Adapting to the New Digital Banking Paradigm

featuring research from forrester The Evolution Of Digital Banking Platform Architecture 2

Architecting for digital business requires an interconnection-first approach The shift to online, anywhere banking has pushed the retail banking industry to compete outside of traditional destination banking centres and is challenging it to deliver superior service on different channels, against new competitors. Branch locations are steadily declining in number as customers choose online interactions, where mainstream banking functions are migrating to smart devices. In an interconnected world where data is shared between banks, credit agencies, insurance companies, government regulators, news services and social media, there will come a time where the data volume will outgrow the capacity of the Internet. Application Programming Interface (APIs) that provide links between applications and data sets that need to be seamlessly and securely connected, may not perform satisfactorily with current legacy infrastructure. New Open Banking rules that are being rolled out in different counties, such as in Australia, will require banks to provide access to their data via these APIs. This will mean having access to fast networks and financial ecosystems will be crucial to In this meet the growing demands of the customers. Leading data centre providers have evolved to become document an ecosystem of networks, clouds and platforms supporting the financial services industry and the rapid digital transformation that is taking place. Software defined networks and edge services will be 1 Adapting required to develop the next generation of applications, that traverse from clouds to mobile devices to the New Digital Banking where everyone is accessing their banking services. Agility and speed will be key to maintaining a Paradigm market edge in the digital banking landscape.

3 Research From To achieve this, the more advanced banks and financial services providers have been deploying Forrester: The regional hybrid cores that provide interconnection hubs to clouds, Software as a Service (Saas) and Evolution Of other business parties for data exchange, linked together by global software defined networks. Once Digital Banking Platform they have deployed their regional hybrid cores, they deploy edge services either virtually or physically Architecture where they need to have a presence close to their customers and operations. This helps reduce latency, providing a better user experience, and capacity can be ramped up or lowered depending on 20 About Equinix demand. In addition, security controls can be easily added to the edge services to provide distributed security where it needs to be. Data hubs can be added at the edge to help solve for data sovereignty, or for data analytics or AI applications adjacent to clouds. This new architectural approach is essential for existing banks and new digital entrants to build or maintain their competitiveness, and to meet the ever-changing customer needs and strict regulatory standards. 3

CURRENT-STATE CONSTRAINTS Retail banks cannot deliver solutions to meet changing customer and market needs fast enough

Traditional, siloed IT infrastructures cannot integrate products and services into a single, rich customer experience. Centralised IT also constrains the performance of digital experiences delivered to customers at scale on a variety of devices. Retail banks are unable to bring new solutions to market quickly or take advantage of data and analytics for insights that could drive customer loyalty and growth. The result is an inability to effectively compete with non-bank and fintech entrants.

FUTURE-STATE CAPABILITIES A dynamic IT infrastructure provides high-quality experiences and quickly delivers targeted value to customers

Interconnection integrates people, clouds and data, enabling the secure delivery of high-quality customer experiences to markets, employees and customers around the world. Access to partner ecosystems allows retail banks to create innovative offerings and accelerate the delivery of those offerings to market. Finally, real-time information and analytics produce fast, relevant insights into changing customer requirements. 4

The Evolution Of Digital Banking Platform Architecture How Connected Instances Of Digital Architectures Can Help Banks Prepare For The Future by Jost Hoppermann April 6, 2020

Why Read This Report Key Takeaways Most banks talk about transformation and Banks Only Talk The Transformation Talk their individual plans for that transformation. Banks have been talking about needing to Nevertheless, banks’ application landscapes are transform for a decade. Yet today only 14% not yet in a shape that would allow them to cope think their applications can deliver great and with the forces that are tearing the industry apart. differentiating customer experiences (CX). This report looks at reasons for this situation Banks Need To Walk The Transformation Walk and offers application development and delivery Layered architectures can help technology teams professionals at banks architectural approaches in banks to move away from vintage banking that ease digital transformation first and prepare applications such as traditional core banking for business models or the API economy later. while mitigating transformation risk.

Connected Architectures Enable Banks To Be Ready For The Future Sophisticated layered architectures allow banks to assemble banking application landscapes from cloud-based and on-premises applications and prepare for the heterogenous application scenarios of the API economy.

This PDF is only licensed for individual use when downloaded from forrester.com or reprints.forrester.com. All other distribution prohibited. forrester.com 5 For Application Development & Delivery Professionals

The Evolution Of Digital Banking Platform Architecture How Connected Instances Of Digital Architectures Can Help Banks Prepare For The Future

by Jost Hoppermann with Oliwia Berdak, Jacob Morgan, and Corrado Loreto April 6, 2020

Table Of Contents Related Research Documents

Banks Need To Race Ahead, But Slow And The Forrester Wave™: Digital Banking Steady Is The Norm Engagement Platforms, Q3 2019

Banks Are Just Going Through The Motions Of The Forrester Wave™: Global Digital Banking Transformation Platforms, Q3 2018

Tech Teams Can Use Layered Digital An Introduction To Digital Core Banking Architectures To Foster Change

As DBPA Matures, Tech Teams Use It More To Foster Innovation Share reports with colleagues. Tech Teams Take Apart The Engagement Layers Enhance your membership with To Drive Innovation And Efficiency Research Share. Tech Teams Move Toward The Lean Core — Making Traditional Core Banking Obsolete

Constellation Architectures Are On The Horizon

What It Means DBPA Eases Transformation And Fosters Innovation

Supplemental Material

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Banks Need To Race Ahead, But Slow And Steady Is The Norm

Forces including more demanding customers; digital disruption; increasing levels of supervisory regulation; and the need for greater process efficiency, cost management, and business agility are tearing the banking industry apart. However, slowed or stalled transformation initiatives force many banks to rely on applications that can’t withstand these forces. Today’s banks need to be ready for continuous, broad, and rapid change. Enduring success requires an open culture, an encompassing strategy, available budgets, suitable operating models, technology, and the determination to change to continuously cope with digital challenges.

Banks Are Just Going Through The Motions Of Transformation Only 14% of global financial services firms believe that they have the right technology infrastructure and applications in place to deliver great and differentiating CX.1 However, more than 80% believe that they will be in this desirable position in 2024. This optimism is rooted in ongoing transformation efforts: 61% of global financial services firms are executing a transformation program and 27% plan to start by 2021, while only 5% have no known plans to transform.2 However, banks have been talking about transformation for the past decade and as yet have little to show for it.3 Reluctant to fully transform their application landscapes, banks easily get stuck in the planning stages or focus their transformation efforts on a single functional or organizational area.4 Why?

›› Ancient core solutions need complex enhancements. Many banks continue to use decades- old core banking solutions and payment engines written in COBOL, PL/I, and assembly language.5 Elsewhere, technology teams need to maintain up to hundreds of old core banking applications, each representing merely one or a few banking products.6 These ancient solutions have almost no flexibility, and the complexity they have accrued over the years makes them both a key driver of and major obstacle to transformation.7

›› Lack of skilled and knowledgeable staff causes uncertainty. Experienced COBOL and PL/I developers have become rare and expensive, and staff with transformation experience is hard to find. And only a lucky few banks still have technology employees who know the history of change there or have detailed documentation of the changes, customizations, and enhancements over the past 20 or 30 years. Banking platform transformation is like a series of brain surgeries on a fully awake patient being. The lack of skills and information makes transformation akin to brain surgery conducted by a med student in a dark room.

›› Fear of failure prevents transformation initiatives from starting. Many banking platform transformations suffer from serious delays and soaring costs despite their already enormous budgets. In recent years, cancellations of entire initiatives have added to the number of failed transformation programs at banks all over the world, including The Co-operative Bank, Deutsche Bank, Hamburger Sparkasse, Kiwibank, and TSB Bank. However, the perceived risk of failure is higher than the actual risk.8 More than one transformation initiative has failed to get beyond the planning phase because decision makers felt they were personally at risk.

Tech Teams Can Use Layered Digital Architectures To Foster Change To help banks transform, Forrester has designed and enhanced a digital target state architecture. Technology teams in banks will find that:

›› Digital architecture fosters change. Digital banking platform architecture (DBPA) is a layered architecture that fosters continuous change (see Figure 1). It has inward-facing APIs to make the architecture more flexible and outward-facing APIs to help it operate in business ecosystems.9 DBPA’s banking entity layer uses a domain-driven approach to create entities such as customer and deposit accounts.10 APIs decouple the various elements of DBPA, such as the data management layer and data on one side from business capabilities on the other.11 Various types of APIs, such as data and functional APIs, allow the architecture to work with external engines delivering analytics and AI, for example.12 The entire target-state architecture exists to help banks gain new internally and externally provided business capabilities rapidly.

›› DBPA enables innovation with internal and external business capabilities. DBPA’s layering, aggregation layer, and domain-focused structure allow banks to assemble business processes or all the business capabilities they need from a variety of sources (see Figure 2). External business capabilities are increasingly available from sources like partner banks, “utilities” or “factories” offering capabilities like clearing and know your customer (KYC), and cloud banking applications. Banks and financial technology firms such as New10, Starling, and U.S. Bank follow this path to use external document aggregation and financial planning to, for example, enrich their product portfolio and assemble their application landscape.13

›› DBPA helps mitigate transformation risk. Legacy application landscapes are complex, and one of the challenges of digital transformation is the need to determine the sequence and timing of application replacement and temporary changes to legacy apps. DBPA strives for the coexistence of legacy and state-of-the art applications (see Figure 3). As soon as a tech team “opens” the traditional core via functional APIs, data APIs, or data replication, there’s no longer a need to radically change legacy applications; a bank doesn’t need to change those apps further until it switches them off.

›› DBPA can harbor data treasures. It’s no secret that banks are sitting on treasure troves of data that few of them have successfully exploited. DBPA allows banks to access the hidden jewels of customer and business information concealed in legacy databases. As soon as legacy applications expose their data to DBPA apps, they can directly access transactional data and build their own long-term data stores. Customer and business insights are more easily available than in a legacy environment — and tech teams can put the data to good use, such as for training AI solutions.

FIGURE 1 Digital Banking Platform Architecture Fosters Agility

User experience layer B2X*

Aggregation layer

(AI, Banking entity layer machine learning, Analytics deep Data maintenance layer learning) Short-term data stores

Long-term data stores

Provides capability APIs Provides data Separation between (domain) apps (microservices) with potentially different technologies Systems of engagement Systems of record *B2X: business-to-X (business, consumer, etc.) Systems of insight DBPA external capabilities

FIGURE 2 Banking Application Ecosystems Enable Ecosystems Of Business And Information Capabilities

User experience layer B2X

Aggregation layer

Banking entity layer

Data maintenance layer

Short-term data stores

Long-term data stores

Bank internal Bank internal Joint venture: capability 1 capability 4 Identi cation/ KYC factory Bank internal Bank internal authentication capability 2 capability 3 provider Unsecured mortgages Fintech 1: Startup: Credit insurance robo advice onboarding

Separation between different (domain) apps Systems of engagement Systems of record Systems of insight

FIGURE 3 Digital Banking Platform Architecture Helps Mitigate Transformation Risk

Traditional core banking Digital banking platform

Omnichannel Mobile UX layer B2X APIs banking banking

Systems of Middleware Aggregation layer engagement (ESB, BPM, rules engine)* Digital core Functional APIs banking Traditional core Banking entity layer banking

Traditional core Data APIs Data maintenance layer banking Systems Replication Short-term data stores of record Data warehouses Long-term and data marts data stores

Systems of engagement *ESB: enterprise service bus; BPM: business process management Systems of record Systems of insight

As DBPA Matures, Tech Teams Use It More To Foster Innovation

While many banks and banking software vendors still struggle to identify the best path toward digital banking platform architecture, leading tech teams have started using DBPA concepts to drive digital innovation in addition to supporting digital experiences, operations, and ecosystems.14 DBPA allows banks to add and provide new business capabilities by design, whether that’s integrating AI engines or building new domain-specific banking entities. Tech teams at leading banks have also begun to use DBPA and similar layered architectures to pave the way for technology and business innovation.

Tech Teams Take Apart The Engagement Layers To Drive Innovation And Efficiency Monolithic architectures are the greatest enemy of innovation.15 While DBPA’s layering eliminates monolithic architectures at a macro level, monoliths need to disappear at a micro level as well:

›› Banks use multiple options to achieve great CX. Tech teams can opt to build or buy DBPA- based solutions — or use a combination, which Forrester calls “buy plus build.” Smaller or fast- track banks typically favor the buy option. Larger technology teams and those with very specialized requirements prefer to retain control and build all or part of the engagement layers (i.e., the UX, aggregation, and banking entity layers).

›› Banks that differentiate via CX frequently opt for buy plus build. Technology teams buy the solution from the aggregation layer downward while building their own CX and employee experience in the UX layer. Banks that want to use this approach off-the-shelf need to look for digital banking engagement platforms that strongly decouple the engagement layers from cross- channel capabilities like entitlements that custom-built apps can reuse.16

›› Banks and vendors refine their view of the banking entity layer to increase efficiency. A large European bank and a medium-sized US bank have started to differentiate between capabilities in the banking entity layer. They consider capabilities such as entitlements, limits, and prices as parts of a foundational sublayer, while customers and prospects, for example, are part of an upper layer that can use lower-layer capabilities. As a result, sales, origination, and servicing processes build on workflows and processes in the aggregation layer as well as business capabilities from the banking entity layer.

Tech Teams Move Toward The Lean Core — Making Traditional Core Banking Obsolete Traditional core banking has been a major obstacle to transformation. It’s vastly monolithic and wasn’t designed with openness in mind. Worse, it has characteristics of both systems of record and systems of engagement. Traditional core banking systems need to foster rapid change and protect data and information — a fundamental conflict that very few can resolve. This is why DBPA bundles business capabilities, workflows, and processes in the aggregation and banking entity layers and leaves pure data processing (e.g., position-keeping plus accounting rules) in decoupled lower layers.17 When we look at how tech teams are working with these lower layers, we see:

›› Bank tech teams starting to accept the notion of a digital core and a lean core. Forrester calls the aggregation and banking entity layers the digital core because they are the new home of key business capabilities, the new “high ground” in the words of Sun Tzu. The digital CIO of a medium-sized universal bank told Forrester some time ago that “The digital core is the collection of the core business capabilities of our bank.” Under the digital core, the lean core focuses on data and providing pure processing capabilities including data-specific rules, but neither collaterals nor pricing, for example.18 Today, tech teams either need to open their traditional core banking solutions to strongly decouple the digital and lean cores, build them on their own, or trust core banking vendors to align with the notions of digital lean core on top and the lean core below.

›› New options to open the traditional core. In the early days of DBPA, we identified data replication as the third-best option to “open” a traditional core banking solution.19 It was basically a workaround, particularly because it lacked a full real-time nature. However, the availability of new tools has changed the situation. Banks and vendors have turned toward streaming and messaging technologies such as Apache Kafka for replication purposes. One large German financial services utility uses this approach to open monolithic back-end solutions of varying ages. Swiss banking platform vendor Avaloq uses Kafka to make data available between applications of two different architectural generations.

›› Few off-the-shelf solutions being ready for the lean core any time soon. Vendors with a traditional core banking solution in their portfolio face challenges in evolving toward digital core banking and the lean core. They have a large installed base of traditional core banking solutions, which may be their cash cow. Digital transformation causes similar issues for both vendors and their bank clients — and for vendors, it’s multiplied by the size of their installed bases. Some leading vendors have just started moving toward DBPA, digital and lean core banking.20 Newcomers focus on leaner cores from the start. US vendor FinXact is one example, albeit without any visible live installations today. UK vendor ThoughtMachine has a relatively lean core as well — whether by design or coincidentally.21 Clients such as Atom Bank, Lloyds Bank, SEB, and Standard Chartered are an indication of ThoughtMachine’s growing market footprint.

Constellation Architectures Are On The Horizon

One DBPA objective is to support the coexistence of and collaboration between banking applications that use different technologies. In banking ecosystems, applications may even belong to different firms to support diverse business models. Transformational coexistence has improved, and business models often require networks of banking application ecosystems. A constellation architecture enables connections within your own banking platform, others’ platforms, software-as-a-service (SaaS) capabilities, and other banking application ecosystems to assemble hybrid solutions that serve your end customer and employees. We see that banking application ecosystems:

›› Are more broadly accepted. These ecosystems don’t define which DBPA layers a banking application needs to build on (see Figure 4). If a bank’s tech team has an architecture like DBPA as its target state, then its own apps will likely support DBPA concepts, although most third-party applications won’t yet. Internal business apps can focus on the lower DBPA layers because the tech team designed them to work under the umbrella of the upper two layers. These apps may deliver business capabilities such as product configuration and pricing in the banking entity layer while using the two layers below in a decoupled fashion: A lean core banking solution can build on the data maintenance and short-term data storage layers. For example, a bank can use KYC capabilities from a banking factory via B2B APIs.

›› Will eventually turn into constellation architectures. The next phase of banking applications won’t necessarily see entirely new architectures, as the notion of DBPA has broadly supported business ecosystems since its early days. However, more powerful and complex future ecosystems will use DBPA differently. Layered business applications will use all or some DBPA layers to best deliver their business value in an API economy with different constellations of business models (see Figure 5). In an endgame situation, connected business applications will use varying DBPA configurations to support constellation businesses — and DBPA will eventually drive a broader constellation architecture.

FIGURE 4 Linear Banking Application Ecosystems Drive Change

User experience layer B2X

Aggregation layer

(4) Bank-internal applications (4)

Banking entity layer Banking entity layer

(4) (4) (4) Data maintenance layer Data maintenance layer

Short-term data stores Short-term data stores

Long-term data stores Long-term data stores

UX layer B2X (APIs) UX layer B2X (APIs) UX layer B2X (APIs)

Aggregation layer Aggregation layer Aggregation layer

Banking entity layer Banking entity layer Banking entity layer

Data maintenance layer Data maintenance layer Data maintenance layer

Short-term data stores Short-term data stores Short-term data stores

Long-term data stores Long-term data stores Long-term data stores

Systems of engagement 1. Provide traditional data Systems of record 2. Provide traditional functionality Systems of insight 3. Use traditional CX 4. Expose business functionality 5. Expose data

FIGURE 5 A Nonlinear Banking Application Ecosystem Supports Complex Business Scenarios

Third-party applications

B2X UX layer (APIs)

Aggregation layer

Banking entity layer (4) Data maintenance layer

Short-term data Bank-internal applications stores B2X B2X UX layer UX layer Long-term data (APIs) (APIs) stores

Aggregation layer (3) (3) Aggregation layer

Banking entity Omnichannel Mobile Banking entity Third-party layer banking banking layer applications Data maintenance “Middleware” Data maintenance (4) (2) layer (ESB, BPM, rules engine) layer B2X (APIs) Short-term data (1) Traditional core stores banking Aggregation layer (4) (1) Data warehouses B2X Banking entity and data marts (APIs) (5) layer Data maintenance Data maintenance layer layer Short-term data Short-term data stores stores Long-term data Long-term data stores stores

1. Provide traditional data Systems of engagement 2. Provide traditional functionality Systems of record 3. Use traditional CX Systems of insight 4. Expose business functionality 5. Expose data

What It Means

DBPA Eases Transformation And Fosters Innovation

Banks’ technology teams have a multitude of different transformation strategies available. They can choose between different transformation speeds and between a set of deployments options from on- premises to full SaaS. However, when starting the journey toward DBPA, technology leaders need to compare their build options with the off-the-shelf availability of suitable banking applications.

›› Incumbent banking software vendors can be ahead of banks, but not by light years. Large banking software vendors need to carefully plan their journey toward any new target state to avoid scaring their existing client base. Some incumbents are moving toward DBPA, but their solutions provide a tremendous amount of functionality that they need to move to a new architecture. This will not be a fast process for everyone.

›› Smaller or emerging banking software vendors can move faster. However, their modern architecture does not yet deliver the rich and broad functionality of incumbents’ solutions. Thus, these newer solutions cannot offer the right functionality for everyone today; some may lack the off-the-shelf capabilities that some banks expect or focus on retail banking only. Further, some emerging vendors don’t employ any more sophisticated architecture than banking platform incumbents when building their solutions; they’re simply better at marchitecture than some of their larger peers.

›› Banking software won’t directly transition to perfect DBPA. In the early days of digital architectures such as DBPA, transitional products and solutions will exist. For example, without a full digital banking engagement platform that delivers the capabilities of the aggregation and banking entity layer, the lean core needs to extend into at least the banking entity layer. During this transitional period, overlapping products may exist — and technology teams need to govern this overlap and ensure that they can easily remove the ballast later on.

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Supplemental Material

Companies Interviewed For This Report We would like to thank the individuals from banks in Asia Pacific, Europe, and North America who generously gave their time during the research for this report but whose internal rules and guidelines don’t allow us to mention the name of their institution.

Endnotes

1 The long-term technology future sees huge optimism but needs solid skepticism. See the Forrester report “Financial Services Firms Have Solid Plans For Transformation But Lack Urgency.”

2 See the Forrester report “Financial Services Firms Have Solid Plans For Transformation But Lack Urgency.” 3 These numbers have been relatively stable since 2009. See the Forrester report “The Path To Digital Transformation In High Speed Financial Services,” see the Forrester report “Architecting Banking Systems Of Engagement,” see the Forrester report “The Transformation Imperative In Financial Services Defies Any Crisis,” and see the Forrester report “Financial Services Firms Again Seek To Renew Their Application Landscape.”

4 See the Forrester report “Predictions 2015: Two-Speed Banking Will Separate Winning Financial Institutions From Their Peers” and see the Forrester report “The State Of Digital Banking, 2019.”

5 The programming languages of these ancient solutions are not necessarily the reason for their inflexibility but indicate that these solutions are likely ancient and may be inflexible. Pushing application functionality beyond its flexibility limits has caused firms to maintain functionality well beyond a solution’s useful life. We have discussed the related complexity and maintenance issues for years. See the Forrester report “The Banking Platform Of The Future.”

6 Offering hundreds of products results in more spending, not more revenue, because too often a business application covers only one or a few products.

7 Hardwired business logic and rigid transactional interfaces don’t allow quick extensions. Some applications have been maintained to death — customized, patched, and integrated for decades.

8 The real and perceived risks of transformation failure delay action. See the Forrester report “The State Of Digital Banking Transformation, 2019” and see the Forrester report ” Predictions 2015: Two-Speed Banking Will Separate Winning Financial Institutions From Their Peers.”

9 Each application and layer provide APIs to foster strong decoupling and high coherence — and thus flexibility. See the Forrester report “Implementing Digital Core Banking At Smaller Banks.”

10 Such a DBPA will consist of a variety of different applications (which are probably microservices-based) that can join their capabilities in the aggregation layer. See the Forrester report “Implementing Digital Core Banking At Smaller Banks.”

11 Design new capabilities with cohesion and decoupling in mind. See the Forrester report “Leading Banks Embrace Digital Core Banking.”

12 Use digital banking architecture for AI-powered automation across legacy and modern applications. See the Forrester report “Develop A Broad Vision For Zero Back Office At Your Bank To Reap Its Full Benefits.”

13 Early movers create value by combining third-party business capabilities. See the Forrester report “Banks Need To Prepare For Banking Application Ecosystems.”

14 See the Forrester report “Digital Rewrites The Rules Of Business.” 15 At a macro level, DBPA’s focus on decoupling, high coherence, and technology and application coexistence is the opposite of a monolithic approach. At a micro level, we need to avoid a preconfigured bundling of DBPA layers because this would obstruct the benefits of DBPA.

16 See the Forrester report “The Forrester Wave™: Digital Banking Engagement Platforms, Q3 2019.”

17 A digital banking engagement platform (DBEP) can easily cover the CX and the aggregation layer of DBPA. Many DBEP vendors with a flexible CX layer offer tools to change CX and workflows. DBEP vendors with powerful tools are rare in the DBEP space. Forrester calls DBEPs with only support of the banking entity layer and only limited availability of tools a basic DBEP.

18 In the past, Forrester called the data management layer and the short-term data store the “data core” and its stored data “core data.” From now on, we will use the term “lean core” for the data core to clarify its scope and purpose.

19 The options then prioritized were data and functional APIs, in that order. Replication was more a workaround than a long-term solution at that time. See the Forrester report “Leading Banks Embrace Digital Core Banking.”

20 The forthcoming Forrester Wave™: Digital Banking Processing Platforms, Q3 2020 will also evaluate this aspect of key solutions.

21 The early days of ThoughtMachine saw a strong focus on distributed ledger technology capabilities within the core and a lesser focus on its lean nature.

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