The banking industry, crucial to our global economy, often faces criticism for its slow adoption of digital technologies. While customer-facing innovations like mobile banking apps and online services have made significant strides, the digitisation of back-office processes lags behind. Why?
In a recent interview with Bloomberg, the CEO of a major Singaporean bank[1] noted:
“A lot of people have tried to digitise before they change the fundamentals. I call that putting lipstick on a pig.”
The fundamental issue, as referred to, is addressing the complexities of back-office integration, which are a significant roadblock to swift digital transformation.
Understanding Back-Office Processes
The back office is where critical behind-the-scenes activities occur, including transaction processing, compliance, risk management, accounting, and customer data management. These processes, often involving legacy systems, are essential for a bank’s smooth operation but have been in place for decades.
Legacy Systems: A Complex Web
One major challenge in digitizing back-office processes is the prevalence of legacy systems. Built using outdated technology, these systems are deeply entrenched in bank operations. Integrating new digital technologies with legacy systems is complex and fraught with risks, with any disruption potentially affecting customers.
Cost of Transformation
Updating back-office systems comes with significant financial costs. Banks must invest heavily in new technologies, skilled personnel, and change management processes. For many, especially smaller banks, these costs can be prohibitive. The return on investment (ROI) for back-office digitization isn’t as immediately apparent as for customer-facing innovations, making it a tough sell to stakeholders.
Regulatory and Compliance Challenges
Banks operate in a highly regulated environment, and any system changes must comply with numerous regulations and standards. Ensuring compliance while integrating new technologies can significantly slow down the process.
Cultural Resistance and Skill Gaps
The human element is crucial. There’s often resistance to change within organizations, especially in banking. Employees accustomed to legacy systems may be wary of new technologies, fearing job displacement or increased workloads. There’s also a significant skills gap, necessitating extensive training or new hires.
Interoperability and Data Silos
Banks often operate in silos, with different departments using various systems and processes. Achieving interoperability between these siloed systems is a major challenge. For digitization to be effective, data must flow seamlessly across the organization, requiring technological solutions and a shift in mindset. For example, establishing data governance, data ownership, and controls can be problematic.
The Risk of Incomplete Integration
Banks can adopt a selective approach to digitization where back-office processes are not completely integrated, but it’s far from ideal. Digitizing without an integrated back-office processes can lead to significant vulnerabilities, including cybersecurity risks, compliance failures, and operational inefficiencies (including system failures/outages). Such an approach leaves banks exposed to various threats, undermining the benefits of digital transformation.
Conclusion
While the digitization of front-office processes in banking has seen rapid progress, the back office remains a challenging frontier. Overcoming barriers like legacy systems, high costs, regulatory hurdles, cultural resistance, skill gaps, and interoperability issues requires a comprehensive approach. Only by addressing these challenges can banks fully realize the benefits of digital transformation, enhancing operational efficiency, customer service that supports sustained business growth.
Should you wish to discuss further, please do not hesitate to contact:
Laurie Antioch, Chief Finance & Strategy Officer.
[1] DBS CEO Gupta says only half of banks making enough tech progress | The Star