As 2022 heralds a new dawn for banks and the banking industry, Mike Yesudas, CTO at banking technology provider, SunTec, discusses key changes in the sector, what we should expect in 2022 and what these developments mean for banks.
Banks have undergone significant transformation in the last two years, witnessing a remarkable acceleration in their digital transformation programs. Banks are now highly digitized, and digital adoption among customers is at an all time high. Innovation within the banking industry remains strong, as banks continue to evolve and adapt to changing customer demographics and preferences. At the same time, they must continually adapt to overcome the challenges presented by the banking democratization trend – where bigtechs and fintechs present a new form of threat to traditional banks.
The game has now shifted to one of survival first and growth next. As 2022 approaches, the key question for banks is about its relevance to customers – and how well equipped they are to meet changing customer needs and preferences.
Digitization without the intelligence
The rate at which banks have embraced digitization in the last 24 months has been nothing short of phenomenal. Before the Covid-19 pandemic, programs that were expected to take a decade or longer to complete were finished in less than two years. There is no doubt that we now live and work within a truly digital world. But as we begin upon a new year, the banking sector still faces a core problem. Whilst banks are highly digitized, their inherent nature means they are not as technologically or data savvy like many of their fintech challengers. A recent report by Accenture revealed that out of nearly 2,000 directors in more than 100 of the world’s largest banks, only 10% of board directors and 10% of CEOs had any professional technology experience.
While banks may have become ‘digital,’ they’re now in a position where they lack the experience and intelligence to drive forward their digitization efforts and reap rewards for themselves and their customers. As traditional data kings, banks now must learn how to leverage their data, and use it innovatively and conveniently while ensuring it is secure. Unfortunately, many banks still lack the technology to truly use this data intelligently – which is a massive missed opportunity.
The importance of data exploration and extraction
To overcome this challenge, data exploration and extraction will become vital and prove a turning point for banks in 2022. We’ll see banks undergo large-scale data exploration programs to scrutinize and examine the data they retain so they can fully understand their data assets. This includes everything from transaction and payroll data through to foreign exchange data.
Currently, big banks are not ready or able to leverage all of the data they hold to their advantage – an area where the smaller players and fintechs excel. Many banks simply do not want to abandon their core banking focus and don’t have the key to unlock the data and realize its full potential. But there is little point in holding such indispensable data if a bank can’t use it to create real change or value. In the coming year, banks will need to step up their game, adopt a technology-first approach to data science and forge partnerships with external service providers to truly deliver a frictionless customer experience.
However, this doesn’t come without risk. Once data moves to third parties and is beyond the bank’s control, it could lead to data misuse and mishandling. If not managed properly, such partnerships can pose an obstacle – so it’s vital that banks implement well-defined policies to mitigate and eliminate risks that may compromise customer trust.
Ultimately, banks of the future will need to differentiate themselves by demonstrating they are connected, present and relevant to customers as they navigate their daily lives, and focus on becoming trusted advisors in the eyes of those users.
Effectively using artificial intelligence (AI)
While banks have a wealth of data, many also have significant technology gaps. Luckily, one of the most influential technologies today can help them address gaps between merely holding and effectively using data: artificial intelligence.
The use of AI in banks is not new – many banks have been using AI to build their own chatbots and virtual assistants for years. A large global bank previously introduced a humanoid on its bank floor to assist customers in its flagship branch on Fifth Avenue in New York and later in Miami, FL and Beverly Hills, CA. It handles customer support activities like teaching customers how to open accounts, relaying credit card details and more. There are solution providers like Simudyne that help financial institutions run large scale stress tests using AI. While the use of AI was initially restricted to front office scenarios, with time banks have begun to use AI in middle office tasks like fraud prevention, customer segmentation, KYC verification, credit underwriting, lending risk management and much more.
In its next stage of evolution, AI is bound to reinvent the way pricing is done across industries, including the banking industry. This sector has numerous products and services even within the same category, making it challenging for the pricing teams to keep track. Above these complexities, pricing teams must constantly deal with changing market conditions and dynamic customer behavior, which often makes it a super human task to make the optimal pricing decision. By tracking the buying trends and competitive product prices, AI will be able to help banks drive optimal pricing decisions and bring more transparency in pricing by clarifying the variables behind each decision, doing away with the ‘black box’ effect which can introduce mistrust on price recommendations.
If banks are ready to think out of the box, the possibilities can be endless. AI can help banks combat friction in customer experience. For example, banks can leverage AI to shorten the KYC and AML compliance requirements by conducting the necessary checks and following all the processes, just like digital bank Monzo did for its onboarding. It focused on optimizing verification accuracy, lowering signup abandonment rates, reducing manual review and improving verification speed. Banks can now get one step ahead and create a bank that is driven extensively by algorithms that nudges its customers at the right time to make the right decisions that consider customer financial goals.
A bank’s ecosystem remains a vital cog in the engine
Whilst many have said a bank’s Achilles heel is its legacy systems, they are still fundamental to progression and innovation in the banking sector. As we enter 2022, a bank’s ecosystem must remain highly robust while simultaneously becoming more agile. The current lack of ecosystem flexibility creates an opportunity for APIs and niche challenger players to compete in the banking landscape. If banks continue to rely solely on these robust, but rigid core systems, can they remain relevant to customers? And what are the different ways in which big banks with a rich ‘heritage’ of applications can remain relevant to new-age customers?
What banks must do in 2022 is deploy a middle layer that has the intelligence to translate data available in their core ecosystem into actionable insights. This middle layer will amplify the effectiveness of the robust core system making the bank more agile and flexible to meet customer needs while leveraging the benefit of a robust core. This can help banks effectively deliver value while taking informed decisions to remain profitable.
For traditional banks, and the banking industry, to remain relevant, they must also compete with bigtechs that offer a complete solution to customers’ problems. And the only way for banks to do that is to quickly adopt a platform strategy, build their ecosystems and own their customers’ journey while extending their solutions like those of their partners to holistically solve customer problems. This type of interaction conducted on a highly efficient platform will ensure there is an effective value exchange between the customers, banks and its partners. The value exchange is everything: it’s where the customer and the bank meet on common ground at the right price, at the right experience for the customer and, importantly for banks, at the right level of profit.
It’s true that 2021 generated significant digital innovation in banks and a new approach to their customer experience strategies – but 2022 has the potential to truly harness the power of this innovation and allow banks to lead from the front.
Cloud technology in banking: Why adoption is on the rise
Alpesh Tailor, Executive Director at digital transformation specialist GFT
The banking sector has never shied away from innovation, whether it is new products to improve customer savings habits or new ways of interacting with people and business, but embracing new technologies such as cloud has, until recently, been relatively slow. However, leading global financial institutions such as Goldman Sachs and Deutsche Bank have accelerated their adoption of cloud, which can provide insights for efficient technology transformation across the sector.
We conducted research to measure 21 medium-size and large banks’ sentiment and operations regarding cloud technology. Examining the relationship between cloud technology and banking professionals, our research provides an insight into the overall finance sector’s perception of cloud technology and how its application can improve banking procedures and efficiency.
A significant trend showed that the way people use their finances and banking systems has changed, particularly when it comes to payments and transfers. Our research revealed that 86% of bankers have adopted cloud services to harness its virtually unlimited scalability, citing a definitive change in transaction behaviour as the main reason for moving to the cloud.
In the world of retail banking, buy-now-pay-later, open banking, and contactless payment systems have revolutionised the way people use their bank, making financial management easier and more efficient. However, despite these evolutions, high street banks are playing catch-up to the challenger banks who possess fewer legacy processes and, therefore, an easier migration to new technologies, such as the full utilisation of cloud and artificial intelligence.
The cloud provides a dependable, scalable, and flexible data system that allows traditional banks to modernise quickly and stay abreast of the innovations that ‘born-in-the-cloud’ challenger banks are bringing to the market. An increasingly popular way of doing this is by adopting a hybrid and multicloud approach.
Most organisations are considering diversifying their cloud technology, with 76% of bankers now agreeing with the importance of implementing multicloud systems in order to benefit from resilience and security improvements made by the main cloud providers. These cloud ‘hyperscalers’ also provide regular updates and continue to release exclusive new services and platforms as they continue to innovate.
Our research indicates that cost optimisation is a primary reason that banks are looking toward the cloud for their future storage needs, with 81% of bankers confirming they have adopted cloud technology to save costs.
Installing and maintaining on-premise IT systems is lengthy and costly for financial institutions. When using the cloud, however, purchasing and installing hardware is no longer required as the cloud service provider hosts all the required infrastructure. The management of the hardware is included within this, reducing the overall cost of IT support further.
Technological innovations are usually heralded for their ability to streamline operations, making them quicker and more secure. Our research illustrates that 62% of bankers believe organisational culture and inertia to be a key challenge within the sector. Besides being flexible for scalability and cost, adopting cloud technology can bolster organisational efficiency, since banks can spend fewer resources managing the relationship between trading volumes and payment infrastructure. Bankers acknowledge this opportunity, with 95% of organisations understanding that cloud technology can reduce time-to-market.
Overcoming misconceptions with cloud technology
Misconceptions usually exist around any emerging technology and our research found that this theme continues with cloud technology.
43% of the bankers we spoke to admitted that security concerns have impeded full cloud migration – a concern that has frequently been confirmed when speaking to financial services institutions. However, cloud providers invest heavily in the security of their cloud infrastructure which, as a result, makes it almost always safer than its on-premise, client-owned counterpart.
One aspect of adopting the cloud that continues to cause concern, is that which is commonly termed the ‘digital skills gap’. More than half of banks claim a lack of cloud-savvy employees internally has slowed down adoption. At GFT, we understand that this is a major issue for the adoption of cloud technology in all sectors, including banking, and have committed to training and encouraging young people to learn the required skills and enter the sector. We recently launched our Manchester Innovation Hub – a dedicated location to support the upskilling and growth of tech roles in the north.
Going forwards, cloud technology is the primary option for banks seeking to evolve and scale their business, whilst minimising risk, time and cost. Bankers recognise these benefits and the overall findings of our research suggest they will continue to grow their investment in cloud technology. Whilst evolving traditional legacy systems is very challenging, cloud technology continues to advance and we believe that over time it will become a powerful mainstay within the financial services industry.
Bringing Automation to Banking
Ron Benegbi, Founder & CEO, Uplinq Financial Technologies
Automation is everywhere you look these days; from supermarkets to warehouses to automobiles. This prominent trend shows no sign of abating anytime soon. However, some sectors remain behind others when it comes to adopting automated technologies. Banking is one such segment, but there’s now evidence to suggest that this could be about to change.
What do we mean by automation?
There are a lot of ways to define automation, but broadly the term applies to any technological application where human input is minimized through design. Over the years, automation has evolved from a basic level, which took simple tasks and automated them, all the way to advanced automation powered by Artificial Intelligence (AI). In general, automated solutions work to increase productivity and efficiency within businesses and often result in a reduction in costs associated with human capital.
Why has the banking sector been slow to adopt automation?
The banking sector has been built on a number of long-standing, tried and tested processes and protocols, which have been continually fortified and refined over time. This is one explanation as to why the sector has been so slow in adopting new, automated methods within its operations. Additionally, many major financial institutions have spent decades building their own internal legacy computer systems, which are often incompatible with modern automated solutions.
When combined, these two issues have caused a significant lag in the banking sector with regards to the adoption of automated technologies. This lag has created a market opportunity that a number of fintech providers have been able to exploit in recent years. Offering a more responsive and tech-first user experience, many fintech providers are leveraging the power of automation to better meet the banking needs of their customers. However, there is still time for the banking sector to start bridging this gap.
Does automation have a place in the banking sector?
The opportunity for automation to play a role within banking can be transformational.
To achieve this, it’s important that legacy organizations begin to learn from their more tech-savvy, smaller counterparts. If used effectively, automated financial solutions can greatly improve the experience of banking customers, both on a personal and business level. So, what exactly does this change look like, and how far away are we from seeing it become a reality?
A good place to start is the small business credit lending process, where not much has changed since the 1980’s. Over that period, the world has greatly transformed, but the methods used to assess credit worthiness have remained somewhat static. For the most part, banks assess data related to businesses’ accounting and banking records and from credit scores. For many businesses, especially the newer and less established ones, this antiquated approach is having a detrimental effect. In fact, it’s often cited as a contributor to the huge funding gap between SMBs and their larger counterparts.
How can automation benefit the banking sector?
By adopting more automated technologies, lenders in the banking sector can begin to assess more comprehensive information when making credit decisions. Notably, new methods exist, which enable additional data sets to be evaluated, in order to build a more accurate financial depiction of a business’ overall position. This data can come from sources like external market attributes, economic indicators, demographic data and exogenous shocks.
By leveraging additional data sets through new methods of financial automation, banks are now in a position to respond more effectively to small businesses, including those in emerging and evolving markets where there is a lack of conventional sources of information.
With more ways to access funding, facilitated by alternative data and automated processes, small business owners can improve their operational efficiencies and accelerate their growth efforts. In doing so, legacy oriented financial institutions can now better equip themselves in protecting against new, nimbler tech-based disruptors.
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