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Operational efficiency

After the publication of the book “Transforming Financial Institutions” and the introduction of the “Fundamentals” through the first blog series, this second series provides a deep dive on the three core pillars of the industry’s transformation agenda. This first one focuses on operational efficiency.

Operational performance can be improved by the automation and optimisation of workflows in an open architecture framework. Interoperability represents a key technology innovation and comprehensive tool kit to address the inefficiencies on financial institutions’ technology platforms.

The first pillar of the transformation agenda

Profitability has remained subdued in many financial institutions which is partly due to the inflexibility of their outdated and fragmented technology platforms. As business portfolios have decreased through rounds of restructuring, operating platforms have also become disproportionately large. While technology innovation has brought new competitive pressures, it also provides incumbent banks with the opportunity to fundamentally transform their own operating models and renovate their technology platforms. Emerging technologies allow banks to replace their heavy core infrastructure, reduce their outsized cost bases and reposition their businesses in line with their core capabilities.

The financial industry has lagged in technology adoption and is in process of undergoing a generational refresh cycle. In-house legacy systems are being replaced by modular, light-weight and more standardised technologies. Financial institutions have looked to start-up and growth companies to innovate, following them closely through principal investments, incubators and dedicated inhouse teams. Given the operational complexity and highly regulated nature of the businesses though, a collaborative approach is required to integrate technology innovations in the ecosystem of incumbent financial institutions. The importance of the start-up community is further to grow while the existing industry structure is expected to break up.

Technology innovation

Operational efficiency is driven by innovation in software and technology infrastructure. These advancements allow the automation and optimisation of workflow, and with application programming interface (API) and cloud computing (CC) new models of interactions and infrastructure set-ups. They are fundamentally changing the operational platforms of financial institutions and allow them to address their ongoing profitability issues.

Workflow automation

Workflow automation tools produce a list of actions to automate tasks and interface to the back-end system. Banking and capital markets with their tailored, bespoken product and service features are businesses with high organisational and operational complexity. Their workflows require specific applications and manual intervention with a lot of people involved. There is a number of off-the-shelf software solutions available today that are replacing internally built systems. However, the implementation of comprehensive re-platforming initiatives at large-scale has been challenging for most financial institutions. Most players have been switching between buy and build strategies for their platforms, heavily driven by their own business requirements. The integration of different native or legacy systems with more standardised available solutions has remained a core issue in these targeted initiatives. As a result, operational costs remained high and financial institutions struggled to decrease them respectively. A new model and integrative approach are required to fundamentally address and resolve the issues.

Application programme interface

API is a software and web development concept that represents a set of clearly defined methods of communication among various components. They make it easier to develop computer programs by integrating the underlying building blocks, and drive connectivity and standardisation between third-party applications. Within a typical banking technology architecture, software systems are typically isolated and the functionality of one system cannot be accessed from the other system. API provide the opportunity to connect these separate software entities. They provide the capabilities that are essential for connecting, extending, and integrating different software solutions. By connecting software, API connect businesses with other businesses, businesses with their products, services with products, or products directly with other products. They further facilitate the share of data between systems. This has led to new architectural design and business methodology that provide agility and flexibility to operating models in particular with regard to the integration of third-party vendors and the management of client, transaction and reference data. The new operating models have become known under the term Open Finance. API provide the mechanism to enable these open architecture services between different providers. This allows financial institutions to focus on their core competencies and capabilities while being in a position to offer their clients a universal set of services.

Cloud computing

CC is the on-demand network access and system resources availability to many different users over the internet. It is applied especially to data storage and computing power, and has added completely new features to technology infrastructure and software applications. The technology enables financial institutions to dynamically scale their data storage, computational power and bandwidth. It leads to a huge advantage compared to previous solutions around data centre and servers. CC relies on the pooling and sharing of configurable computing resources to achieve economies of scale and coherence. When multiple users access the same virtual resources in the cloud such as software, storage or virtual machines, those resources know multiple tenants. Virtual applications can be installed with their own operating systems and different set of applications. This allows consolidating large numbers of physical machines onto fewer physical machines with lower operating costs.

Open architecture

Since the establishment of the internet, API and CC have fundamentally changed the operating platform and technology stacks of financial institutions. An open architecture model defines design principles across a group of core components that changes the industry’s operating models. It decomposes the value chain and separates the core platform from the service offering. API enable the access to large data pools, internal and external resources as well as regulatory compliant infrastructure, and allow the integration of best-in-class services from third-party providers. CC facilitates the consolidation and access of data across financial institutions with different service applications such as software as a service (SaaS), platform as a service (PaaS) or banking as a service (BaaS). Such open architecture models allow financial institutions to focus on their core capabilities across customer management which include onboarding, interactions and compliance as well as risk transfer and management through assessing and managing the overall exposure. Regulators have established a framework for Open Finance and the respective management of data access and distribution. The UK’s Open Banking directive that came into force in early 2018 forced Britain’s biggest banks to release their data in a secure, standardised form with the objective to share it more easily between authorised organisations.

Optimisation of workflows

To decrease the high people costs, straight-through-processing has been applied as core principle for operational performance at financial institutions. It leads to the targeted automation of front-to-back processes and services, addressing the high manual work of complex product integration. Application interoperability and smart desktops have been one of the key technology developments for large-scale banking and capital-market businesses over the last few years. Its original focus was on the integration of web applications with other web applications. Open-system containers were developed with the objective to create a virtual desktop environment in which these applications could be registered and then communicate with each other. Interoperability has now evolved into full-service platform solution which includes container support, basic exchange between web and web but also native support for other application types and advanced window management. Smart desktops create intelligent workflows with customized workspaces. It allows cross-application data sharing in an instant and eliminates manual re-entry and error rates. This optimisation of workflows leads to substantial gains in effectiveness and efficiency in an open architecture framework.

Interoperability acts as the integration hub to execute the vision of Open Finance through a unified user and desktop experience. A set of codified specifications for writing API, known as the Financial Desktop Connectivity and Collaboration Consortium (FDC3) standards, is driving these developments under the umbrella of the Fintech Open Source Foundation (FINOS). A growing number of financial institutions has worked collaboratively with technology vendors to accelerate this developments given the substantial potential to optimise the workflows across the sell and buy side.

The book “Transforming Financial Institutions” aims to contribute to ongoing discussion about the financial industry’s transformation agenda with its three pillars to facilitate commercial growth and operational change. The two blog series in combination with the book follow the objective to provide decision makers a comprehensive framework to drive their own institutions’ transformation agenda. Further information to the book and related thought leadership series can be found on Detailed information to the optimisation of workflows and interoperability with whitepapers for the buy and sell-side is available on The next blog published under this series will focus on augmented decision making, the second pillar of the transformation agenda.


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