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Digital Banking & the Customer Experience: Disrupt or Dis-intermediate

By Enrique Ramos O'Reilly 5 Dec 2016

In many parts of the world, fintech innovation has driven banking modernisation. Recently, dominant banks in the Caribbean islands have also begun to face increasing competitive pressures to improve the customer experience and to become more efficient through adoption of new technologies. Status-quo is no longer an option.

Digital innovations embraced by consumers in one region or one industry are quickly demanded by consumers in another geography or another market. In a climate geared toward person-to-person and small business transactions, branches alone are not enough. Banks now have two options: disrupt their own approach to banking and partner with fintechs, or disintermediate and innovate on their own.

Disrupt—Fintech Partnership

As of yet, the Caribbean and Latin American region has yet to render a fintech hub. That is not to say there is a lack of fintech providers coming from the region. Startups in Barbados and the Cayman Islands, as well as in Latin American countries, are making bids to position their countries as the fintech leader of the region, with such innovations as Barbados' "Bitt" and the accelerator that made a splash in the Cayman Islands in 2014, Latitude.

While tourism and exported commodities prevail as the primary sources of income in the region, many of the islands are looking to diversify their economies. Over the last decade, the region has experienced a deep transformation, undergoing strong economic growth. But recently, the Latin American and Caribbean region faces a continuing decline in growth, as a result of an external environment particularly adverse to commodity exporters. As a result, the Latin American and Caribbean region didn't grow in 2015 and is expected to contract by 1% in 2016. Governments, banks and entrepreneurs alike are looking to reduce obstacles to economic activity in order to boost the economy.

There is a trend becoming prevalent in the U.S. and Europe, and now emerging in the Caribbean, of partnering with fintechs instead of competing head-to-head. The nature of these startup fintech companies is that they are built on new and flexible technology, circumventing the cumbersome legacy systems that many banks rely on. Many financial institutions are finding that partnering allows them to improve the customer experience they offer, as well as participating in the reshaping of the industry. By disrupting the traditional, competitive approach to banking, these partnerships create a stable, growing financial ecosystem.

Barbados & Bitt

For instance, the Barbados-based startup, Bitt, is a Blockchain-based company which offers the ability to trade Bitcoin for local currency and vice versa. The company seeks to "bank the underbanked" by diminishing barrier fees associated with foreign exchange transactions through a 1:1 relationship with the central banks from each island – effectively providing a financial solution that has the potential to reach across nation-island borders and increase financial inclusion.

Other areas of banking are also seeing more fintech activity. Credit bureaus, for example, aren't as well established in the Caribbean as they are in Europe, as many of the islands are too small to sustain their own credit reporting agencies. While an effort is being made to create a credit bureau that can cover multiple countries, fintechs are starting to use social media and data from utilities to offer credit scoring. For example, in Mexico, this is having an impact on banking the unbanked, helping banks such as Soficam and SeFia to reach into more remote population areas to offer microfinance.

But how long can banks rely on third-parties to fulfill the needs of their customers? Innovations like these are not necessarily limited to deposits. As fintechs continue to gain momentum, they can expand into other verticals, such as lending. While reciprocal relationships with fintechs breed innovation in the financial sector, many banks will find that in order to meet the needs of their customers, they, also, will need to implement cutting-edge technology.

Disintermediate — Internal Innovation

Banks can learn from fintech start-ups like Bitt, which are already demonstrating that digital banking is the way forward. What Caribbean banks need to define and implement is how they can offer more services via a 24x7, real-time vehicle. Historically, banks have relied on vendor-specialised experts to develop complex coded interfaces between all of their systems. Unfortunately, this approach means that banks struggle to integrate new business systems (including fintech partners), quickly and cost-effectively. In addition, this point-to-point integration approach that banks tend to adopt is more difficult to support real-time business across multiple channels, which makes supporting real-time settlement (RTS) impossible.

"The central challenge is that banks have designed their IT systems to support processes that deliver products across multiple channels. Bank systems are, therefore, arranged around products rather than around customers. Digital transformation, on the other hand, demands that customer data be leveraged to provide services at the point of need."

Deloitte. "Banking Disrupted," 2014.

As we see globally, many banks have legacy IT systems that are expensive to run and difficult to maintain and upgrade. These legacy systems are starting to become a hindrance in the execution of digital strategy for financial institutions, given that the cost would be too high. Digital banking is becoming more sophisticated across the world and progressive renovation is increasingly seen as a way of dipping a toe in the digital water. This could very well be a good way for banks in the Caribbean islands to plan for system modernisation to keep up with consumer demands.

Progressive renovation, as well as cloud technology, allows banks to increase their reach in terms of services, improve customer experience and cut the cost of technology and operating costs without wholesale change. Rather than add to the complexity of their existing systems by adopting apps piece-meal, banks can look holistically at their needs and add for example, mobile capabilities using software-as-a-service hosted in the cloud. This way, change can be made slowly, step by step, and services can be migrated to a new platform when the bank is ready.

Caribbean & Latam Growth

New players such as El Salvador's Banco Azul, which is wholly-owned locally, offers mobile, retail and corporate banking – operated on a Temenos platform – and is proving extremely popular. In Mexico, Prestanómico is opening for business soon, offering a virtual lending hub hosted on Temenos core banking technology. Similarly, Venezuela's Banesco is successfully undergoing a full core banking replacement, giving it full digital capabilities and pole position to offer a modern banking service, ramping up the competition and pressure on rivals.

The result is that fintech is growing and while there is not yet a hub to rival the world's dynamic centers such as London, New York and Dubai, there is interesting activity. Temenos is also seeing increased interest from the region in our Marketplace – our online forum and market for third-party solution providers to help banks advance to the next level of differentiation in service and efficiency.

It is only a matter of time before competition is ramped up further with international rivals starting to look once again at the region for much needed growth, tempted by the higher margins. The local banks, by moving towards digital services either by disruption or disintermediation, will be better placed to retain customers. At the same time, their interest in digital banking will help native fintechs to flourish.

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