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The rip and replace approach to digital transformation has finally been seen for what it is – a failed strategy for delivering change that adds complexity at huge cost and risk. In its place, banks are turning to fintech ecosystems to allow them to compose the bank they want to be, today and in the future.

As the new decade began, the banking sector gradually realised that a substantial portion of the billions of dollars invested in digital transformations had gone to waste. In a nod to the infamous marketing quote, one global bank’s chief financial officer told consultants Oliver Wyman: “I know 50 per cent of my digital transformation spend is wasted – I just don’t know which 50 per cent.”

A joint survey of 500 senior banking executives by FT Focus and Mambu showed that banks need to evolve immediately to avoid being made extinct by nimbler, more technology-savvy competitors. More than two-thirds of banks in the report believe they will lose market share in two years unless they make significant progress in their digital transformation, and 74 per cent expect technology giants such as Google and Amazon to hold the largest market share in the banking industry in just five years’ time.

This is echoed by investors. When surveyed by Oliver Wyman, 37 per cent said banks’ digital strategies were neither clear nor credible.

To be fair, the penny had been dropping for a while. It had become increasingly hard for banks to justify the risk, cost, time, resultant complexity and lack of clear returns on investment of large digital transformation projects. Indeed, the notion of completely replacing legacy systems with new ones had been widely acknowledged as unfounded or unrealistic. In their place, banks such as Raiffeisen Bank International AG and ABN AMRO are launching independent parallel new banks –RDB and New10 – with their own digital platforms and business models.

IT transformation projects rarely involve a complete replacement of all technology with new systems. While banks migrate some technology, they often leave a significant amount in place, leading to increased complexity. Cost-benefit analyses are usually manipulated, avoiding the harsh reality that projects often exceed budgets, timelines, and fail to deliver as expected. According to McKinsey, only 30 per cent of banks that have undergone a digital transformation report successfully implementing their digital strategy, and the majority fall short of their stated objectives.

Big digital transformation programs may be over, but non-digital players can learn from the market and position themselves for success.

Both greenfield challengers and established incumbents understand the significance of agility and adaptability in composing their core. An essential aspect of this system is its openness, enabling seamless collaboration. Recognising that no individual bank can swiftly develop affordable proprietary technology to cater to 21st-century customer needs, banks are now focusing on cultivating and participating in ecosystems of collaborators where each member contributes something valuable, resulting in a synergy that exceeds the sum of its parts.

Ecosystem development is becoming a must-have, and it should be on the list when enterprises evaluate their banking service providers. Partners play a huge role in getting the right capacity and skills to grow retail banks while mitigating risks.

BCG reports that only 27% of top banks have engaged in ecosystems to a significant extent—defined as having substantial ecosystem activities with a strong link to their core business, not just peripheral experiments. More than half (52%) are in the experimental phases, and 21% have yet to sponsor anything beyond small projects or pilots.

Regulations, consumer preferences and even a global pandemic can all demand fundamental change to a bank’s processes and products. The ability to react fast will increasingly be a prerequisite to success. With open technology, change like this can be accommodated easily with minimal risk by adding new partners according to need. The bank is thereby composed of the members of its ecosystem, which evolves with time.

But agility isn’t the only goal. Fintechs have a strong record of delivering innovative solutions to banking challenges at a lower cost than banks could develop them themselves. So as the big platform companies such as Alibaba, Amazon, Apple and Google all encroach into financial services, bringing new, uber-customer-friendly ways of handling money, banks are having to respond.

All this is pushing banking further down a collaborative road. The challengers and some incumbents have already got this. With the myth of rip and replace exposed for what it is and the benefits of the collaborative model clear, many more will be able to develop coherent digital strategies that allow them to tightly focus their investment to respond effectively to change. But every day they delay, they fall further behind. Both customer expectations and technology are moving fast and the best of the competition are responding with equal pace.

The future is no longer about wasting cash on one digital transformation. The smart money is on continuous change.

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