Danny Healy, financial technology evangelist, MuleSoft
The unprecedented disruption of COVID-19 has changed how consumers interact with banks; there’s been a 20% increase in digital engagement levels and a halving in the use of cash. Many banks have also needed to rapidly meet demand for new services such as ‘Interruption Loan Schemes’ to support those hit hardest by lockdown measures and, like many organizations, are operating with a partially remote workforce. Much of this change could remain even after the pandemic; one-third of retail banking customers plan to increase their use of digital banking as a more permanent shift.
As such, banks need to meet this new set of demands both in the short and long term. However, as a sector that’s built upon legacy systems, change — particularly rapid change — can be difficult to implement. The systems and processes — as well as the procedures, policies, and controls that banks employ to carry these out effectively — must be highly reliable and secure to maintain regulatory compliance and reduce the operational risk that comes with doing things differently. Any change must, therefore, be implemented carefully and with caution, but in the current climate, that cannot come at the expense of being able to respond quickly to customer needs. Banks must find a way to balance speed with managing the risks that accompany change, both now and in the future.
Ongoing operational risks
When it comes to operational risks, security is a primary concern. Banks are founded on the assumption that they provide integrity and confidentiality in customer dealings, protect customers from fraud, and ensure their details are not shared inappropriately. However, COVID-19 has seen a rise in digital transactions, in turn heightening security risks. With more transactions taking place through online channels, it becomes harder to spot suspicious or fraudulent behavior, and there is no absence of fraudsters taking advantage of the situation to target banks and their customers.
Another key area of operational risk is third-party collaboration. Whilst this can help banks respond quickly, cut costs, and offer more innovative banking services, it can also expose them to increased risk. Compliance and security can be impacted by third-party negligence, but so can the availability of a banks’ service. If a third-party’s product or service that is supporting the bank’s own offering does not work as expected, then consumers might not be able to access that offering at all. If customers are unable to access crucial financial services at any point either now or in the future, it could mean serious reputational damage for the bank. So, how can these risks be managed?
A digital tourniquet
In recent years, some banks have attempted to navigate the need for rapid change and the risks that accompany it by creating specialist digital teams. These teams are ringfenced away from the rest of the bank to reduce operational risk and remove any constraints to innovation. However, this often prevents innovation from reaching the wider bank, which still operates on monolithic technologies and systems. As such, innovation can wither at the edge and fail to deliver real impact for the bank and its customers.
Adding to these challenges, many banks are also battling with bottlenecks to innovation; 60% of IT leaders within the financial services sector reported they were not able to deliver all of the projects they committed to last year. This does not bode well for a time where rapid response and completion of new projects is key. Banks need to find a way to overcome these constraints, without creating unacceptable operational risk.
Accelerating change through flexibility
API-led connectivity can provide the solution that banks are looking for, allowing them to connect applications, data and devices without tight couplings that lead to increased risk when change is implemented. APIs can effectively act as gatekeepers for data or processes, providing a natural place to apply security controls, and maintain awareness of who is accessing resources and how. For example, this can be embedded in APIs for employee and customer-facing processes, so threats and unusual patterns can be identified early and resolved. For instance, if a customer account is accessed from Italy but the bank knows the individual is based in the U.S., it can act immediately to protect the customer.
APIs can also provide a secure, standardized mechanism for onboarding and working with third-parties as well as data-sharing within those relationships. Regulators have standardized some aspects of that in the EU PSD2 directive and the UK’s CMA Open Banking regulation. Finally, once a bank’s data is exposed in a secure, governed way using APIs, it can be more easily harnessed in new customer-facing applications within a cloud environment to meet growing demands and ensure services remain highly available.
Putting APIs to work
One bank that has adopted this approach is HSBC, which has developed an API strategy to support its adoption of cloud platforms, which increase the availability and scalability of its systems. The bank has built many APIs that expose its core capabilities in a multi-cloud application network. This unlocks legacy systems, making them available to support new services and enabling the bank to bring new offerings to its customers more rapidly. They also help to enforce policies related to security, providing the capability to feed downstream online fraud detection systems.
With the banking landscape and consumer behavior changed — possibly forever — by the ongoing pandemic, it’s clear that banks need to have the capability to rapidly respond to new demands as and when they arise. By harnessing API-led connectivity, banks can support security, availability, and third-party collaboration, whilst also managing any risks that may arise along the way. By taking this approach, banks will future-proof themselves to cope with this unprecedented disruption in the short-term and position themselves to thrive in a future that presents many uncertainties.
TRANSFORMATION IS NON-NEGOTIABLE FOR BANKS LOOKING TO DELIVER VALUE IN A POST-PANDEMIC WORLD
Andrew Warren, Head of Banking & Financial Services, UK&I, Cognizant
In addition to responding to changing customer expectations, higher operating costs, new technology, and an evolving regulatory landscape, financial services organisations now also face the uniquely challenging business environment created by COVID-19. The economic consequences that are unfolding rapidly and unpredictably mean that banks must double-down on both their efficiency and customer experience agendas. In light of this, the need to modernise legacy banking platforms will gain sharper focus as banks emerge into the post COVID-19 landscape, driven by the need to focus on value for customers and agility to change and shift operations quickly.
If banks are to remain strong and stable and make real progress with their efficiency and experience agendas, transformation is non-negotiable – but it can be risky and have high rates of failure. So how can banks pursue their transformation agenda, while addressing the very real risk that modernisation of legacy banking platforms presents?
Communicating value across the business
Banking transformation may have traditionally been the domain of the IT function, but the impact on current and future value means it should be on the agenda of a much wider set of senior executives. This includes the CIO and COO but should also be as far reaching as the Chief Risk Officer, Chief Financial Officer, Chief Digital Officer, and Chief Experience Officer.
When we talk about value in the context of transformation it can mean multiple things. In monetary terms, transformation can reduce the total cost of a bank’s IT infrastructure, with legacy equipment 55 per cent more costly than cloud data. More importantly however, transformation often results in moving from highly manual orientated processes to more efficient, automated – and therefore accurate – processes. In turn this can lead to more informed and tailored products and services, internal process efficiencies, enhanced cybersecurity, advanced analytics, and reduced risk, especially around fraud and malicious activity. These all add significant value to customers, as well as operational and regulatory imperatives.
Furthermore, viewing transformation through a value lens should tie it to a range of specific financial and accounting metrics that ultimately measure success. That includes both those that reflect the protection and extension of current value, as well as measuring the extent to which transformation will support the capture of future value. Financial services organisations have a huge opportunity to create greater value for customers from innovation in products and services. Changing market dynamics are creating a basis upon which banks and others in the industry can evolve their offerings and organisations.
In much the same way as we have already seen in retail, for example with Amazon and AliBaba, and media platforms, such as Facebook and Netflix, customers are adjusting to a new way of banking that is changing expectations. To keep up, banks need to increasingly provide easy-to-use digital-first services across their products, as well as introduce new tools to help customers manage their money in the 21st century. And there is no doubt that the fall-out from COVID-19 will likely further drive the degree and extent of digital adoption.
Traditionally, financial institutions take many different approaches to transformation, such as developing sleek new customer experiences to compete or developing new platforms and partnering with fintechs. But achieving success for more mature banks is more challenging given the obstacles presented by their legacy platforms. Comprising complex, customised systems, these are expensive to run and very costly to change.
The inevitability of change
To truly transform operations and experience, many banks are now having to face up to the reality that they cannot move forward without banking platform transformation. That means they must – in one way or another – replace their historic systems with more modern, cost-effective, and flexible platforms. That is going to be essential to stand up the capabilities required to enable digital products and deliver the truly revolutionary experiences that customers demand.
Recognising this, many banks are now considering their options. Some have already started down the challenging path and hit bumps in the road. A very small number have successfully executed their ambition to create a platform for the future. All banks contemplating transformation should take lessons from both the successes and the mistakes. These will be critical to inform their plans.
What are the next steps?
There are a number of essential transformation steps to consider that will help realise value from investment as rapidly as possible, provide an appropriate level of delivery confidence and manage exposure to the operational risk normally associated with such changes. These include:
1. Business strategy must inform every step of transformation – ensure that the approach to platform transformation is tightly aligned to the wider business strategy.
2. Design a strategy-aligned roadmap for delivery – a transformation roadmap should clearly set out the logical order in which business outcomes will be delivered. Here again, that needs to align with the value that the organisation is seeking to achieve, with incremental progress determined by business priorities. This involves making appropriate use of modern delivery methods, such as agile, and making sure that everything that is done satisfies and is frequently assessed against the relevant value criteria.
3. Assess technology selection against business value – organisations often undertake detailed and exhaustive market, functional and technical assessments when reviewing new products and suppliers. This often means either the technical assessment dominates proceedings and / or new technology platforms are selected without a clear line of sight to the value required. Poor product selection is a risk as a result, as well as a lack of understanding of how products should be deployed to inform the sequence of delivery required by the transformation roadmap.
4. Assess your readiness for change – unsurprisingly, given the sheer scale and velocity of change that business leaders must deal with, resistance to change is often a key reason given for the failure of banking transformation projects. However, it is crucial that the ability of the organisation to deliver and adopt the operational, technical, and cultural changes required to support transformation is comprehensively assessed and done early.
The impact of COVID-19 paired with and the demands that financial services organisations face from all directions, make change an inevitable necessity for the most. The approach to delivering a successful banking transformation, underpinned by a modernised platform, will vary dramatically from bank to bank. However, above all, businesses need to ensure that value drives every aspect of change explicitly linking transformation strategy and investment with the realisation of value.
CLOUD ALLOWS BANKS TO BASK IN CHANGE
by: Elliott Limb, Chief Customer Officer at Mambu
As a new era of banking takes off, the cloud is enabling players to adapt fast at low cost and with minimum risk, while rolling out products that customers actually want, writes Elliott Limb
For all the talk of today’s banking landscape being the most competitive ever, you’d think the customer would be spoilt for choice. Sure, there are more banks and prices are low, but the reality is that it is still pretty hard to tell one from another when it comes to real value-added services.
Every retail bank, for example, offers some form of online and mobile banking; and most private banks have adopted automation and robo advice of some kind to help bring costs down and make its service more relevant to customers.
The upshot of this homogeneity is that rather than working to provide a unique service, banks seek to stand out from the pack through marketing – offering free travel insurance for premium customers; zero-fee balance transfers; no interest on overdrafts; low-cost or flexible loans. These offers aren’t about providing a better banking service. They are small treats in an industry that has raced to the bottom on price.
But this old-school approach is now being challenged. Technology across other industries has already forced change, putting choice for the customer front and centre. The big platform companies like Amazon or Google were among the first to use Big Data and algorithms to analyse behaviour and thus predict what the customer wants – often before the customer knows it themselves.
As other industries apply predictive technologies, it has had two effects: customers have come to expect a highly personalised and relevant service that enhances their lives; and the big platform companies are beginning to encroach on some banking activities such as loans and payments. The capital reserves held by Apple today would put it among the top ten banks outside China.
Taken together, these changes are dragging banking into a new era of differentiation and choice, where customers will expect to get what they want when they want it at a price they’re willing to pay.
What every successful player will have in common is agility – the ability to quickly adapt and change not just products and services but business strategy to reflect movements within its own market space. And to be clear: this agility isn’t just about the technology that is used – it’s a business model.
The agile model doesn’t wed the bank to a set of tools; it marries the bank to choice, thereby maximising the chances of it becoming and remaining the best. This agility can only come from cloud operations.
Enter the cloud
Cloud allows banks to innovate fast. Digital technology in the cloud lets them quickly reconfigure products and services to take into account new regulations or temporary circumstances – the fall-out of Covid-19 and the need to waive overdraft fees or provide payment holidays, for example. Where legacy systems demand banks carefully plan and time changes, which can take many months, banks working with the cloud can carry them out on the hoof, often within hours. This makes them more competitive, incurs lower costs and lowers risk.
Working with the cloud also allows banks to align costs to revenues because billing is on a pay-as-you-use basis. Use can be scaled up or down according to demand, so expensive technology doesn’t lie idle on-premise ever. Locked-in costs are minimised. This means that you could launch a great new customer-centric bank today and scale up to become a $1bn unicorn fast.
Finally, cloud technology helps cut risk. By providing flexibility, banks can adapt their products and services as the market evolves. They aren’t locked into medium and long-term strategies. They can be nimble.
Furthermore, cloud providers invest heavily in their technology, updating and upgrading it constantly and ensuring its resilience and security in a way that individual banks simply couldn’t afford. So banks working with cloud providers will have access to the best, most secure, resilient, up-to-date technology.
Make no mistake. Competition going forward will be tough and customers will expect the best or they will go elsewhere. Margins are already low, thanks to the above mentioned fight to the bottom on price.
However, banks using cloud technology will be ready to compete on a level unseen as yet and offer customers services that they want and need, at price points they can afford. They are able to differentiate on agility and adapt quickly as their market dictates and they are able to manage risk. As a result, customers will have real choices for the first time – choices that will add value to their banking experience and even their lives.
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