When we think of banking we think of money. What is money? People of my age think of money as something you carry in your wallet such as green dollar bills, credit card, debit card, etc. We buy and sell things using money. Often the money is put in a safe place, which is often a bank. A bank is a regulated institutions that stores money for people and other institutions. It also provides loans to people and intuitions. The money can be withdrawn from a bank when needed. A bank also provides safety guarantees with some acceptable risk. Governmental organization (such as FDIC) backup the safety of money up to a limit.
Over the years banks have transformed themselves due to regulations, technology advancements and customer expectations. But the basics of banking has not changed. Banking is based on two foundational principles: Exploiting asset-liability mismatch and liquidity risk management (https://www.amazon.com/Introduction-Banking-Principles-Management-Securities-ebook/dp/B07B1RTMXH). There are two main functions in banking: taking deposits from people and institutions and loaning to people and institutions. Depositors want to deposit money for a short term and loaners want to loan for a long term. Therefore, banking is provisioning of loans and deposits; the loans produce income for the bank, while the deposits create expense for the bank. The banks acts as a broker between borrowers and lenders.
A bank consists of primary functions and secondary functions. Primary functions include accepting different types of deposits such as savings deposit, fixed deposits, etc. Primary functions also include granting loans and advances such as bank overdrafts, loans, cash awards, etc. A bank also has several secondary functions that include transfer of funds, pay bills for their customers, collect checks, issue certified checks, safe deposits, foreign exchange, etc.
A bank has front office that cater to their customers through their primary and secondary functions. A bank also has back office that provides the backbone to the functioning of the banks. The back office consists of several functions such as IT (information technology) management, risk and compliance management, procurement, human resource, etc.
A bank exists for two main purposes: (1) to create value to its investors and (2) to create value to its customers. The two purposes are interrelated. There is also a third purpose, which is provide value to the society or environment such as Environmental, Social, and Governance. There are many strategies and approaches for a bank to deliver value to its investors and customers. A bank can focus on its core strengths to create products and services which are then delivered or sold to the customers. Such inside-out model is typically used by traditional banks. They have created a trusted customer base and know the expected amount of utility of these customers. Often a new and disruptive technology will change the capabilities of such incumbent banks. Banks that do not transform themselves, due to their rigid business models, will soon become extinct.
There is another strategy where banks focus on the needs of their customers and build new capabilities. Many startup businesses mushroom because they found a niche market and they develop capabilities to deliver value to the customers in the niche market. Incumbent companies that are agile will soon realize the need to transform their business capabilities to capture the new market, either organically or through acquisitions.
Banks and other financial institutions are undertaking digital transformation journey. The following figure illustrates one such journey from traditional banking to invisible banking is illustrated below.
The first step in any journey is understanding what is needed and how to achieve the needs. Banking is a complex environment due to their legacy applications, regulatory requirements, technology changes, customer expectation, and many other drivers. Once we understand what needs to be transformed, the next step is to virtualize some of banking functions. A key aspect of virtualization is to identify the “control part” and “functioning part” of the banking functions. We separate the control part and move them into “control plane services” and move the “functioning part” into the “data plane services”. For instance, a bank function that has coupled secret management (say for authentication) should separate the secret management as part of the control plane services. In a containerized model secrets can be delivered as a sidecar attached to pods in Kubernetes. Also, there are services that are purely controlling functions and those functions should also be moved into the control plane services. For instance, many of the compliance checkers should be moved into control plane services. We define software-defined banking as a set of services whereby banking functions are separated into control plane services and data plane services. This is very similar to what is done in software-defined networking.
The next step in the journey is to enable decentralization of banking services. The control plane services should be decentralized. Many banks are not ready to adopt blockchain and Web 3.0 technology. The data plane services deal with primary banking functions, such as opening deposit account, moving money from one account to another, making payments, etc. These transactions often require higher throughput and lower latency. But control plane functions are less stringent. For instance, KYC (know you customer) function could be de-centralized.
The next step to enable banking functions as embedded utility functions (EUF). EUF are a class of software applications that are based on two key principles:
(1) EUF should plug-and-play based on open standards and technologies.
(2) ESU should be enabled as a Utility Toll Booth that collects a toll every time the utility services are used.
The underlying EUF programming model should be a developer-first model that allows developers to quickly put together a solution to satisfy the needs of their customers. Many of the secondary banking functions can be implemented as utilities. For instance, KYC are utilities for banks and financial institutions.
The final step of the journey is to make these EUF as invisible to end users. This leads to the notion of Invisible Banking. To elaborate this further, we must understand the notion of customer journey. The customer experience world has moved from Financial-Centric to Life-Event-Centric. Customer life events starts even before a life is born and continues after a life passes away. A customer life consists of many life-experiences, called as Customer Journey such as Education, Marriage, Travel, Family, Purchases, Retirement, etc. Each customer journey verticals consists of customer journey verticals Education vertical consists of College Education, Continuing Education, Pre-K to High School Education, Vocational Training, Medical School, etc. The customer journey context is illustrated in figure below. The figure is a modified version of https://www.eaprincipals.com/course/financial-services-agile-business-architecture
A customer journey starts with a customer life experience events and ends with a customer satisfaction and customer trust. Each customer life events triggers one of more value streams in financial and non-financial firms, each value stream consists of one more value stage, enables one or more customer journey within the firm, and which in turn trigger one or more use cases.
Financial and non-financial firms must build a partner ecosystem that enables these customer journeys. This partner ecosystem should make banking (and other services) invisible to the customer. The journey from traditional banking to invisible banking is not simple and requires deep understanding of banking systems, customer expectations, regulatory requirements, and cybersecurity threats.
Kyndryl is there to help you to undertake this journey with you. Please reach out to me if you want to discuss this and other related topics.