The emergence and success of new entrants in financial services has forced established institutions to reassess both the customer experience they provide and their operating model. In order to secure long term sustainability, institutions are quickly recognising that they need to change thinking and embrace a digital-first approach, or risk being left behind.

This entails adopting an operating model that provides the flexibility to address threats while simultaneously accessing the same technology giving new entrants an edge. Along with enhanced customer experience and streamlining operations, the right technology will allow the creation of completely new opportunities like launching an independent digital banking spinoff to compete with challengers.

Launching a spinoff - an agile speedboat from the large and heavy cruise ship that is the bank - is a growing trend. These speedboats combine the best of two worlds, the resources and market experience of an incumbent with the technology and culture of a modern agile organisation. Why a spinoff as opposed to reengineering the existing organisation? Spinoffs have significantly lower operating costs, are able to easily respond to customer demands and regulatory requirements and deliver better results in a shorter period of time. Free of the legacy processes, technology and thinking anchoring the parent organisation, spinoffs can win new customers and present the parent organisation new sources of income. This helps drive the established institution's transformation journey and supports its long term strategy.

Change of People, Processes and Technology

These spinoffs represent a fundamental shift in the culture, operational approach and technology used by incumbent institutions, and can be launched in as little as six months.

Traditionally the journey to launching new products or entering new markets has been arduous with years and significant resources spent defining requirements and consulting numerous departments to accommodate all requests. This led to a tendency to over-engineer, building for the future while accommodating for batch changes. The development itself was slow and complex and organisational silos resulted in no single view of the customer. Technology was complex and cumbersome, both to implement and change, with limited ability to test before implementation, introducing significant risk.

Today, building the architecture on which to launch a spinoff is quick and cost effective. ABN AMRO's newly launched fintech New10 went from concept to launch in just 10 months. New entrants are lean, agile and innovative, making them competitive in a short period of time. These enviable attributes are brought to life for incumbent institutions by spinoffs with the right combination of technology, people and processes.

Open Thinking and Collaborative Culture

The right technology means understanding and embracing the benefits provided by Software-as-a-Service (SaaS) and cloud-based services. Rather than having to buy, build, and maintain an IT infrastructure of poorly-connected systems, SaaS allows companies to leverage services built on a flexible yet secure infrastructure. Initial costs are low and subscription-based with providers managing all upgrades, making integration and updates seamless. Applications or software are usually cloud-native, run on application programming interfaces (APIs) and developed specifically for the cloud paradigm allowing them to be scalable, stable and agile.

APIs enable the flow of information between applications, giving different business areas the ability to easily access customer data, draw insights and create innovative products tailored to market and regulatory needs. New products or iterations of existing offerings can be rolled out, integrated and modified at a fraction of the cost and time it would take with a legacy system.

With these tools, specialised IT or technical teams can shift focus from legacy maintenance and 'keeping the lights on' to continuous customer and market-driven innovations in products and services. They can concentrate on helping the business to move forward, prioritising and developing differentiated products and services, and create better value for customers rapidly, assuring its place as a champion in a digital-first world.

Build a Composable Architecture

SaaS and APIs are defining characteristics of new entrants, enabling the iterative nature of their approach. The build begins with the minimum viable product (MVP) - what is needed to make the product ready for customers - and giving it sufficient capability to satisfy early adopters, then design and change features based on feedback and market dynamics. The aim is to learn from each iteration and use it to create a better product quickly, one that is more closely aligned to customer, regulatory and market needs.

To achieve this, a modular or composable API-driven architecture is necessary. The traditional approach is all or nothing, build an end-to-end solution which relies on a single vendor which would be responsible for the implementation. But the composable approach embraces thinking that one company cannot focus on everything and be the best at it. The architecture can be divided in small pieces and managed through life cycles separately and tested, removed or replaced without risk.

Taking a composable approach enables the use of best of breed providers. Each company is focused on a specific part of the architecture from the SaaS engine to chatbots or credit scoring, to analysing customer data insights. This allows multiple integrations to specialised complementary cloud services. Both the business and IT teams are able to make changes quickly, adopt new technologies or switch providers and services - all without having to depend on an army of coders or consultants for execution and customisation.

Prepared for Change

Apart from flexibility, this composable approach also prepares organisations for innovation and the next market shift. The digital banking space is dynamic and evolving at a rapid pace. For example biometric identification as part of an account opening process would not have even been a consideration just five years ago, but with software to deliver the new experience it can now be quickly implemented. It also keeps organisations current with the latest technology through continuous delivery. The smallest change can be delivered directly into product development, and is infinitely simpler than rolling back multiple changes, reducing risk, costs and improving the response to customer needs and competition.

Nothing Set in Stone

The elements that would make the digital banking spinoff approach successful are the convergence of technology, people and processes working in sync. Easily interchangeable building blocks make change and flexibility possible, instead of having an architecture built in stone, forward thinking providers are creating ones built of lego. Institutions are able to identify opportunities, then quickly align products and services to capitalise on this opening without the traditional high cost of change. Technology provides the freedom to build a vehicle that meets evolving customer demands and competitive pressures, helping lending and banking institutions navigate an ever evolving market.