DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY, Part 3

  (Source: East Japan Railway Company)

Leverage Digital Technology

In the banking sector, players should strive to become trailblazing purveyors of financial services that leverage digital technology.

There are areas in the banking services value chain where firms should work independently to generate unique, in-house, high-value-added services and products; there are also areas where banks stand to benefit by collaborating with other firms to drive down costs. Also, firms should consider collaborating with other firms to leverage economies of scale and economies of scope, parlaying cost centers into new profit centers, and securing a role in the industry infrastructure.

In actual operation, after deliberating and implementing such initiatives, big-data analytics and the automation of all processes will prove the most important. Here as well, a shift to a modular supply structure will be required, and a critical factor in determining the success of financial institution management will be alliances — namely, how adroitly firms partner with other entities.

In Conclusion

Celent offers the three points below as food for thought and policy prescriptions for modernization in the banking industry.

1. Technology as a driver of growth:

  • Look for ways to pioneer new segments through the use of technology without fixating on the segments that have been your bread and butter up to this point.
  • For example, robo-advisors can be used not only for mutual fund but also for insurance products sales to retail customers. Bancassurance and alternative distribution channels should also be driven by robo-advisors.

2. Vertical disintegration:

  • Prioritize finding the sweet spot for cost and risk and revisit and rethink your processes (such as vertical integration and/or internalization, and the use of horizontal division of labor and/or outsourcing) across the board.
  • For example, enhancing the agility of new payment product research and development might be achieved by vertical disintegration of banking business into payment services discovery, development, and marketing organizations.

3. Industry-wide priorities:

  • Place top priority on initiatives to raise financial and IT literacy among customers.
  • Actively seek to leverage monetary policy and system reform as business opportunities; avoid a passive approach to system reform.
  • Rebuild the industry value chain through methods of modularization, specialization, and integration.

Legacy modernization in the banking industry is much more than simply the application of novel technology. Rather, it portends nothing less than a structural overhaul of the banking industry, an opportunity to envisage anew and redefine the industry’s future. There can be no doubt that this transcends the mere establishment of a digital channel; rather it will certainly impact products, services, IT units, and sourcing models, and, in so doing, provide the banking service providers of the future a chance to seriously consider exactly what kind of companies they would like to be and the corporate cultures they would like to foster.

Celent perceives legacy modernization in the banking industry as instigating change at a fundamental level, in both business execution and organizational structure. Moreover, this transformation promises to have legs and vast implications that will play out over the long haul. Legacy modernization is much more than just new technology and it will have sweeping implications.

 

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Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY, Part 2

  (Source: Charles Schwab)

The Banking Industry of the Future

The securities industry can be regarded as the first sector in the financial industry to have embarked down the path of modularization. Mutual funds was the first major area involved in this first step toward modularization. Mutual funds are now mainstream products of banking and wealth management. The banking industry should not overlook the following episodes.

The mutual fund business model can be broken down into two process areas: 1) selecting investments or investment destination (portfolio building), and 2) sales of the created mutual funds. In the former, the products (portfolio) are designed and created (produced), while the latter involves the sales of investment firm securities (mutual fund beneficiary certificates), with sellers undertaking the office processing such as customer transaction reports.

In the closed model era of brokers and mutual fund firms, the norm until the 1960s, mutual fund firms would outsource sales to securities companies (full service brokers). This resulted in mutually beneficial consignment-based relationships between the investment trust companies and securities firms that endured for a long time with a fixed fee structure (investment sales commissions paid from the customer to the securities company) and securities trading fees (paid by the mutual fund company to securities company). These sales formats have since diversified.

No-load funds entered the market starting in the 1970s, spurred on by the liberalization of commissions for the brokering of securities, sluggish demand in the stock market, and the emergence of discount brokers that did not offer investment advice. This era was characterized solely by diversification of sales methods, and was entirely absent changes to the closed model that covered planning, manufacturing, and sales.

However, change descended on the market in the form of the mutual fund supermarket revolution. With the launch of Mutual Fund OneSource in 1992, Charles Schwab offered multiple funds that customers could purchase without paying a commission, but for which Schwab’s mutual fund management arm collected an annual management fee based on asset balance. Metaphorically speaking, this approach was akin to companies putting mutual funds on the shelves of a supermarket and charging commissions only for the products sold. The interface between mutual fund companies and securities companies opened up, and the creation and sales components were decoupled and functionally modularized.

More change is on the horizon. An era is coming in which the banking industry should orchestrate a shift to a structure that hinges on modular demand to respond to new needs fostered by digital technology and the new demand of the emerging digital generation.

Industry players should be ditching vertically integrated direct sales, or so-called keiretsu, which are tantamount to direct sales routes; instead, they should establish delivery models that are more dynamic and open. Omnichannel initiatives are not only opportunities for firms to launch or shut down these channels, but also to revisit and reconsider their optimal delivery model. Moreover, collaborating with non-financial sector players, including start-ups, opens the door to the possibility of accessing vast and new untapped market frontiers.

Robo-advisor initiatives can be expected to accelerate the speed of advances in modular demand structure. Presumably, coming delivery channels will seek to optimize information and investment expertise, driven by approaches that respond to the needs of investors by providing automated advice and harnessing bankers as human support mechanisms.

To be continued – Click here

 

Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

WHAT DOES IT MEAN TO MODERNIZE? (Part 2)

Enhanced Risk Management: Realizing a Dynamic Risk-adjusted Investment Cycle

One element that is consistent across capital markets in any age is a fervent desire to pursue alpha couched in efforts to optimize risk, all of which finds a point of equilibrium as determined by the market. Today all market players pursuing modernization are doing so in an environment that is subject to the below common factors.

  • Diversification of trading product (asset class) and trading method (execution method)
  • Deployment of new frameworks for securities settlement and margin trading
  • Volatility in cash, leverage, and particularly liquidity
  • Continuous strengthening of capital requirements 

As regulatory scrutiny intensifies and investor expectations for investment alpha rise, buy side financial institutions are being pushed to modernize their management functions in ways that accommodate their investment strategies with advanced levels of diversification, defensiveness, and risk transparency.

Looked at from the perspective of investors, it is clear that in addition to the deployment of advanced operational methods and superior investment strategies, that to execute these new ideas it is imperative that firms develop the capabilities needed for robust operation and risk management. Indeed, these investor expectations are likely a more daunting prospect than the stress tests and other regulatory requirements.

To perform well in today’s capital markets, Celent has advocated the need for excellence in business operations—in other words, the establishment of effective risk management and control[1]. Toward this end, it is imperative that companies destroy institutional barriers and silo-riddled organizational structures, understand regulations and risks in the context of the market, products, and trading, and seek to strengthen their organizations with an eye to securing greater transparency.

Until now, finance (funds management or capital management) has been carried out in silos, spawning competing control and management initiatives. This is proving increasingly untenable and driving the need to better integrate finance with governance, risk management, and compliance—what Celent refers to as GRC. In the meantime, the costs only continue to surge both in terms of time and money stemming from confusion related to information transmission and the value chain.

What is the best path forward?

To accurately gauge the magnitude of this issue requires a firm awareness and comprehension of the facts, but today the management of risk and finance, processes, data, and technology are fragmented. This spaghetti-like situation and disparate nature of data routes and management systems slows business processes and obscures the reality of the issue itself. Action is urgently needed to establish data flows that cut across risk and finance as well as to create agile front office control and strive for enhanced portfolio optimization.

In addition to bringing together the three elements of data—establishing a set degree of data freshness, data quality, and data routes—it is similarly imperative to integrate seamlessly front office trading systems (OMS), portfolio management (PMS), risk management, and capital management mechanisms.

The approaches taken demonstrate the limits of long-implemented stop-gag measures implemented to meet regulatory requirements. Put another way, to heighten effectiveness, there is a need to overhaul both business and technology architecture.

Management of Risk and Finance: Disparate Processes, Data, and Technology

Celent helps buy side organizations in the market today modernize their risk management—which is to say, implement initiatives to improve the effectiveness of their risk management. Celent does this in part by using the below six items as a conceptual framework to get a handle on the situation, research available solutions, and then offer advice on implementation.

  1. Understanding regulation and risk that accommodate the market, products, and trading: What is the backdrop or context and what changes are on the horizon?
  2. Integrating regulation and risk management with control functions: What targets should be integrated?
  3. Unifying risk data and risk value chain objectives: Which data and processes should be redefined?
  4. Selecting architecture and components aligned with objectives: Which solutions should be chosen?
  5. Securing mobility and flexibility in data management and platform strategies: How should the solution build be implemented?
  6. Rethinking business processes to achieve consistency with risk management: Where are the ancien régime legacy elements that hamstring business modernization?

 

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Related releases:

Legacy Modernization in the Japanese Securities Industry, Part 1

Legacy Modernization in the Japanese Securities Industry, Part 2


WHAT DOES IT MEAN TO MODERNIZE? (Part 1)

In Order to Modernize

Before proceeding any further, let’s pause to consider what core system modernization signifies to a brokerage firm. Celent surveys have found that to brokers modernization means agility in operations and reductions in IT costs.

This prompts the question of how to make modernization a reality. Celent focuses on two jumping off points or angles from which to approach this: One is trading lifecycle optimization (TLO), the second is improving risk management, that is to say, realizing of a dynamic risk-adjusted investment cycle.

Trading Lifecycle Optimization (TLO)

The digital advances in trading environments have spurred the proliferation of algorithmic trading and high-frequency trading (HFT), developments that have reduced the number of traders needed. At the same time, Asia has witnessed increasing fragmentation that is particular to the regional market, spurring the spread of smart order routing (SOR).

Social media and big data are increasingly being used as market data and exerting greater influence on the market at the same time that high touch sales by sell-side firms remains. In addition, increasing diversification is evident with significant variation in the degree of digitization across asset classes and markets, and in terms of liquidity and trade type (bulk, block order, small orders, etc.).

Against this backdrop, a new electronic “hybrid” trading that fuses traditional high-touch trading with HFT and algorithmic trading has emerged in modern capital markets and trading environments. This has extended technology application beyond traditional areas of focus such as trade execution management and portfolio management. Indeed, the role and importance of technology is only growing, particularly in these areas: linking pre-trade compliance in order management, post-trade compliance in the middle office, and the various financial intermediaries (account keepers, transfer agents, administrators, prime brokers) that work across the front, middle, and back offices.

Celent has advocated the concept of trading life cycle optimization (TLO)[1].

TLO has come under scrutiny due to market environment changes that traders face in addition to factors including disparate or unevenly distributed trading technologies as well as trading risks (time, location, asset class, trader).

Hybrid trading environments combining traditional high-touch trading with HFT or algorithmic electronic trading, could clearly serve to benefit from TLO. Spanning the trading process—before, during, and after trading—it is vital to integrate across administration, monitoring, and auditing metrics for governance, risk, and cost (GRC). This makes extremely important to harness market data, which can serve as criteria for TLO.

Trading Lifecycle Optimization (TLO):

Areas targeted for optimization by trading technology block (types of technology used) can be broken down into the following four: infrastructure, operation, trade execution, and allocation.

These technology blocks are very important such as when it comes to audit requirements, sponsor descriptions, trader performance reviews, and identifying automated and discrete ranges. At the same time, these are also seen as crucial functional requirements for the front, middle, and back office systems in next-generation trading.

Celent believes that trading technology modernization should mean for both the sell side and buy side a focus on amending disparity and gaps in this technology.

To be continued – Click to read more

 

Related releases:

Legacy Modernization in the Japanese Securities Industry, Part 1

Legacy Modernization in the Japanese Securities Industry, Part 2


 

WHY MODERNIZE?

Celent has consulted on many securities firm legacy modernization projects. At the outset of these projects, Celent asks the CEO and CIO a number of questions similar to those below.

CEO Questions:

  • How much time and money were required the last time your firm had to rework connections to exchanges, settlement and verification institutions, clearing and settlement institutions and respond to system reform?
  • What is your average cost per transaction? What is your average cost per customer?
  • How many systems must a call center staff member access to answer customer questions? What is the average time required? The average cost?
  • How many staff members are required to work on applications to open a new  account? How many systems must be accessed?
  • What are the foreseen costs and risks associated with outsourcing IT department operations?
  • What are your legacy systems and what are candidates for modernization?

CIO Questions:

  • What was the volume of code that need to be modified the last time your firm had to rework connections to exchanges, settlement and verification institutions, clearing and settlement institutions and respond to system reform?
  • How easy is it for you to integrate existing and new applications?
  • Are you spending more on maintenance or new projects?
  • Is your IT certainly capable of supporting new business acquisitions?
  • How many systems are there for risk management, compliance management and reporting to authorities? How much are your costs to maintain your IT?
  • Do you have any maintenance contracts that will be ending soon?

These are among the questions that executives need to ask themselves when they look to tackle IT challenges (e.g., data model rigidity, lack of application flexibility, IT duplication, and associated labor efforts). If you already know the answers to these questions, then the typical challenges securities firms face spelled out in this post likely do not exist for you. The issues broached here are not the kind of challenges that can be resolved by improving peripheral systems or patchwork core systems solutions.

For financial institutions that have designed, developed, operated, and maintained core systems themselves, formulating a replacement strategy is akin to putting together a plan to travel to an unknown world. Such a situation requires correct understanding, which mandates a bird’s-eye view or systems map of the entire firm (as-is state) coupled with recommendations for the system to be (to-be state).

Moreover, companies must select the solution that best matches their needs from existing solutions in the market. The key is the business requirements document (BRD). This means defining the operational functions and system requirements that will satisfy the next system’s needs. Often, understanding the current situation accurately is not easy, the ideal system goes unrealized, and companies end up with something approximating a reproduction of the legacy system. Thus, it is crucial to distinguish between the legacy and modern systems.

Legacy Systems and Modern Systems: A Comparison:

To be continued – Click to read more

 

Related releases:

Legacy Modernization in the Japanese Securities Industry, Part 1

Legacy Modernization in the Japanese Securities Industry, Part 2

2016年後半のカンファレンスを振り返る

カンファレンスは、いつも刺激に溢れています。2016年もアジアの各地で、パネルディスカッションやプレゼンテーションの機会に恵まれました。自らのプレゼンテーションを通じて、過去のリサーチ成果を発信するだけでなく、カンファレンス・チェアやパネル・モデレータの役割は、業界ソートリーダーとのインプロビゼーションであり、将来のリサーチトピックスやインサイトテーマを仕込む、貴重な瞬間です。人が出会い、意見を交換し、議論を深める。そのための準備と当日の緊張感は、アナリストの責務であり、醍醐味でもあります。 本稿では、2016年後半の5つのカンファレンスを振り返ります。銀行、保険、証券、ウェルスマネージメントの各業界の議論に共通したキーワードは、引き続き、フィンテック、デジタル、そしてモダナイゼーションでした。
***

Insurance, Digitization and Bubbles(7月1日:東京)

保険業界は変革を迫られています。超低金利、新規事業参入者の増加、激化する価格競争、顧客との関り方の急激な変化が、保険会社の商品/ビジネスモデルを揺さぶっています。モノのインターネットやスマートロボットだけではなく、いまやブロックチェーンも保険業界に大きく影響しつつあります。 こうした新しいテクノロジーは、本当に業界を根底から変えてしまうのでしょうか? 仮に変化があるとするならば、いつ、どんな出来事が、どのような順序で起こるのでしょうか? セレント主催の本イベントでは、世界の保険業界におけるデジタル改革の最新トレンドを紹介し、お招きした日本の保険業界を代表するソートリーダーの皆様と、中長期的な視点での将来像を模索しました。
  • 世界の保険業界におけるデジタルトランスフォーメーションの最新トレンド
  • InsurTechが保険業界の未来、ビジネスモデル、事業運営に与える影響
  • 短期、中長期的な視点での展望、業界の未来図
  • 日本におけるInsurTechの現状と展望
Insurance, Digitization and Bubbles
***

Asia Anti-Money Laundering Summit713-14日:シンガポール)

アジアにおいても欧米同様に、規制の継続的な改正、最大手の金融機関における規制違反事例など、AMLの運営管理全般を改善する必要性が高まっています。電子取引の爆発的な普及は新たな課題をもたらしており、金融機関が様々な事象をチェックする際に、もはや規制当局や政府公認のブラックリストだけでは不十分な状況にあります。 AMLはまた、海外業務を展開する大手銀行だけのテーマではなく、全金融機関において同様な備えとその効率化が問われる時代となっています。本イベントは、アジアの保険業界を中心としたコミュニティにおいて、AMLとKYCを真正面から討議する場となりました。 セレントからは当日、以下の既刊レポートを中心に、「ユーティリティモデルの隆盛とAI適用」に関する報告を行いました。 Asia Anti-Money Laundering Summit
***

Asia Insurance Technology Awards95-6日:シンガポール)

2016年も引き続き、セレントは、AIR の主催する Asia Insurance Technology Awards (AITAs) の審査員を務めました。アジア各地の保険業界における、イノベーションと現代化に関する先進的な取り組みを表彰するこのイベントは、セレントの主催するアワード:セレントモデルインシュアラー と併せ、当社アジア保険部門の2大イベントとなります。 新たなテクノロジー、ビジネスモデルそして業界構造や組織変革への取り組みが、6つアワードカテゴリーにおいて表彰されました。中でも、Best Newcomerに輝いた Everledger(英国)、Digital Transformationを獲得した PetSure(オーストラリア)の両社は、InsureTech時代を象徴する取り組みと賞賛されました。
  • IT Leadership: Liberty Videocon General Insurance
  • Best Insurer, Technology: New China Life Insurance, Max Life Insurance
  • Digital Transformation: AXA Asia, PetSure (Australia)
  • Big Data and Analytics: AXA Hong Kong
  • Best Newcomer: Everledger
  • Innovation: IDBI Federal Life Insurance, Ping An Property & Casualty Insurance Company of China
Asia Insurance Technology Awards
***

5th Asia Insurance CIO Technology Summit95-6日:シンガポール)

AITAと同時開催のアジア保険CIOサミットにおいて、キーノートスピーチ「InsurTech & Digital: A Global Round-Up 」を提供しました。 さて、保険会社の存在価値とは何でしょうか?
  • 安心、安全、健康な人生を支援する
  • 企業活動の全てのリスクを担保する
  • 人生の、企業活動の不安とリスクを軽減する仕組みの提供
様々な表現で語られますが、全てに共通することは、「顧客中心」主義。一方で、これまでの金融機関におけるテクノロジー活用の中心命題が、長らく
  • システム化による、人手から機械への代替による合理化、コスト削減 であったことは事実です。
しかし、テクノロジーの進化とその爆発的な普及は、こうして古典的な命題を激変させました。本キーノートでは、情報とテクノロジーを手にしたデジタルな顧客に対峙する現代の金融機関は、
  • 「デジタルな顧客中心」主義であるべき と提唱しました。
また、デジタル世紀の金融機関が遭遇している、急激な業界構造の変化に対して、
  • 「戦略自由度の担保」とそれを実現する「アーキテクチャ」 も提案しました。
5th Asia Insurance CIO Technology Summit
***

TradeTech Asia 20161019-20日:シンガポール)

キャピタルマーケットとウェルスマネージメント業界の祭典 TradeTech Asiaは、今年もシンガポールで開催されました。セレントは長年、このイベントのカンファレンス・チェアやモデレータを務めてきました。ウェルスマネージメントにおけるロボアドバイザーの台頭、トレーディングデスクにおけるAlgoからAIへのシフトが鮮明だった2016年は、アジアの機関投資家の方々と、以下のパネルに参加しました。
All Star Panel: How can you use machine learning and artificial intelligence for predictive analysis and accurate analytics?
当日は、セレントのAIフレームワーク:人口知能モデルを披露し、資本市場、資産運用ビジネスにおける、AI活用の現状と展望に関して、以下の事柄に言及しました。
  • トレーディングライフサイクルの最適化におけるAIの役割
  • 投資分析の予測能力や正確性を向上させるAIの適用方法
  • リサーチ:投資分析やポートフォリオ分析におけるAI活用
  • AIとコンプライアンス:不正取引の監視におけるAIの活用
  • 購入か利用か、構築か?:AIにおけるフィンテック企業の可能性
TradeTech Asia 2016  

Core System Strategies for the Fintech Age: LEGACY MODERNIZATION IN INSURANCE INDUSTRY, Part 6

Finally, we will speak out the proposal from three perspectives…

  1. Automation to Complex Systems
  2. Core Standard and Local Variation
  3. Review Sourcing Models

Winding down this post series, Celent would like to put forth an approach specifically tailored to helping insurers formulate modernization plans.

This entails determining top-priority business strategy challenges, formulating a solid scope definition sufficiently reflecting a firm’s capabilities, strengths, and appetite for risk, architecture design, and assessing the feasibility of the project.

***

 

LANDSCAPE AND TARGETING

It is important to create a conceptual diagram that will function as a systems map, containing the peculiarities and implied information to give stakeholders a clear overview of the systems.

In addition, using a system landscape, which is an accepted industry approach to convey knowledge (including the constitutive elements of the core systems in the context of business goals and by involved stakeholder), companies can thrust the unique and peculiar elements into relief.

This task will probably be unfamiliar to Japanese insurers who have designed, developed, operated, and maintained their own core systems. In short, it will be difficult to determine

  • What is standardized?
  • What is peculiar?
  • What can be outsourced?
  • What should be internalized?

Identifying modernization targets, along with formulating the project scope definition, will facilitate setting business strategy priorities and will help lead to emphasizing core system priorities based on desired capabilities.

FIG6-1: Landscape and Targeting: Insurer System Landscape

FIG6-1

 

MODERNIZATION THAT AVOIDS RECREATING LEGACY ISSUES

The greatest risk of any legacy modernization project is recreating legacy issues.

Indeed, Celent regards this as more significant than both stable system operation and realizing a business case.

It is of paramount importance that modernization projects do not recreate legacy challenges but rather free firms from them. Celent puts forth the three proposals below to help ensure that insurer modernization initiatives are successful.

1. Automation and Its Application to Complex Systems

The key to attaining a high level of operational efficiency, not only among systems, but also with straight-through processing (STP) of insurance office tasks as well as office and communication processes, lies in applying automated business processes to complex systems tasks (this refers to processes that are excessively concentrated and frequently require exceptions processing).

When it comes to communication among insurer stakeholders (customers, intermediaries and agents, employees, management, and others involved in the market), it is important to look at several things including rethinking stakeholder interaction and communication (reports, contact, and consultation routes that occur in daily operations), making communication possible through a portal, and the possibility of consolidating existing applications such as workflow tools.

The capacity for insurance office activities to be automated (core processes, exceptions processing, eligibility criteria, business rule management, and business process management) is rooted in a common infrastructure and the monitoring tools of this infrastructure. The positions and opinions of many internal staff members, ranging from actuaries, underwriters, and marketing staff to name a few, must be considered when, for example, implementing a monitoring scheme, renewing automated rules and processes, and setting and modifying governance rules. In particular, for changes in rules or processes, the transition must be rapid and be able to respond to increased business volume. In addition, the objective of STP is to minimize exceptions processing. Eligibility criteria need to be used from the initial stages of the process even if conducting appropriate process routing.

FIG6-2: Automation to Complex Systems

FIG6-2

 

2. Establishment of Core Standard and Allowance for Local Variation

The key to realizing agile operations and reducing IT costs is determined by reusability and standardization in lower layers. Of the three layers of presentation, business logic, and data, the first two, must be shared to standardize and make the data layer reusable.

This is difficult as shown by the insurer responses indicating that "data model rigidity" is one of the largest IT challenges. While it may be difficult, if insurers do not address this matter, they are doomed to recreate their legacy issues.

FIG6-3: Core Standard and Local Variation

FIG6-3

 

To avoid being ensnared in this pitfall, Celent recommends referencing the below approach. These are universal issues that are applicable across industries, and Celent hopes to see vendors create tools and strategies that offer better solutions to this problem.

  • Presentation layer:
  • Configuration for unique user interface (even if fixed or common, configure using tool base).
  • Equip with framework for items such as shared user interface, reporting, and audit procedures, security (even if for unique user specifications, configure using tool base). 
  • Business logic layer:
  • Architecture allowing common office processes and unique variations to operate in tandem.
  • Equip with rule library to implement unique variations and common office processes (even if for unique user specifications, configure using tool base). 
  • Data layer:
  • Standard data model and field for adding unique items.
  • Mechanism to allow the use of non-structured data.

FIG6-4: Core Standard and Local Variation (cont.)

FIG6-4

 

3. Review Sourcing Models

Formulating a modernization plan should include a review of sourcing models. This should start with the design phase, involve assessment of the build phase, and sufficiently verify plan feasibility.

Global insurance IT firm offerings are many with options spanning core system build, operation, and maintenance. IT firms have expanded their scope of activities to include areas such as maintenance of existing applications, testing relating to the center of excellence (CoE), and data migration.

FIG6-5: Review Sourcing Models

FIG6-5

 

We should conclude this post series in this page.

KRQ #3: What does an insurer roadmap to modernization look like?

We’ve found the following:

  1. Legacy modernization framework.
  2. Understand your organization’s priority challenges and risk tolerance.
  3. Scope definition.
  4. Ensure that your modernization does not simply reproduce legacy issues.

 

Related releases:

Legacy Modernization in Japan’s Insurance Industry, Part 1: Survey Analysis and Status Update

Legacy Modernization in Japan’s Insurance Industry, Part 2: Prescriptions and Proposals

 

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Core System Strategies for the Fintech Age: LEGACY MODERNIZATION IN INSURANCE INDUSTRY, Part 5

LEGACY MODERNIZATION FRAMEWORK

Since its inception, Celent has helped host countless events to facilitate financial institutions selecting the optimal next-generation core system.

Sometimes as a project management office (PMO), other times as a third party advisor, Celent has long been deeply involved in working with financial institutions on processes to optimize core systems.

Rooted in this wealth of advisory experience spanning countless projects, Celent has formulated and suggests using the theoretical yet practical framework in this table.

In the modernization project, three things you should know before starting a tender are:

1. VISION AND CONCEPT

  • Initial motivation and direction

2. CHALLENGE AWARENESS

  • Management, systems, products and services, business process and its priority

3. EXPECTED CAPABILITIES

  • Quantitatively, qualitatively, need to measure the ability of your organization

FIG5-1: Legacy Modernization Framework

FIG5-1

 

The next three things you should need are Methodology for the best project execution:

4. SELECTION PROCESS AND POLICY

  • Usually, it is the Constitution of the project, the project charter to be a live document, these seven items are described.

5. SCOPE DEFINITION

  • Not only the solution to be implemented (the new system and the new organizational structure), all of the things that the organization is involved up to its realization, without omission, rather than duplicate, each other without contradiction, MECE (Mutually Exclusive and Collectively Exhaustive) is essential.

6. REVIEW PROCESS

  • Especially in its project members, evaluation team, it is necessary to ensure the cross-organizational human resources:from both sides of the solution evaluation and commercial evaluation.

FIG5-2: Legacy Modernization Framework (cont.)

FIG5-2

 

When selecting a next-generation core system, the important thing is not to depend on industry-specific differences or degrees of complexity, but to establish a methodology that is versatile.

In other words, the essence of legacy modernization is a comprehensive framework.

That should highlights top-priority business strategy challenges, includes architecture design, and fully reflects the scope definition in light of a firm’s capabilities and strengths to assess the feasibility of the project, all while making sure that it is a good fit.

The KFS are Scope Definition; Understanding Your Risk Tolerance and Organization’s Priority Challenges.

FIG5-3: Scope Definition

FIG5-3

 

Factors that will be crucial to determine the success of system modernization projects include firmly understanding your organization’s priority challenges and appetite for risk coupled with a good project scope definition.

This involves determining priority areas, what to procure and build, and what to cut — all within the scope of your risk tolerance.

Maximizing the use of limited business resources to respond to increasingly diverse and sophisticated digital users’ needs cannot be achieved by simply letting things take their natural course; rather, this requires intent and taking the initiative.

FIG5-4: Legacy modernization is a strategic move in digital innovation

FIG5-4

 

Related releases:

Legacy Modernization in Japan’s Insurance Industry, Part 1: Survey Analysis and Status Update

Legacy Modernization in Japan’s Insurance Industry, Part 2: Prescriptions and Proposals

To be continued – Click to read more

 

Core System Strategies for the Fintech Age: LEGACY MODERNIZATION IN INSURANCE INDUSTRY, Part 4

This post series examines the current status and future directions of legacy modernization in Japan’s insurance industry.

It is based on a legacy modernization survey Celent conducted in 2015. The survey targeted insurers, financial institutions, and brokers. It was supplemented with additional information gathered in follow-up interviews.

The new two-part report is an extension of this work that narrows the focus to the insurance sector.

The Report Part 1 offers an overview of the state of modernization in the industry.

The Report Part 2 builds on this to offer policy prescriptions and suggestions for industry players.

KRQs: Our Key Research Questions are…

  1. Where are Japan’s insurers in terms of legacy system modernization?
  2. What does legacy system modernization mean to insurers and why do they do it?
  3. What does an insurer roadmap to modernization look like?

In Part1 – 3 of this post series, we’ve discussed the KRQ1 – 2.

From Part 4 of this post series builds on this by seeking to answer questions three.

***

 

What about the DIGITAL FINANCIAL SERVICES?

First, we will address the relationship between digitization, innovation, and legacy modernization.

  • Celent advocates that companies revisit how they frame the legacy modernization challenge and stop thinking about it as a system unit or cost center issue.
  • Interviewees told us that it was not that core system business cases were not viable, but that business cases without ownership were not viable. Determining where costs should be allocated and breaking down the attendant benefits are important, but more important is reaffirming that today, success hinges on modernization of core systems and core system business processes for more than half of digital financial services.
  • Companies talk the talk and undertake digital projects, but these are often limited to the front office — that is to say, the contact point with the customer. At the same time, today’s digital consumer is increasingly comfortable with digital processes.

In Europe and the United States, digital native financial services have undertaken modernization of core business processes to such an extent that they will not consider adoption of a process that cannot be digitized. Here, we want to show a diagram that portrays the eight dimensions of digital financial services. Figure 6 draws attention to the importance of core systems of the middle and back office and operational processes, which collectively occupy more than half of the eight dimensions.

FIG4-1: Digital Financial Services

FIG4-1

 

The level of digitization reflects the modernization level of core systems.

In other words, the digitization of customer behavior spurs a shift in the digital processes of financial services (such as STP, automation, and self-service), which in turn drives the modernization of legacy systems — a difficult challenge that many people would rather ignore.

It shows us the stages of digital adoption. It is premised upon a modern core system in the middle and back offices that seamlessly combines with front-end digital channels.

FIG4-2: Digital Transformation

FIG4-2

 

DIGITAL NATIVE INITIATIVES

In the insurance industry, a novel business model is appearing. Still in its early stages, this approach fuses peer-to-peer (P2P) insurance with the traditional insurance model, creating insurance based on small circles or small communities.

This insurance is based on a small inner circle that is akin to a “circle of friends.” This approach has deftly used social networks to find a foothold and niche that meets the needs of digital natives.

It has undergone two or three iterations, is optimizing cost, and growing a new customer base at an extremely rapid clip.

Here also technology is the key to agility.

FIG4-3: Digital Native Initiatives

FIG4-3

 

DIVERSIFICATION OF TECHNOLOGY SOURCING MODELS

In the insurance industry, IT needs have accelerated to an unprecedented pace in the third sector arena, which includes new service sectors such as medical and nursing care, involving the addition of new sales channels and novel underwriting assessment models using AI, the IoT, and robotics.

The securities industry is also experiencing change and heightened requirements in terms of variability and flexibility for core system and back office operations (such as securing availability, variability, and scalability related to processing, latency, and connectivity to accommodate varying transaction sizes).

SaaS and BPO are no longer the latest and greatest technologies. Instead they are only two of the available sourcing model choices to accommodate the level of involvement that financial institutions and their technology partners desire as well as their resource, cost, and risk parameters.

Like best execution and optimized trade market selection, these choices are subject to pressure from sponsors and shareholders. Selecting technology models that can accommodate varying transaction volume and frequency is becoming the norm, and relationships between financial institutions and technology vendors are changing from a more specialized model to a more utility-based model.

FIG4-4: Technology Sourcing Models

FIG4-4

 

Related releases:

Legacy Modernization in Japan’s Insurance Industry, Part 1: Survey Analysis and Status Update

Legacy Modernization in Japan’s Insurance Industry, Part 2: Prescriptions and Proposals

To be continued – Click to read more

 

LEGACY MODERNIZATION IN INSURANCE INDUSTRY, Part 3

WHAT DOES IT MEAN TO MODERNIZE A CORE SYSTEM?

There are Two Major Modernization Propositions for Insurers:

Let’s think about what modernization means to an insurer. Respondent answers to this Celent survey indicated that they expected modernization to yield more agile business operations and to reduce IT costs.

This prompts the question: How do they expect to make this happen? Celent advocates these two propositions.

  1. Straight-through processing (STP) for insurance office processes
  2. Realizing operational efficiency that extends beyond the system, including office and communication process operations

These propositions involve:

  • Communication between insurer stakeholders (customers, intermediaries and agents, employees and management, and other involved parties) and
  • Using common infrastructure and monitoring tools to control the capacity to automate insurance-related office processes (core processes, exceptions processing, suitability criteria, business rule management, and business process management).

FIG3-1: Two Major Modernization Propositions

FIG2-3

 

And we have already found out Five Approaches to Modernization:

Celent’s survey results clearly indicated Japan’s insurer system replacement strategies to be the following:

  • System replacement with a new system
  • Rewriting with new code
  • Replacement with a new platform.

For insurers undertaking modernization, Celent puts forth five approaches as examples.

Insurers can use these to gauge their risk tolerance and select an approach that best fits their needs.

FIG3-2: Five Approaches to Avoid ‘Bad Legacies’

FIG2-4

 

New Technology and the Need for an External Perspective

Core system modernization projects require a long-term perspective. This perspective must have one eye on the future, be driven by technology, and consider factors that will drive business model transformation.

  • An example of the successful transformation of a business model in progress is nonlife insurer use of telematics to calculate individualized rates for policyholders. Already, this technology is offering a glimpse of things to come and a disruptive business model that is emerging in auto insurance rate calculation and underwriting.
  • One example of this is post-underwriting assessments in life insurance that use the socalled “Internet of Things” (IoT). The IoT era is an era of sensors. External biomonitors, such as fitness bands and wearable computers, track everything from body temperature, pulse, and blood details to oxygen consumption and exercise volume to generate information about the user’s health level and risk for disease.

In other words, core system modernization extends beyond the replacement of internal IT assets.

  • An internal perspective that considers the future is of course important, but in addition to this, an external, more macro view of modernization is also indispensable.
  • The challenge that insurers face is to improve the caliber of their internal system while building a platform that will enable them to do more and do it better by adding competencies in the future. Ultimately, this entails preparing architecture that will enable them to take advantage of external opportunities.

FIG3-3: The importance of external perspective

FIG2-5

 

KRQ #2: What does legacy system modernization mean to insurers, and why do they do it?

We’ve found the following:

  1. Insurer legacy system modernization means migrating an insurer’s core system, including business operation functions, integration, support, new product development, scalability, and sourcing models, to a more modern configuration to streamline operations and create new business opportunities.
  2. Business drivers of system modernization are typically a desire to implement a growth strategy, restructure and rebuild business units, and realize new processes (high-efficiency STP) to respond to changes (more digitization) in demand.
  3. Modernization should be conducted carefully to avoid reproducing the legacy issues it is designed to eliminate. An external perspective is essential. This perspective should be focused on ensuring that the result is fueled by technology and can drive business model transformation.

 

Related releases:

Legacy Modernization in Japan’s Insurance Industry, Part 1: Survey Analysis and Status Update

Legacy Modernization in Japan’s Insurance Industry, Part 2: Prescriptions and Proposals

To be continued – Click to read more