Banks have started a process of reinventing their value proposition as a highly automated and integrated platform for a continuously innovating portfolio of financial services. Payment is key to this and in the same time under threat by external market entrants. This article looks at the drivers for change and their impact on the banks’ IT and crypto architecture. It suggests 6 crucial technical features required by the crypto architecture as key enablers for a successful transition.
We have dedicated several blogs on disruptive changes driven by regulations and compliance (e.g. PSD2 or PCI PTS HSM v3), technical innovation (such as cloud computing, blockchain or Quantum secure cryptography (PQC)) and enforced competition through new market entrants.
Another driver is the customers’ demand for innovative, sophisticated added-value services – spoiled by the digital economy and its sheer never ending supply of new services.
Put under severe pressure by non-banking entrants & Fintechs into the payment market and following the example of IT companies, banks are embracing the idea of platform innovation as a source for new service generation.
In a survey conducted in the Global Transaction Banking Sector by McKinsey and published 2020, 89% of the respondents see platform innovation as a key to build competitive advantage. 95% want to target their investment towards the creation of customer experience .
50% of the banks interviewed allocate an IT investment budget exceeding 100 Million € to reach this goal .
Let us just revisit the term platform innovation. It is the creation of a fertile environment, allowing for internally and externally (ecosystem)-driven innovation through free access to the available (virtualized) services. The services can be orchestrated to new, value-adding composite services, driven and complemented by unleashed internal value creation and external ecosystems. If managed properly, it can incite an emerging process of continuous value creation .
Interestingly, the focus on Cybersecurity (which has been evaluated as AA use case by 75% of the respondents for current projects) is losing importance. For future projects, only 25% consider it highly an AA use case .
Digital services embracing analytics and process automation are considered critical now. Examples are liquidity forecasting, exposure management and even chatbots for customer service automation .
How is platform innovation accomplished?
There are three enablers for platform innovation:
Digitizing services demands automated end-to-end processes. Monolithic isolated applications and infrastructures are major disturbances in this quest.
Internal services are increasingly integrated, to consolidate the data (needed for analytics), but also to generate new meta services.
Internationalization of services fuses formerly autonomous banking entities into an integrated service landscape.
Mergers and acquisitions are the 3rd driving force for integration. Historically disjunctive infrastructures and services have to be brought together for efficient consolidated operations and data integration.
We keep on speaking about ecosystem innovation. This requires opening up the formerly closed banking infrastructure to external service providers. At least in Europe and driven and regulated by the PSD2. Regulation, infrastructures need to open up and embrace external services.
The above described factors led to a “strategic trend” to phase out legacy frameworks .
It appears that the seemingly immortal good old mainframes finally reach the end of the line now.
Total cost of ownership of cryptography needs to be brought down to be able to cope with the increasing competition in the payment segment.
At the same time availability of many new services as well as the opening of the bank’s APIs increase the security requirements from the infrastructures and the demand for coping with this broad variety of services (from data-center-based to the cloud).
The answer in business terms is to provide a better and all-embracing crypto architecture, which at the same time reduces the overall cost-burden.
An important step is to upgrade and consolidate to newer, more secure HSM infrastructures that are able to handle more banking services concurrently. This is a realistic and accomplishable goal. But the following six technical features need to be considered when upgrading the current infrastructure:
Current legacy architecture does not need to be thrown overboard immediately, but can be phased out gradually. A good crypto infrastructure shall be able to handle
The article “7 Steps to Reduce Total Cost of Ownership Around HSMs to Gain Force in a disrupting finance market” (in publication) provides a closer look at the six technical features addressed above. And our series on TCO dives into each aspect separately, providing the technical information needed by CISOs and IT change managers in financial institutions, to conduct a successful upgrade towards a future-oriented, flexible and value generating service platform.