The Modern Banking Dilemma
By: Edgardo Torres Caballero, Managing Director Mambu Americas
Latin America’s financial industry is evolving quickly and developing several new opportunities for banks and fintechs along the way. Yet the critical challenge the industry faces is in how it will serve both the region’s fast-growing and evolving needs, and the millions of unbanked individuals coming online thanks to smartphone access and connectivity. According to GSMA, the percentage of the continent’s population that uses a smartphone in 2020 is pegged at 76%, but only 45% has access to banking services.
In certain cases, banks seem to find themselves in a dilemma, they can’t be everything to everyone and must choose between being able to quickly add new products and services or be large enough to capture as many customers as possible.
Some banks have been overshadowed in this area by start-ups like Brazil’s Nubank that recently completed a $400 million USD round of funding bringing its valuation to more than $10 billion USD and has recently launched in Mexico and Argentina. Despite the explosion of and competition from this growing part of the industry, incumbent banks boast an arsenal of advantages – an existing customer base, trust, data, and strong balance sheets – that position them as leaders today and well into the future.
“As the pace of change increases—whether due to innovation, regulation or competition—a bank’s vulnerability increases,” Bloomberg wrote in a 2018 article. “The only way that banks can manage this risk is by embedding flexibility into their operating models to enable them to adjust rapidly to the way they serve their chosen market. In short, more agility is required to allay any fears about being ‘too big to respond.’”
The question isn’t scale versus agility. It is which institutions will embrace a new model of banking. It’s one that is cloud-based. It also integrates interoperability and flexibility through open APIs, which allow different applications from different sources to collaborate and share information and focuses on meeting customer demands quickly and seamlessly. The question is which institutions will use a composable banking approach to both create agility and build scale into a true future-proof bank.
Composable banking is about the design and delivery of financial services based on the rapid and flexible assembly of independent, best-for-purpose systems. It helps banks create modern customer experiences to compete in the fintech era — and constantly evolve them to respond to change.
So, what makes this approach different? It first recognizes the need to respond quickly to changes in markets, customers, competitors, regulations and technologies. A truly SaaS platform allows banks to cut costs drastically while creating a fintech hub to meet the needs of experience-focused customers by quickly deploying independent systems that improve or pivot without major disruptive releases.
In a 2018 study titled “Agility at Scale” Deloitte provided the following recommendations based on its experience working with clients around the globe in the financial and other sectors.
“Adopting an agile methodology to work at the enterprise level cannot be achieved with superficial changes. It requires a fundamental shift to successfully evolve a traditional organization to one with cross-functional teams that work autonomously together aligned by common strategic objectives.”
In a 2019 article, the consulting agency said legacy banks locked into outdated systems often written in near obsolete programming languages simply lacked the level of agility needed to compete in the modern, digital marketplace where consumer demands and regulations can change seemingly overnight.
Composability gives banks the power to collect and analyze data to yield actionable intelligence that can help quickly contribute to the bottom line, all supported by the cloud-based platform’s ability to efficiently create and roll out new products.
In 2019, Accenture compared this strategy not to the future, as one might expect, but to a bygone era of smaller banks that intimately knew their customers’ needs, likes, habits, and unique behaviors. By using a composable approach banks are not only able to gather information about these trends at unprecedented speed and in unprecedented numbers, they are also able to free this data from the locked silos of legacy systems and create the “fabled segment of one where products and services are tailored to the individual in real time.”
Yet for a legacy bank with a high degree of structural, regulatory and procedural complexity, achieving agility at scale requires partnership with a proven system and team that can minimize operating costs and resources. It’s also one that can be completed in months, not years, to start reaping benefits at the speed of 2020.
It’s far more than a fantasy. Banco Galícia, an established bank in Argentina, has recently launched NaranjaX, its digital financial services provider, as a progression of Naranja, the biggest credit card issuer in the country, with over 5 million customers, with ambitions to quickly reach 20 million users. Meanwhile, also in Argentina, the fintech startup Ualá, started using a composable banking approach to make credit decisions based on consumer data and has underwritten over $800 thousand USD paid out in just 10 months to underserved markets. The time to embrace change and design the future is now.
