Life used to be so easy for retail banks and their CEOs. Hogan provided your core banking, Cisco took care of your networking and no one, but no one ever got fired for buying IBM.

These days however, banks face such intense pressure to increase efficiencies and reduce costs while delivering next-generation digital services that they are compelled to turn to startups in the fintech community.

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That is because incumbent application vendors have been so slow to respond to new requirements, according to a new report from Gartner.

Indeed research outfit Gartner predicts that by the end of 2019, a quarter of retail banks will use startup providers to replace legacy online and mobile banking systems.

The market for digital banking platforms is highly fragmented. Vendors include:

  • Incumbent bank niche vendors
  • Mobile or online banking solution vendors
  • Horizontal digital platform and customer experience vendors
  • Horizontal portal vendors
  • System integrators
  • Emerging digital banking vendors
  • Startup digital banking vendors

According to Gartner, bank CIOs should be prepared for extensive, potentially disruptive changes in this market, including merger-and-acquisition activity, heightened competition and new entrants from other geographic regions.

In a new report called report “Market Guide for Open Unified Digital Banking Platforms.”
Gartner argues that new vendors are emerging to meet both customer and bank needs for channel integration and better customer experiences. These insurgents challenge the traditional — often incumbent — vendors of traditional online and mobile banking and core banking solutions.

According to the report, “Banks worldwide clearly recognize the business-critical importance of the shift toward digital banking, which is a component of the overarching trend toward digital business.”

Gartner defines the “digital business” as those new business designs and business models created by blurring the line between the digital and physical worlds. This includes the connection or integration of business, people, and now the autonomous networks of devices and senses that comprise the Internet of Things (IoT).

The report says, “These ‘things’ are an increasingly critical element in digital business, because they increasingly have enough “intelligence” to negotiate with one another, as well as with people and business. ”

Digital banking enables — and requires — banks to build new ways of creating value based on prior business and technology innovations, as well as to pilot new approaches to conducting digital business, they say.
“From a technical perspective, information, connectivity and context require a new platform to support new services networks. Digital banks leverage ecommerce-developed supply chains, pricing models and channels, and an integrated process/ workflow set to augment analog activities.”

Furthermore they argue, the digital banking strategy includes, but is not the same as, a bank’s consumer online banking strategy.

“A digital bank will also leverage the emerging IoT, and specifcally, how IoT devices and sensors are connected to the Internet, to enable the development of new revenue opportunities.”

Stessa Cohen, research director at Gartner says “Startups and emerging providers of digital banking platforms offer banks interesting opportunities for innovation. However, CIOs must prepare to manage the challenges of evaluating and selecting new vendors that may not have proven track records in the financial services vertical or may simply be new and untried without an extensive customer base.”

Cohen says that while it can be difficult for CIOs to justify investment in their solutions to their boards and regulatory agencies, this should not be seen a reason to exclude new vendors.

In her report, Cohen says, “Emerging digital banking platform technologies are key to the success of banks’ business-critical digital initiatives. Open unified solutions make it possible to deliver new digital products and services, and create a multidimensional customer experience across all digital channels”

In Gartner’s opinion bank CIOs need to assess the bank’s comfort with, and ability to manage, the risks associated with using new providers, especially financial technology startups.

Legacy Vendors Slow to React

Gartner says that legacy vendors have been slow to react to new customer requirements and demands of digital banking.

Among their myriad sins, Incumbent vendors often don’t support open architectures that decouple the presentation of services from the services and transactions themselves and, crucially, enable the bank to bring new and existing processes together to offer innovative digital services.

New vendors meanwhile have emerged with digital banking capabilities that enable bank business and IT staff to offer apps and applications that support personalized, customer-centric banking experiences, data and behavioral analysis, location and context sensitivity and creation of a partnership ecosystem to create new services leveraging partner data, transactions and processes.

“This is why many banks developing digital banking strategies to meet customer demands have sought out new providers to replace their existing online and mobile banking solutions with digital banking platforms,” said Cohen.

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