, a nexus of disruptive technologies is becoming omnipresent in banking as they lead to increased agility, elasticity and connectedness. Next generation
core banking platforms built on these technologies can deliver complex functionality 20X faster1 and are 10X cheaper to run2.
In a survey3 we commissioned this year with the Economist Intelligence Unit (EIU) with 305 global banking executives relating to the digitization of banking,
66% said that new technologies will continue to drive global banking in the next five years, over regulation and changing customer behavior.

Cloud/SaaS APIs Microservices DevOps Big Data AI/Machine Blockchain/

Learning Distributed DB

1. McKinsey: Next generation technology transformation in financial services April 2020

2. Expert Interviews; Temenos analysis
3. EIU Report 2020: “Forging new frontiers: advanced technologies will revolutionize banking

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Cloud/SaaS: Cloud infrastructure offers Microservices/ APIs: An architectural and organizational DevOps is the combination of agile
broad network access, resource pooling, approach to software development, microservices are independently cultural philosophies, practices, and tools
rapid elasticity, high resilience and on- deployable and updatable units of software that communicate over that increases an organization’s ability to
demand self-service for provisioning. well-defined APIs and are owned by self-contained teams. APIs are deliver applications and services at high
By 2023, Cloud spend is projected to a proven technology that integrate different IT systems and provide velocity. DevOps enables the introduction of
represent 45% of the total enterprise access to open data and secure access to private data and to new software faster and more predictably
spend of banks4. Moreover, COVID-19 enable 3rd party developers to build applications around the bank. using continuous testing, integration
will accelerate this trend; 55% of CIOs Together microservices and APIs have multiple purposes – internally and deployment techniques rather than
indicate that they will increase Cloud to streamline and accelerate software development and simplify traditional waterfall approaches. Benefits
adoption more than planned since legacy IT systems and externally to enable compliance with open according to McKinsey include a 25-30%
COVID-195. Beyond Cloud, consuming banking regulation and allow banks to connect with ecosystems of increase in capacity creation, a 50-75%
banking software-as-a-service (SaaS) is related businesses, offering a significant opportunity to innovate and reduction in time to market, and a greater
expected to grow at 10X the non-SaaS develop new products and services quickly. McKinsey estimates than 50% reduction in failure rates8.
market for core banking6. that the value at stake across global banking is significant —
approximately 50% of revenues or 65% of profits (the money banks
make from distribution rather than manufacturing) over the
coming decades.7

“Temenos was the only provider that was able to deliver on all three of our key
4. IDC Report Worldwide ICT Spending Guide, IDC Report requirements: cloud, interoperability and open APIs, with its world-class core
Worldwide Public Cloud Services Spending Guide, 2018-2023
5. Flexera 2020 State of the Cloud report
banking system that will scale with us as we grow.”
6. McKinsey Analysis on core banking market, Temenos financials,
IDC, IBS – Minerva Tantoco, Co-Founder and CTO,
7. McKinsey Insights: Cutting through the noise: How banks can
unlock the potential of APIs Grasshopper Bank
8. McKinsey Insights: DevOps: The key to IT infrastructure agility

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Big Data: A bank’s ability to curate, manage Artificial Intelligence (AI): This is predicted to be Blockchain: The distributed transaction
and leverage big data, namely the vast stores a game changer for banking in the future. 77% of our validation model behind digital currencies,
of structured and unstructured information from EIU survey respondents think unlocking value from AI blockchain has not been widely adopted in
within the bank as well as from exogenous will be the differentiator between winning and losing retail banking in contrast to capital markets and
sources like social media sites, partners, suppliers banks. AI is predicated on automation and digitalization wholesale banking. Nevertheless, there are
and customers, is a key differentiator. McKinsey which result in the accumulation of more and more data applications in cross-border remittances, KYC/
estimates that building on their long history of about customers and products combined with the easy ID fraud prevention, and risk scoring. McKinsey
leveraging data and sharpening analytics efforts availability of analytic tools enabling banks to draw estimates that blockchains applied to cross-
could lead to an increase in earnings of as much commercially useful conclusions very quickly. AI’s efficacy border payments could save about $4 billion
as $1 trillion annually for the global banking depends on the depth of data (better accuracy) and a year and blockchain solutions in customer
industry. The benefits would be widespread, breadth of data (more complex use cases). For global onboarding could create up to $1 billion
but about a third of the gains would come from banking, AI could potentially deliver up to $1 trillion of of savings in operating costs for retail banks
reduced fraud losses and about 20% from better additional value each year, boosting revenues through globally and reduce regulatory fines by
informed pricing and promotion. increased personalization of services, lowering costs $2 to $3 billion11.
through efficiencies, and uncovering new and previously
unrealized opportunities through the use of data, say
McKinsey10.

9. McKinsey Insights: Smarter Analytics for Banks

10. McKinsey Insights: The Executives AI Playbook
11. McKinsey Insights: Blockchain and retail banking: Making the connection

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 Increasing pressures on
the Retail Banking Industry 2
The widespread uptake of the disruptive technologies, taken together, is exacerbating the pressures facing the retail banking industry – demanding customers,
rise of new competitors and increasing levels of regulation. This is happening while the industry faces unprecedentedly tough market conditions significantly
worsened by the COVID-19 crisis that are not likely to ease in the foreseeable future.

Reliability Payment
& Trust specialists
Responsiveness & Convenience “Tech-fin” - Technology giant +
Relevance – personalized offerings Ecommerce platforms

Financial Inclusion Fintech - start-ups, neo-banks

1. Demanding Customers 2. Rise of New Competitors

COVID-19
Open Banking impact
and PSD2
Market & geopolitical valability
Instant payments
Economic slowdown and low proitability
Cybersecurity & Resilience
Basel, IFRS, SOX, Dodd Frank Increased cyber crime

3. Regulation and Market Practice 4. Market Conditions

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 1 2

Demanding Customers: Digital technologies facilitate repeated and Rise of New Competitors: All the new entrants that are or have been
increasing customer interactions at multiple touchpoints both inside and entering banking in the past few years share certain characteristics – they are
outside the bank (bank-owned channels as well as external portals), and all consumer-oriented, technology-driven companies that are leveraging the
customers want to seamlessly go back and forth across these in no particular disruptive technologies to develop compelling propositions for their customers.
sequence. It is no surprise then that customers journeys today are non-linear, 50% of our EIU survey respondents saw payment providers (Paypal, Alipay,
complex, individual, spontaneous and unpredictable, instead of the traditional Apple Pay) and technology and e-commerce disruptors (Amazon, Google,
static sequence of awareness, interest, decision and action that banks hard- Facebook, Alibaba) as the biggest competition for the next 5 years. The latter
wired into their processes, IT systems and organization structures, often in bring massive distribution platforms and high-quality data to the table. BBVA’s
product silos. Thus, banks must provide their customers as broad a choice as CEO was prescient when he said almost 8 years ago, “If banks are not
feasible on what channel to engage on at every part of the journey. prepared for new competitors like Google, Facebook and Amazon, they face
certain death.” According to McKinsey13, 45% of the banking revenue pool
Retail customers demand more convenience, greater relevance and higher is at risk to these new entrants who are cherry-picking the most profitable
responsiveness from their banks. They are less loyal and happy to shop around segments of the banking value chain. For instance, up to 50% of payment and
for alternative providers of banking products and services for a better quality investment and 35% of consumer and SME lending business volumes could be
of user experience and better value for money. 57% of consumers in the UK disintermediated by 202514.
said in 2018 that they would go to multiple providers for their financial needs
based on the best proposition12. Customers are creating their own curated
banking universe i.e. a virtual everyday bank which is a portfolio of cherry-
picked offerings from multiple providers. As this happens and proprietary
relationships and proprietary information become relegated to the past, those
banks that proactively position themselves at the centre of this universe rather
than those that find themselves at the periphery will be winners.

12. PwC 2018 survey

13. McKinsey Global Banking Annual Review 2019
14. Citi Research Global Digital Strategy “Bang and Fuse” Model

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 3 4

Regulation and Market Practice: Ever since the credit crisis, banks Market Conditions: Post-2008, the industry has struggled with historically
are under ever-increasing scrutiny from local and global regulators, low interest rates and margins caused by prolonged recessionary conditions,
governments and credit agencies, with more rigorous financial reporting the debt crisis and increased geo-political volatility. This is reflected in the
and risk management practices such as Basel III, MiFiD and Dodd-Frank. drastic drop in average returns on equity since 2008, from above 20% to
But today, regulation is no longer just about reporting and compliance. It is below 10% for the industry. We have found that in 2019, ~70% of banks
causing banking operating models to fundamentally change. Regulators all globally earned a return on equity below their cost of equity and were valued
over the world are driving innovation and competition through new standards below their book value.
in open banking, issuance of new banking licences to non-traditional entrants,
and creation of technology sandboxes for banks to collaborate with new The situation is not helped by the shift towards capital market financing driven
players on innovative propositions. Regulators are also forcing banks to focus by regulators wanting banks to deleverage, driving up the cost of funds and
on cybersecurity – PSD2’s 2-factor authentication and GDPR’s digital IDS by price pressures exerted by the new entrants. In Europe, traditional banks
requirements to manage consent and authorization are examples. Throughout have average cost-income ratios of 50-60%15, whereas the new digital-only
2019, ECB Banking Supervision has continued to treat IT and cyber risks as banks are aiming for 30%.
a supervisory priority citing dependencies on end-of-life systems as a major
cause for concern. Banks recognize this – cybersecurity was cited as the
biggest challenge posed by digital and open banking today and their top
investment priority according to this year’s EIU survey.

15. Calculated based on global average weighted by sector (Retail and Corporate / Mass Affluent / Wealth) in the
Temenos Value Benchmark 2018 – Sources: McKinsey Global Banking Insights (02/18), Oliver Wyman Global Wealth
Managers (02/18)

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Accelerated digital transformation since COVID-19: COVID-19 led to immediate changes in consumer
behaviour such as increased reliance on digital engagement for obvious reasons like inability to visit branches in
lockdown conditions and the bulk of shopping moving online. COVID-19 has also created serious financial distress 15%
and anxiety for society so calls to banks have skyrocketed. This has led to customer traffic spilling over from branches
to call centres and from assisted to digital channels. Therefore, banks have been compelled to beef up their digital
capabilities to handle many more interactions and transactions in terms of scalability, extend omni-channel capability Increase in consumer digital
to enable relationship managers and call centres to seamlessly engage, and ensure even complex customer journeys adoption (2-3 years worth)
can be handled completely digitally for all product lines and services, including those that may have been offered only in 3 months16
in branches before the pandemic. So even one step in a customer journey or even one product that is not digital has
become a matter of survival in the COVID era.

Behavioural scientists who have analysed previous crises caution that many of these mindsets and behaviours will outlast
the COVID-19 crisis. We can thus assume that the increased acceleration digital banking and engagement is likely to 30-40%
continue well beyond COVID-19.

Reduction in cash usage16

“Temenos will provide a completely remote installation “Our top priority in these unprecedented times is
in light of the Coronavirus pandemic, enabling us to supporting our small business and commercial clients.
realize our business goals and support SMEs with vital With Temenos digital omnichannel capability, we were
financing in a matter of days.” able to build a brand new digital loan portal specifically
for the U.S. Paycheck Protection Program (PPP) in less
than a week.”
56%
- Kelly Dakin,
– Mr. Mohammed R, Chairman, Chief Digital and Customer Experience Officer,
Al Ain Finance (UAE) Atlantic Union Bank (USA) Consumers concerned about their
ability to pay back loans17

16. McKinsey Consumer Financial Pulse Survey April 2020

17. Lightco Customer Survey: Impact of COVID-19 on consumer banking March 2020

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 Structural Change –
Disintermediation of the Retail Banking Chain 3
The chipping away of the banking value chain by non-traditional players plus the widespread consumption of
digital banking services by technologically savvy, less loyal customers, combined with the high costs of operation
of incumbent banks mean that the end-to-end manufacturing and distribution of banking services entirely within
a bank will continue to decrease and that manufacturing and distribution will continue to diverge making it
necessary for banks to co-exist with and collaborate with other players of the eco-system, be they fintechs, telcos,
retailers, technology giants or other banks. This unbundling of the banking value chain will only gather pace, as the
disruptive technologies mature in financial services.

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Banks will need to assess which elements of their value chain truly add value
to the end customer and which do not, how much value is created, what are
the associated risks and costs and what are the opportunity costs of divestment.
Accordingly, banks may decide to focus on certain processes themselves, may
consider outsourcing and other innovative partnership models for sections of
their value chain or may in-source certain business from other banks, leveraging
economies of scale and leading to the rise of new utility models in the industry.

Open banking will drive all banks towards focusing on what is really core to
them i.e. which business segments and geographies they want to operate in.
Focus areas in the future will be extending private banking to the mass affluent
and ultimately mass retail segments and extending corporate banking to the
underserved SME segment. Banks may choose to provide a full front-to-back-
service in selected business lines or offer their own products to third-party
distributors or sell third-party products to their own customers. Thus, banks will
co-exist with and co-evolve with multiple players in the banking eco-system,
pursuing a combination of open banking business models.

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 The Retail Banking
Capability Model of the Future 4
Incumbent banks still possess an enormous competitive advantage over non-traditional Percent of respondents who trust big tech
entrants. Their scale, connectivity, assets and special role as custodians of consumers’ to handle financial needs18
financial information put retail banks in a prime position to capture the market of the future.
Being regulated means implicit state support in the shape of insured deposits and access
to central bank funding, resulting in lower costs of liquidity and raised barriers to entry.
Historically, this has led to increased trust between the bank and the customer, but the 65%
trust advantage is fast narrowing. Customer attitudes towards banking with technology
companies have become more favourable in recent years.

Banks are running out of time to seize the opportunity presented by the twin trends of
digital and open banking which will entail fundamentally restructuring their business model,
acquiring new competencies as well as improving their ability to execute.
58%

18. McKinsey Future of Banking Consumer Survey July 2019

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Key banking capabilities in the digital and open banking age: The banking capability model today needs to balance between customer-driven
differentiation in distribution and efficiency-driven standardisation in manufacturing, both of which are underpinned by front-to-back digitization and analytics.
The insights held by banks are their core asset in today’s world and these are increasingly driven by AI which is infused into every aspect of the banking business
model, whether to launch hyper-targeted marketing campaigns and personalize products and experiences or to optimize processing and reduce operational
costs and risks.

Digitally augmented
customer experience
89%
87% Contextual 94% Mass 88% Open banking 74%
Distribution &

Omni - channel user-experience r

personalization
Harmonized, seamless, Collaboration with
channels

Analytics-driven, Tailored products ecosystem partners

proactive, intimate omniscient, proactive and services via APIs
Front-to-back digitization

91% Analytics
Analytics
Manufacturing

87% 90% 95% 88%

Flexible, modular Straight-through, Scalable, secure Adaptive and resilient
product engines real-time processing infrastructure (Cloud) operating model

Efficient and effective operations

X% Proportion of Temenos Value Benchmark* retail participants that rated the capability as top priority (4 or 5 out of 5 on importance)

* Temenos Value Benchmark (TVB) is Temenos' proprietary survey-based strategic programme to discuss business performance
and value creation by a bank's investment in IT, structured around business and IT metrics and qualitative best practices.
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Temenos Value Benchmark (TVB) participants confirm that digitizing the bank from the front through to the back and the bank-wide use of analytics are key
capabilities required to compete in the industry today.

Front-to-back digitization Analytics

This includes seamless on-boarding and origination, automated processing Analytics is about the fact that decision-making across the bank is supported
of transactions, payments and settlements from the front to the back as well as by user-friendly facts and data using descriptive/ diagnostic as well as
automatic accounts reconciliation and billing processes. 89% of participants predictive/prescriptive analytics embedded into banking processes. 91% of
have given this an importance rating of 4 or higher on a scale of 1-5. The TVB TVB participants have rated analytics as the highest priority. The TVB has also
has also revealed that the best performing banks in terms of cost-income ratio revealed that the best performing banks in terms of cost income ratio have the
have the highest levels of front-to-back digitization i.e. top performing banks highest levels of analytics usage i.e. top performing banks use analytics 23%
are 26% more digital19 than the average performers, indicating that digitization more widely20 than the average performers, indicating that analytics maturity is
maturity is a driver of financial performance. a clear driver of financial performance.

“Take the experience that we currently deliver to our bankers in face-to-

face channels and provide that same quality of experience through a digital
channel. The big challenge often comes down to how do you personalize it and
make that experience different for every client and recognizing what makes it
unique. And a big part of that comes down to data and AI.”
- Jeff Wright,
SVP Client solutions, Canadian Western Bank (Canada)

19. Temenos Digital Index = 0.25 x Digitally active customers (%) + 0.25x Front Office STP rate (%) + 0.25 x Operations STP rate (%) + 0.25 x Payments STP rate (%)
20. Temenos Analytics Index = 0.5 x Analytics users (%) + 0.5 x Analytics Reports per FTE (%)

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The distribution end will focus on providing a digital customer experience that differentiates the bank from competition. It will have the following
characteristics:

Omni-channel: Today’s full-service banks need to support multiple Contextual user experience: Personalized and analytics-driven
channels, assisted and unassisted, internal and external. They must provide a customer journeys are the cornerstone of the retail banking experience
consistent experience and share intelligent data in real-time so transactions today. A bank must hold a 360 degree view of the customer and understand
on one channel seamlessly continue on another. The focus has moved from customer behaviour at every touchpoint as well as preferences and spending
driving customers towards lower cost digital channels to re-injecting intimacy habits. Real-time and predictive analytics are key in order to proactively
into these e.g. chatbots, hybrid video chats with human and digital touchpoints monitor as well as dynamically change this behaviour by generating insights
delivered at scale. Multimodal channel capability i.e. combining more than on next best interaction, propensity to buy or to leave and then using
one channel into a single touchpoint are some of the newer challenges. gamification, for instance, to nudge a customer towards their financial goals. It
is a top priority for TVB participants (94%).

Mass personalization: Customers want their own personalized set Open banking: A direct outcome of the disintermediation of the banking
of products and services, designed and priced based on a 360 degree value chain, open banking is now a global phenomenon, actively promoted
lifetime view, preferably via a self-service menu of mix-and-match options. by regulatory regimes in ~40 countries. It is all about banks flexibly and
Additional value-added offerings such as personal finance management to seamlessly collaborating with 3rd party service providers or technology
enable customers to gain insights into the spending and savings habits of their developers via open APIs in a bid to deliver beyond banking lifestyle services
peers are being commonly used to personalize the customer experience. to the end-customer. Examples include conveyance and home insurance
Mass personalization has been rated high by slightly fewer TVB participants bundled with mortgages or integrating a credit application on a real-estate
(88%) because it depends on banks’ individual business models e.g., niche website. It entails banks having access to well populated and well curated
players focusing on specialist products may not need to mass personalize. digital marketplaces to enhance and extend their functional capabilities with
innovative third-party solutions where appropriate. Open banking has been
rated high in importance by fewer TVB participants (74%) because it is still
nascent in many markets.

“Leveraging Temenos deep market experience and its advanced cloud-

native, cloud-agnostic and API-first technology, Next Bank will set the
standard for innovative digital banking and hyper-personalized customer
experiences.”
- Wang Tun Chou,
Chief Information Officer, Next Bank (Taiwan)

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The manufacturing end will need to focus on efficient and effective operations. It will have the following characteristics:

Flexible, modular product engines: Modern product architectures with Straight-through, real-time processing: In order for banks
re-usable product features, hierarchies and relationship pricing allow banks to offer to support digital customer journeys end-to-end from prospecting,
customer-centric, innovative feature-rich products that are quick to create and easy to order fulfilment to servicing, they need straight-through processing
maintain. Speed to market in launching products at the manufacturing end enables test all the way. Today’s always-on customers can only be catered to
launches based on real-time customer feedback, targeted time-bound promotions and by highly available 24x7 real-time core processing engines which
introductory offers at the distribution end. can receive and process transactions and queries any time e.g.,
for instant payments, it is required to have a downtime less than 60
Scalable, secure infrastructure (Cloud): Banks must be able to handle minutes per year in Europe. 95% of TVB participants cited this as a
the proliferation of increasingly complex customer interactions and transactions top priority.
engendered by digitization, open banking or contactless payments to acceptable
levels of performance. New business models mean unpredictability and rapid Adaptive and resilient operating model: The operating
response to change which cloud-based infrastructures with auto-elasticity, hyper- model of the future must have in-built mechanisms for self-monitoring
scaling and accelerated release cycles provide. Today, it is all about instances being and logging of interactions and transactions in real-time to
stood up or down in real-time. Active-active capability to move from one cloud continually optimize performance. Technologies like robotic process
platform to another without downtime provides the highest levels of resilience. Today’s automation embedded into banking processes help achieve this.
retail banks must have a multi-level cybersecurity framework including authentication,
authorization, access and consent control as well as non-repudiation. Scalable and
secure infrastructure was cited as a top priority by 94% of TVB participants.

“Temenos is a highly scalable “Temenos has been a key technology “What we did with M-Shwari was a big, ground-breaking project.
platform, it’s a secure platform and partner on our 6-year journey with We went live in 5 months because we were able to launch so
it’s a platform that the regulators its scalable and resilient core banking quickly, we massively exceeded our business case targets. In the
were comfortable with.” platform supporting our exponential first 3 weeks, we onboarded more than 850,000 customers, and
growth from day one.” processed over 5 million transactions.”
- Eric Muriuki Njagi,
- Colin Walsh, - David Young, CTO, General Manager, New Business Ventures
Founder & CEO, Varo Bank (USA) Metrobank(UK) M-Shwari(Kenya)

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 The Current Reality
and the Case for Digital Transformation 5
The majority of established banks still have complex and fragmented legacy IT architectures,
pre-dating the digital era. For some, a history of mergers and acquisitions has resulted in multiple, High
overlapping legacy systems across their business lines and geographies. 77% of European operational costs
financial institutions reported complex IT infrastructures with high dependencies on end-of-life
critical systems in an IT risk assessment by the ECB Banking Supervision IT and Cyber risk survey
High
in 2018. As a result, ECB plans to increase its focus on these institutions with the aim of reducing
operational risk
reliance on these high-risk legacy systems.

Core banking systems designed decades ago were originally batch; the memo-post that
Poor
evolved later still did not track full information or trace to source. Worse, product-based banking
customer experience
services were hardwired into channels making it prohibitively expensive and time consuming to
launch new products.
Reduced speed
The advent of always-on, anytime, anywhere digital channels, the consequent dramatic increase
in both queries and transactions and the requirement for instant processing of payments
to market
propelled banks to build additional niche applications and interfaces around the legacy.
This has resulted in complex and fragmented architectures with multiple interfaces and systems,
Poor
which are inflexible and difficult to change and expensive to run.
business insights
Legacy-based IT architectures have several disadvantages, reducing the banks’ ability to
compete in today’s world.

Complex, Monolithic,
Inflexible, Batch Legacy
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 High High Poor
operational costs operational risk customer experience

Banks spend on average 11%21 of their revenues Apart from the risk of technological obsolescence Legacy spaghetti behind a modern, digital front-
on IT, a percentage much higher than industries like and skills shortages, a legacy landscape with end can imply manual hand-offs in an end-to-end
manufacturing or oil & gas (up to 3-4% of revenues manual hand-offs and re-keying of information in banking process. A customer journey that begins
on IT), which have already industrialized their different systems increases the risk of processing digitally and switches to manual at a later stage
processes with the help of packaged, upgradeable errors. Multiple interfaces introduce multiple points of the process, say in a mortgage application, will
software. Moreover, only 27%22 of banks’ IT of failure. There have been several instances of frustrate customers that are expecting an Amazon-
spend is on growth and innovation; the rest is on high-profile outages with associated reputational style, seamless service from their banks. It also
non-discretionary regulation or on business-as- damage and regulatory fines. A spate of online makes it almost impossible for banks to provide
usual, coping with the legacy spaghetti that leads glitches have hit almost all the UK’s high street customers with accurate updates on the status of
to manual processes and greater integration banks in recent years prompting discussions of their query or application as the transaction moves
and maintenance efforts. Peak usage during the resilience and operational risk in the industry. from the front-office to the back-office. Batch
batch process results in high infrastructure costs, in The Basel Committee on Banking Supervision processing in some legacy systems implies that
contrast to modern real-time systems that smooth has recently imposed new rules to standardise customers are forced to wait for their transactions
out usage patterns and enhance efficiency. the way banks assess operational risk, including to clear, instead of instant processing. Outages
the potential impact of system failures. As a result, imply inconvenience and even loss of credit ratings
banks using internal models that make them appear adversely impacting customer satisfaction.
less risky face higher capital risk requirements that
can undermine a retail bank’s ability to lend and
increase the costs of maintaining deposits.

21. BCG IT benchmark in banking 2004-2011

22. Celent report “IT Spending in Banking” 2018

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 Reduced speed Poor
to market business insights

Of 65 senior banking executives surveyed by Powerful analytics driven off data from the core
Ovum in Europe23, 80% said outdated core engines are required to understand customer
banking systems were causing them to struggle needs, supply regulators with necessary data
to bring new products to market quickly, while and to make key business decisions to improve
75% felt that existing systems do not support performance. Extracting the data from legacy
regulatory change. Legacy systems are typically systems is often too complex and costly an
not parameter-driven, taking months (9 -12) of exercise, often resulting in banks sitting with a
coding and testing to launch new products or to wealth of rich transactional information across
adapt existing products and services to market/ their organizations, and unable to exploit it.
regulatory changes or to extend product range They could miss business opportunities from
to non-banking services. Mainframe legacy interconnected customer relationships, say, when a
release cycles are also too rigid and infrequent, retail customer works for, supplies to, or purchases
often quarterly or half-yearly, making it difficult to from a corporate customer of the bank. Legacy
respond quickly to business requirements. Google landscapes are also typically characterized by
and Facebook, in contrast, have weekly release high duplication of data, seriously hindering the use
cycles. Modern packaged software providers of advanced analytics. A global Tier 1 bank, for
now have continuous deployment and testing and example, embarked on a big data implementation
online software updates, making them much more project in 2012 to extract data from 46 mainframe-
responsive to the fast-moving retail banking world. based data warehouses that over a span of 30
years, had built up 90% data duplication24. In
contrast, even the average performing banks with
packaged software have duplication in the range
of 30%, and the digital natives none at all.

23. The Business Case for Core System Transformation - Ovum Research 2012
24. Press research 2016

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Strategies to Respond to
Industry Pressures 6
Banks recognize the need to address the limitations of their IT landscapes. They are following a combination of
three strategies to respond to the compelling propositions from new competition:

Collaborate Build Renovate

with fintechs greenfield existing business

Source capabilities Launch a greenfield Adopt cloud,

from fintechs to augment / challenger bank microservices and API
complement own creating (new brand/market) technologies to renovate
new revenue streams or same solution and leverage existing IT architecture
reducing cost of funding the functionality that meets
their needs.

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Collaborate with fintechs Build greenfield Renovate existing business
Almost all banks are collaborating with fintechs 10-15% of banks are setting up a greenfield Transforming their IT architecture is the most
to bring in new capabilities that augment or are challenger bank with a new operating model difficult strategy for incumbent banks. Cloud
complementary to their own. Banks are seeking and standalone technology platform, often as a and Software-as-a-Service (SaaS) have led
new technologies, ideas and agility and above all new brand to address a new market or customer banks to address the challenges of their current
innovation skills and mindsets from partners while segment e.g., millennials with a simpler product IT landscapes. 60-70% of banks are in various
they bring their large customer base, compliance proposition. As this is relatively low cost to set up stages of cloud enablement. However, the
prowess and trust to the table. Collaboration (~$50M), it is becoming popular as a flanking majority of banks are not re-architecting their IT
takes the form of investment, partnerships and strategy. 70% of bank-owned digital challengers landscape; they are avoiding difficult decisions
acquisition. The last is not popular as it is hard to are about bringing in new revenue streams but and ending up either lifting and shifting existing
find a player that meets the bank’s compliance 30% allow cannibalization of existing business to systems to Cloud infrastructure platforms or
and M&A criteria. It is more common for banks build a future architecture and a low cost-to-serve building new capability on top of existing legacy
to promote hackathons, accelerators, incubation model that will be the Minimum Viable Product say, product and pricing on top of core, also
hubs and venture capital funds these days. While (MVP) to move the existing business to, eventually. called hollowing out the core. Only 10-15%
useful in terms of providing ideas for innovation, of banks are pursuing true bottom-up digital
collaboration is by no means a transformational transformations involving simplifying and re-
approach. The technology platforms built by most “We are a digital-native bank and architecting their landscape and decommissioning
fin-techs are excellent for the specific use case Temenos has enabled us to redefine legacy platforms bottom-up. Of the 50 largest
they were built for but as they add more features banking – to use the internet as our global banks, three out of four now pledge
and functions there can be a disincentive of scale branches.” themselves to some form of customer-experience
as their architectures are not designed for scale - Tom Lin, Executive Vice President, transformation but just a handful are embarking
or long term flexibility (geographical and product O-Bank (Taiwan) on true digital transformation.
complexity).

“PSD2 opens the door for us to develop “Thanks to Temenos’ model bank “Our core banking transformation
– or partner with others to provide – approach, we obtained a new banking enabled us to reduce our spend on
new services for our customers“ license in China, and have implemented hardware and software maintenance
a new core banking system that meets by 50%, freeing resources that we
local regulations in 6 months” could invest in customer service and
innovation.”
- Vernon Hill, Chairman, - Said Adren, General Manager, - Mr. Coolson Shen,
Metro Bank(UK) BMCE Bank of Africa (Morocco) Project Manager, Sinopac (China)
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 A new Approach to Digital Transformation
using Disruptive Technologies 7
Banks recognize that “hollow-out-the-core” and Current approaches
other fringe strategies will not address the underlying Historically, core transformations had high execution
issues of extremely complex IT landscapes, and risks, costs, complexity and multi-year timelines,
hence will not allow them to dramatically reduce often exceeding the average tenure of CIOs and
their operating costs and risks or enable them to other top executives. Banks’ reluctance to simplify
quickly and cost-effectively deliver all the products business processes before implementation as well
and services and experience that their customers as changing business requirements during the
demand now and in the future. long-running project led to scope creep, delays
and overrunning costs. Multi-year core banking
However, core banking platforms that support all transformations structured around few and infrequent
retail transactions are critical to a bank’s operation milestones, had long payback times, high initial
and programmes to transform them consequently investment and late-accruing benefits. The business
come under high regulatory and shareholder case was hence difficult to justify, especially when
scrutiny, with associated reputational risk. For competing with more immediate non-discretionary
example, TSB’s high-profile failure in the UK has regulatory or customer-facing digitization projects.
reduced banks’ risk appetite for core transformations. This is because banks followed traditional
approaches involving:
1. Best-of-breed target architecture involving costly,
time-consuming vendor selections and coordinating
and managing multiple vendor relationships and
software upgrades;
2. Implementation strategies with traditional waterfall
development models, complex, interdependent
work-streams involving co-existence and integration
of new and old systems, duplication of effort and
throwaway code.
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The role of disruptive technologies

Today, the maturity of software package providers in harnessing the disruptive technologies
upends these traditional approaches, dramatically lowering the complexity and cost of
implementation and migration to platforms that are so compelling and cost-effective to run that
banks are left with no choice but to transform.

Distributed cloud-native architectures leveraging containers, microservices and open APIs

combined with automated DevOps allow software packages to be implemented in leaner,
more discrete steps which lower the costs, risk and time to value, allowing incremental benefits
to be achieved in a more continuous fashion. Together with rich functionality that is highly
componentized, with in-built advanced configuration and smarter and more automated data
migration tooling and pre-integration with 3rd party and digital marketplace providers, today’s
software providers make it easier, cheaper and faster for banks to transform.

In addition, the software-as-a-service (SaaS) option enables banks to consume, manage

and maintain packaged software in a secure, continually evolving, self-service platform while
allowing them to develop their specific banking models through advanced configuration and
extensibility capabilities at their own pace and desired frequency. This results in even greater
business agility and speed as well as cost efficiency and transparency, while providing
enhanced security, resilience and compliance. Banks can focus on innovation and their core
business, while the software provider takes care of the rest

Disruptive technologies allow a radically different approach to digital transformation

irrespective of whether banks want to build and migrate or pursue continuous renovation.

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Migrate and Consume on Demand - A new paradigm

The key to a successful digital transformation is the smooth transfer of a bank’s existing data to the new platform. Traditionally, banks built the new solution first
and subsequently migrated the data in accordance with the new platform. Today, disruptive technologies allow banks to take over and understand this data
much earlier in the process. Subsequently, banks can “consume” individual capabilities in accordance with the specifics of their business strategy and context.
This means decoupling the actual data migration process from the subsequent consumption (or activation) of the migrated data along with the build of the new
platform.

FROM Implement and Migrate: TO Migrate and Consume on Demand:

Implement new platform followed by migration of existing data Migrate existing data using AI-based technologies first and incrementally
"consume" or activate data as new functionality is built on target platform

1 Step 1: Implement new platform 1 Step 1: Migrate existing business data to target platform
(before bank-specific implementation)

Old Platform New platform

database
Build or Continous
Data
& Renovate Renovation

2 Step 2: Migrate existing business data onto 2 Step 2: Consume on Demand

newly implemented platform

Build Continous
& Renovate or Renovation
Old Platform New platform

Data
Data migration alligned to
implementation millestones
New Associated Data Activation
Platform and Consumption

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The Migrate and Consume on Demand approach is based on the following enablers:

1
Next generation
data migration technologies

Data migration is an extremely complex activity Minimum mandatory data can be prescribed Thus, intelligent, automated and online
and banks often need to undertake several by the new platform and enforced for each data migration massively accelerates the
iterations in order to filter, de-duplicate, clean banking domain. Subsequently, the bank can decommissioning of legacy systems, reduces
and accurately map legacy data sources to conduct a full product rationalization and the time needed to migrate the existing
the target platform’s data structures in order mapping to the new platform with far fewer business, and provide banks full control
to extract, transform and load the data onto resources and much reduced timelines. and flexibility to sequence their migration
the target platform. Automation and AI-based according to their specific requirements.
technologies can significantly speed up the Financial data cannot be duplicated during
migration and optimise the individual steps the migration process unlike master and
involved. Intelligent AI-driven data migration reference data; hence there cannot be more
algorithms can automate data mapping focusing than one source of the truth. There should
not only on client and transactional data but be no downtime to allow continuous digital
also legacy products, by proactively proposing services during the migration. Online data
the necessary product components (e.g., fee migration capability supports financial data
structures, lifecycle, other features) needed takeover at a customer or product level,
to re-build those products in the new system. without the need to bring down systems
Furthermore, Robotic Process Automation (RPA) avoiding duplication.
technologies can automate several steps in the
migration such as data mapping sequencing and
reconciliation of the loaded data.
The Migrate and Consume on Demand approach is based on the following enablers:

2 3
Low code bank-specific
Domain-oriented
differentiation
microservices architecture
capability

Cloud-native domain microservices with In the context of COVID-19 and the Packaged software with broad
preconfigured business capability and acceleration in digital transformation, banks functional coverage augmented
pre-packaged APIs allow banks to control need to rapidly expand and deepen their with hyper-parameterization for
what functionality to implement and when, digital offerings in multiple channels with maximum flexibility, with preconfigured,
whether they do so themselves or procure straight-through execution and processing. extensible and re-usable features as
software as a service. The pre-packaged Domain microservices allow banks to well as developer-friendly technical
APIs that connect digital channels and other frequently update discrete core banking tooling allows banks’ IT staff to extend
systems both within and outside the bank capabilities, avoiding the risky and costly and differentiate. Today’s software
help speed up the required integrations. exercise of having to test the entire platform. packages come with thousands of
Cloud native microservices help banks better Finally, microservices lend themselves to configuration, migration and extension
control the integration landscape in a core automated software delivery – continuous APIs and design-time tooling to allow
transformation as well as lower costs through deployment, integration and automated bank to design and publish specific
elastic scaling. The ability to independently testing greatly speeding up any changes APIs, enabling rapid incremental
deploy manageable units of the required required during implementation. implementation.
banking capability (e.g., different product
lines, pricing, payments execution) with
limited downtime allows smaller and simpler
upgrades thereby providing banks the agility
to roll out new features in a more timely
manner in response to market requirements.
 The Size
of the Prize 8
McKinsey estimates a substantial impact on the ROE of the banking sector The trillion dollar profit opportunity
through digitization-driven productivity improvements (2-5% uplift) and by End-to-end digital transformation could unlock an incremental profit
building on the digital foundation to orchestrate an open banking eco-system opportunity worth $1 trillion across the banking industry for those banks
strategy (3-6% uplift), from improving margins, acquiring new customers at on their way to digital transformation, as well as those that are yet to make
lower cost, and then capturing a share of some non-banking markets through meaningful advances.
the platform model. There is tangible value to be gained if banks are able to
digitally transform their businesses and move from legacy-systems to modern,
off-the-shelf packaged software running on the latest cloud-native, cloud- Return on Equity
agnostic API-based platforms. 16.4%
9.5% 6.9 pp
As the world’s leading provider of banking packaged software focused
exclusively on banking for 27 years and with 3000 banks running our $1 trillion
software, it is our mission at Temenos to help our banking clients out of the operating profit*
vicious circle of low profitability and into achieving tangible business value
directly driving banking performance. Global Temenos Value
Average Benchmark Average
The average ROE for Temenos clients in the Temenos Value Benchmark is
16.4%, 1.5X the current industry average of 9.5%. This translates into $900-
1000 billion in incremental operating profit potential for the global banking *By closing the 6.9 pp gap between Temenos and Global average, Every 1pp increase in ROE quates to
incremental $140B in ore-tax profit. Sourse: McKinsey Global Banking Reviews 2017/2019, Temenos analysis.
industry, were it to digitally transform and thereafter follow successful
ecosystem strategies.

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In addition, we found that our top-performing clients already achieve industry-leading
returns on equity of 29%, 3X the industry average and cost-income ratios of 26.8%, 0.5X
the industry average. These clients also invest over 51% of their IT budget on growth and
innovation versus maintenance, which is 2X the global industry average. This data can
help boards of leading banks to gain confidence that core banking transformations are
not only eminently do-able, but also yield proven financial benefits, if done right.

Our high performing clients

Achieve Achieve Allocate IT spend
cost-income ratios returns on equity
2x industry
0.5x industry 3x industry average to growth
average average & innovation

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 Conclusion
At Temenos, we believe the tipping point has been reached. The banking
industry is changing so dramatically that it is no longer possible for banks to
stay competitive and fulfil the needs of customers with their legacy-based IT
landscapes. Many bank executives have tended to view digital transformation
too narrowly, concentrating on stand-alone front-end features such as mobile
apps or online spend analysis charts. Digital innovation built on batch systems
with inflexible product engines, hard-wired channels and broken, manual
processes, is not sustainable. A modern, digital engagement platform without a
modern core processing engine will eventually hurt a bank, for it will be unable
to provide customers the full front-to-back service that they have come to expect
from providers of lifestyle and retail services, like Amazon and Uber.

And finally the order of magnitude reduction in operating costs required for
banks to compete in today’s open banking world mean they have no choice but
to digitally transform and renovate their end-to-end business model to the core.

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 Author
Kanika
Hope
Chief Strategy Officer

Acknowledgements
Prema Franck Sundareswaran
Varadhan Magnan Devarajan
Chief Product Architect Director of Global Principal Business
Client Engagement Solutions Consultant

About Temenos
Temenos AG (SIX: TEMN) is the world’s leader in banking software. Over 3,000 banks across the globe, including 41 of the top 50 banks, rely on Temenos to process both the daily transactions and client interactions of more than 500
million banking customers. Temenos offers cloud-native, cloud-agnostic and AI-driven front office, core banking, payments and fund administration software enabling banks to deliver frictionless, omnichannel customer experiences and
gain operational excellence.

Temenos software is proven to enable its top-performing clients to achieve cost-income ratios of 26.8% half the industry average and returns on equity of 29%, three times the industry average. These clients also invest 51% of their IT
budget on growth and innovation versus maintenance, which is double the industry average, proving the banks’ IT investment is adding tangible value to their business.

For more information, please visit www.temenos.com.

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