What Digital Means In Banking: Operating Model

Editor’s Note: The following is third in a series of blogs excerpted from a report published by Celent entitled Defining A Digital Financial Institution by Daniel Latimore and Zilvinas Bareisis . D3 Banking has licensed the content used for general distribution. For the full report contact Celent. The previous installment in this series dealt with the the need for financial institutions to provide customers with a personalized, consistent user experience across all digital channels.

Digital requires a fundamental change in the banks’ operating model. Delivering the desired customer experience in the digital world is impossible without changes in products and services, organization, and technology. The figure below shows that Marketforce Digital Banking conference participants view legacy systems and organizational culture as two of the biggest impediments to banks improving their digital sophistication. This section discusses challenges presented by digital to the operating model.


It is imperative that banks deliver new products and services to their customers; digital allows them to do this more efficiently and effectively. Over the years, Celent has written much about innovation in payments: digital wallets, merchant payments directly from a bank account, and card-linked offers are all examples of banks delivering innovative digitally enabled products to their customers. We have also written about “native digital” banks, such as Moven, Simple, and Fidor, which are radically reshaping customer expectations on how to engage with their banks and financial services providers.

Impediments To Digital

What tends to be the great impediment to banking in improving their digital sophistication?

 Source: Marketforce Digital Banking Conference Participants

Digital is also changing how banking products are being developed — from engaging customers in idea generation to rapidly testing new product ideas to allowing customers to self-design products with features they value the most. For example, Spain’s CaixaBank has been very active in engaging with customers through social media. One of its communities, Inspiranos, is focused on innovation and is designed to attract customer ideas on how to enhance the bank’s digital channels. The “Credit Agricole Store” launched in 2012 became the first European app store proposed by a bank, where financial apps are cocreated by clients and developers using open bank APIs.

 Banks increasingly realize that they need to embrace partnerships to compete effectively in digital. For example, Lloyds and Santander have partnered with Monitise and iZettle respectively to bring mobile POS solutions to market. Incumbents are starting to experiment with crowdfunding and peer-to-peer lending, the two innovations which have been threatening to disrupt the banks’ lending business. In June 2014, Santander became the first high-street bank to refer its customers to Funding Circle, an online P2P lender. Royal Bank of Scotland announced in October 2014 that it was also partnering with a third party to launch an online P2P platform before the end of the year.

 Another way for banks to accelerate their product innovation efforts is by investing in startups. For example, Barclays has partnered with Techstars to launch its own Accelerator program to help promising startups. Others have launched investment funds, such as Santander’s Innoventures fund, which, according to Finextra, “has been set up to invest in fintech firms around the world, initially focusing on startups involved in e-commerce and payments, online lending and investing, and big data analytics.” Of course, banks can also choose to outright acquire capabilities, as BBVA did when it bought Simple earlier in 2014.


The digital world poses significant challenges to banking IT. Banks stuck with old and siloed legacy platforms struggle to maintain agility demanded by digital. In the meantime, regulatory and other mandatory changes keep pressure on the IT budgets.

Oliver Wyman’s report, Pity the CIO: The CIO’s Digital Predicament in Banking, highlights the following five challenges facing the CIO:

  • How to make the business case work?
  • How to get the strategic capability sequencing right?
  • How to create the digital delivery workforce?
  • How to free up the funding?
  • How to overcome legacy constraints?

The path forward is not always obvious. For example, considering how difficult legacy replacement is, banks are looking at alternative solutions, such as implementing an orchestration layer that reuses legacy capabilities but offers more flexibility in processing logic. The survey conducted during Marketforce’s Digital Banking conference in 2014 indicated that over 40% of participants viewed adapting rather than replacing legacy as a viable option to deal with the IT legacy challenge. Understandably, there are many believing that legacy replacement is unavoidable — 32% disagree strongly with the view that simply adapting will be enough.

Dealing With The IT Legacy Challenge

To what extent do you agree with the following statement - “Most financial institutions will be able to satisfy the expectations of the digital consumer by simply adapting, rather than replacing, their legacy systems?”


Source: Marketforce Digital Banking Conference Participants

However, as the adage known as Conway’s Law states, “organizations which design systems are constrained to produce designs which are copies of the communication structures of these organizations.” In other words, IT mirrors the shape of the business; for IT to become more effective, the business organization needs to break down its silos.


Indeed, given the wide-reaching impact of digital on business, an organizational transformation becomes paramount. It will be impossible to deliver a seamless FI brand experience across all points of interactions with existing channel and product silos. To break down these silos, digital transformation needs to become a CEO-level issue.

Celent’s recent survey also asked how different financial institutions organize to meet multiple channel priorities (see Figure 8). The most common approach prevalent in 55% of all FIs is to group channels under several heads (e.g., have one person responsible for branch and ATM, and another for digital channels). However, large FIs (over $50 billion in assets) tend to have one person responsible for all delivery channels; 46% of respondents indicated this approach at their institution. Six percent of all institutions, mostly smaller, responded “Other”; a number of those commented that they currently have delivery channels under different heads, but are considering an organizational structure change that would bring them all under one.

Organizing For Digital And Omnichannel

How do you organise to ensure your multiple channel priorities get met?


Source: Celent

Of course, such highly visible new roles and organizational units may backfire. There is a risk that the rest of the organization feels that “The digital box has been ticked” and that digital has become someone else’s responsibility. To truly succeed in digital, the culture across the entire bank must change. Transition to digital is first and foremost a large transformation program. Engaging all employees and ensuring their buy-in is essential, especially considering that the programs often result in changing roles or even redundancies.

What are your thoughts? Log your comments below. Be sure and subscribe to the 270 Degree View so you are notified when the next installment from Celent’s Defining A Digital Financial Institutions – “What Digital Means In Banking: Change To Product, Services, IT and Organization” is posted.