Digitalization of Financial Services in the Age of Cloud

Chapter 4. Climatic Patterns in Financial Services

“A change in the weather is sufficient to re-create the world and ourselves.”

—Marcel Proust, French novelist

As you explore your value chains, building maps as you go, some factors will come into play that are entirely out of your control. Just like the weather, or perhaps more accurately like the climate, these forces and patterns represent additional parameters and constraints that affect how you can evolve and optimize your systems according to the goals of your digitalization strategy. In mapping, these influences on your strategy are called climatic patterns.

The Wardley Mapping community is collating an ever-growing catalog of climatic patterns for consideration when building your strategies. Each climatic pattern fits into a defined category. In this chapter, we’ll follow the same approach to identify the climatic patterns that are more specific to financial services:

Category	Patterns
Market opportunity	“Financial Services, Everywhere”
Competition	“No Business Is an Island,” “Emphasis on Speed, Scale, and Agility”
Components	“Lower Technology Barriers to Entry”
Environmental	“Sustainability Matters”

Climatic Pattern 1: Financial Services, Everywhere

“Financial Services, Everywhere” may sound like a cliche, borrowing from slogans from the past (“Java Anywhere” anyone?).¹ However, it reflects precisely what financial services organizations face today. “Financial Services, Everywhere” is more than catchy marketing. It is a fundamental climatic force that is changing in the industry.

The central role of a financial services organization hasn’t changed drastically since people first established financial services products and built their marketplace. On the surface, everything still looks like money. Financial services organizations provide products and services that enable money to move, to transform, to grow. But money is just the manifestation, the physical embodiment—in software engineering terms the “concrete API”—of the services provided. Money is the message, but it’s not the point of financial services.

Trust and Risk Distribution

Every financial services organization deals in something more fundamental than money: trust and risk distribution. Through reputation, regulation, and daily operation, a financial services organization develops and maintains the trust it needs to provide the essential services individuals and organizations need across the globe.

Services that work within the financial business of that individual or organization shoulder the burden of the fundamental risk that the work entails. The global economy needs to trust financial institutions, and individual people need to trust their financial institutions. This trust is earned when financial institutions provide the resilience and risk distribution the economy needs to work at scale and reach, for all parties involved.

Diverse Products, Globally Accessible: Embedded Finance

The fundamental remit of financial services has not changed much. But the ways that the job is done, where it is done, and how easy and accessible it is have changed beyond all recognition in recent times.

From the very beginning, financial services institutions have taken advantage of new technological inventions, innovations, products, and commodity services to bring their core strengths of trust and risk distribution to their customers. In the early days of the industry, that meant satisfying the needs of the few with capabilities that only a few organizations could provide. Not so anymore.

Nowadays customers expect, and financial services organizations are rushing to supply, financial products and services wherever those customers are—physically or virtually. Platforms are drawing together financial institutions, technology providers, and distributors of financial products so that those services and products can be embedded directly into customers’ experiences, rather than forcing customers to redirect their efforts to a financial services institution. More than ever, a customer will choose a supplier of those products and services from a growing collection of competitors, selecting one that best meets their needs and can reach them in an increasingly diverse set of physical and virtual, highly convenient locations on demand.

“X, Everywhere” Is a General Climatic Pattern

“Financial Services, Everywhere” is not a climatic pattern limited only to financial services. You can see the same market direction in another sector, ecommerce.

Ecommerce is expected to be ubiquitous, and the full spectrum of financial services are being encouraged, even forced, along the same path. This change in customer demand has fueled a rich and evolving ecosystem of digital native FinTechs and other startups that are challenging the hegemony of the traditional financial services organization. In this environment, slow and steady becomes less acceptable when your customers want access to financial services right here, right now, wherever they are and whatever they are doing.

For all these reasons, “Financial Services, Everywhere” has become a crucial market force in the financial services industry. “Financial Services, Everywhere” is our first example of a climatic pattern impacting financial services technology strategy, but it is far from being the only one. Next let’s leave behind the financial services market and look farther down the value stream at how those “Financial Services, Everywhere” can be supplied.

Climatic Pattern 2: No Business Is an Island

As financial services organizations aim to speedily evolve and supply products and services in more and more diverse locations, the pressure to innovate leads naturally to an “acquire and/or partner” pattern. In an increasingly dynamic environment, incumbent financial institutions become aware of the need to innovate quickly to make the most of existing markets, and reach new ones, while retaining that all-important trusted status.

A fast route to protecting, evolving, and extending your crucial business value chains is either to acquire or insource an existing, complementary technology or partner with a third-party supplier. In financial services, this pattern is most evident in the profusion of financial technology companies that are springing up. Commodity cloud technologies and financial models have successfully lowered the barriers to entry such that a five-person (or fewer!) venture can establish a segment of a financial services value chain valuable enough to augment products by providing their service, entering a formal partnership, or even being acquired.

This pattern is to your advantage if you have prepared an effective digitalization strategy where you know what you have (through your value chain maps), you know what properties you want to achieve and invest in, and you can take advantage of new services/capabilities quickly. Your systems’ architecture, and importantly modularity, is the critical factor in making this approach possible. More on this in Chapter 6.

Climatic Pattern 3: Lower Technology Barriers to Entry

It’s easy to forget that, in the not-so-distant past, one significant barrier to entry into operating financial services value chains was the investment in technology infrastructure necessary to operate effectively. The computing, networking, and storage capabilities necessary to deliver working, secure, compliant, and reliable capabilities to a segment or complete financial services value chain were expensive enough to represent a significant barrier to entry. A brick-and-mortar presence was crucial to establishing yourself as a financial institution that could be trusted, and indeed interacted with, so the necessary technology tools were available only to the wealthy, established few.

It’s true that technical barriers to entry still exist in the form of skills and knowledge. But the walls of technology investment that protected financial institutions from competition in the past have been eroded by the climatic change of large-scale, technology service creation and, in some cases, commoditization. The combination of the largely ubiquitous reach of the internet, universal availability of high-quality, supported, open source–enabling capabilities such as the GNU/Linux operating system, the radial access network for wireless communications, and proliferation of cloud services technology providers means anyone with sufficient, but not necessarily vast, resources can enter the marketplace.

To survive and thrive in the wind of the climatic pattern of commodity cloud computation, you can look in your value chains for opportunities to leverage these economies of scale, rather than banking on resisting them.

Climatic Pattern 4: Emphasis on Speed, Scale, and Agility

Hand in hand with the “Financial Services, Everywhere” pattern goes the need to meet the challenge of increasing competition and innovation in the financial services marketplace. One perspective you can take, and many still do, is to focus on the work necessary to build and maintain your systems, breaking up that work and responsibility into manageable chunks and separating the work, responsibility, and accountability for operating those systems from those responsible for building them.

This approach, sometimes referred to as siloing, makes sense when you have well-established, undifferentiated systems that are stable, possibly standardized, and even well-known and replaceable commodities. Slow, steady, long-term iterations of project work may not hinder the evolution of those systems.

For the more specialized, novel, and differentiated systems that form part of your value chains, however, a different approach has emerged as a climatic pattern over the past 20 years. Strengths inherent in the project-focused approach and siloed operations, such as stability and large degrees of change control, have become the very things that make it difficult to react to the changing demands of a market burgeoning with innovative financial services everywhere.

The “Financial Services, Everywhere” pattern means that many system components will be constantly under the relentless pressure to change as they rapidly evolve from early invention and discovery to innovation and, perhaps, stability and commoditization, as shown in Figure 4-1.

Figure 4-1. A system may begin its life under intense pressure to change in its genesis stage and gradually evolve through being a differentiating product into potentially being a stable utility and commodity in the marketplace.

A different culture and approach are needed for systems earlier in their evolution, and this has manifested as the climatic pattern of “Speed, Scale, and Agility.”

As the need for system components and value chains that evolve quickly becomes more apparent, it has been embraced by the teams developing and operating those systems. These teams emphasize the following practices:

Speed

The capability to deliver change frequently and safely

Agility

The capability to change direction quickly and easily

Scale

The capability to be ready to gain economies of scale as the system becomes more stable and well understood by your business and the marketplace

By mapping out your value chains, you can gain insights into where, as part of your digitalization strategy, you will see the need to invest in speed, agility, and scale for particular system components and value chains. These insights will help you organize your people and their responsibilities and accountabilities, along with enabling technologies and practices, optimally to help, not hinder, the unlocking of real value to your business.

Climatic Pattern 5: Sustainability Matters

Given the extreme importance of financial services organizations and the trust placed in them to facilitate so many of the crucial activities of the modern world, it is perhaps unsurprising that the impact of those activities from an environmental standpoint is getting more attention. Ensuring that financial services activities are ecologically sustainable has become a publicly visible priority for ethical and competitive reasons.

As an example of the importance of this climatic pattern, consider how seriously hyperscale cloud service providers, such as Amazon Web Services (AWS), are taking it. AWS launched its “AWS Well-Architected Sustainability Pillar” to help teams design and operate value chains while monitoring and optimizing AWS-specific resources and its sustainability metrics (e.g., carbon footprint) to achieve the right sustainable scale and service level to meet users’ needs. Other organizations, such as Red Hat, develop a view across multiple hyper-scale cloud resources, helping organizations optimize for cross-cloud operational resiliency and, therefore, optimize for the best mix of sustainability for their value chains.

Note

Beyond sustainability, several other considerations make up what a well-designed and run system and value chain can leverage. You’ll explore more of those options, and how to consider them for your own systems and value chains, in Chapters 6 and 8.

Consumers of your services will expect, and demand, that the price of your value chains won’t impose an undue environmental cost, so sustainability becomes a consistent challenge to consider as you build your digitalization strategy. Through your strategic choices (see Part III, “Strategic Digitalization Doctrine”), you will balance economic and sustainability factors when selecting the right path for your system components and value streams.

Climatic Patterns Change

As you build your digitalization strategy to get your business’s needed ROI, you will keep an eye on the general and specific climatic patterns in play when making choices about how and where you should make investments. You can grow your situational awareness and build your own prioritized catalog of important climatic patterns as you explore your digitalization strategy options.

However, though seemingly part of the firmament, climatic patterns can at times be as changeable as the weather after which they are named.

While sudden changes in the large-scale conditions of your business and marketplace may be rare, they are not without precedent. Therefore, as part of a regular strategic reevaluation, it is a good idea to embrace this potential for change by revisiting your catalog of important climatic patterns to assess whether any have changed in importance or impact or disappeared, or whether entirely new patterns have emerged.

¹ R. Khare, “W* Effect Considered Harmful [Internet WAP]”, IEEE Internet Computing (July–Aug 1999).