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Nearly 80% of Banks Globally Remain in Nascent Stages of Their Hybrid Cloud Adoption

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By Hans Tesselaar, Executive Director, Banking Industry Architecture Network (BIAN) and Shanker Ramamurthy, Global Managing Partner Banking & Financial Markets and Industry Academy President, IBM

 

Findings from the First Study in a New Multi-Year Research Collaboration, IBM and BIAN Identify Challenges and Best Practices Impacting Bank Financial Performance

In the years since the 2008 financial crisis, banks have struggled with performance and profitability. Average return on equity (ROE) remains well below banking industry metrics, and cost to income ratio (CIR) has improved on average but remains high.

Fintechs and Big Tech continue to grab share from traditional banks as customer preferences shift and millennials and Gen Z make up an increasingly larger share of the workforce. Improving metrics like ROE and CIR not only requires a new mindset, but also a willingness and readiness to embrace the evolving global digital landscape. Banks must innovate and adopt new digital platforms that are much more consumer oriented with rich personalization, new AI powered digital tools and services that help them remain relevant.

Hans Tesselaar

To help financial institutions with this digital transformation, IBM, and the Banking Industry Architecture Network (BIAN) have embarked on a multi-year research collaboration to identify and examine best practices in technology infrastructure. To kick off this collaboration, we are today unveiling the results from a new study which sought to better understand what sets apart the most successful banks from those who are lagging behind and how technology plays a role in bank profitability, outlined in our detailed report, Foundations of Banking Excellence.

 

Key Findings

Among the findings, the analysis uncovered that 79% of banks are still in the foundational stages of their hybrid cloud journey and that the institutions that have achieved superior financial performance prioritized IT architectural models, for example data fabrics and AI factories.

Specifically, banks with healthier financial performance are characterized by six key practices that they are executing against:

  1. Engaging in partner ecosystems to fuel faster innovation and efficiency
  2. Implementing end-to-end digitalization to streamline and automate complex operational workflows and drive innovation
  3. Establishing data fabrics to allow data to flow through a broad network ‘on tap’
  4. Deploying AI factories and transform data environments that put data into action
  5. Creating small, operationally focused teams that are responsible for identified, end-to-end tasks
  6. Integrating early development process monitoring to provide data, obtain user feedback, and prepare for deployment and maintenance activities

These six themes highlight that banks who look at business operations holistically are most successful not only with their digital transformation, but also when it comes to their financial performance. This includes utilizing modern technology like hybrid cloud as a transformative lever for unlocking business value and artificial intelligence to derive more from their data. Hybrid cloud strategy is particularly important. In fact, according to a recent IBM Transformation Index: State of Cloud study, 71% of financial services organizations that were surveyed thought it was difficult to realize the full potential of a digital transformation without having a solid hybrid cloud strategy in place.

Shanker Ramamurthy

The impact of cloud on business value, when integrated with transformative levers, is 20x greater than the potential economic realization of cloud as a standalone strategy. Successful banks often prioritize collaboration and innovation both within and across their enterprise boundaries.

Best Practices: An action guide to adopt exponential technology as a business opportunity

Exponential technologies have become fundamental to achieve operational efficiency, obtain competitive advantage, manage risk, and achieve financial outcomes. To fully achieve these results, we see banks executing against these six practices in three main areas:

  1. Open up to external participation and innovation through engagement with ecosystems of both bank clients and partners.
  2. Banks need to digitize their business processes, professional practices, and applications to run the business more efficiently.
  3. Beyond initial exploration of hybrid cloud, it is necessary for banks to modernize technical infrastructure. This is where a coreless banking approach comes into its own. Banks can future-proof their systems while overcoming many of the obstacles involved with adopting new technologies.

Banking

How Banks Can Boost App Innovation, Speed and Compliance

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Steve Barrett, Senior Vice President of International Operations, Delphix 

As new finance and banking applications disrupt the market each day, and customer expectations around speed, privacy and quality continue to grow, financial organization CIOs and DevOps teams have to innovate quickly to bring new apps and updates to market, while remaining strictly compliant to a myriad of regulations. DevOps innovation in financial services requires fast access to accurate, compliant test data, and as anyone who touches the industry knows, data privacy is a highly complex, critical process woven into the everyday world of finance.

Banks and financial services organizations collect vast amounts of data, but using that data for innovation can be challenging due to the vast size and complexity of test data. These challenges can inhibit the adoption of new and transformative technologies and hinder innovation if they are not addressed head on. To address these challenges, many organizations are integrating the use of highly innovative test data management (TDM) tools within their DevOps ecosystems. DevOps TDM provides access and delivery of lightweight, compliant data for DevOps initiatives including digital transformation, software upgrades, cloud migration, artificial intelligence and machine learning (AI/ML), and analytics.

Data – the last automation frontier

Historically, application teams manufactured data for development and testing in a siloed, unstructured fashion. Over time, large IT organizations began consolidating TDM functions to take advantage of innovative tools to create test data. With the rise of modern development methodologies like DevOps and CI/CD that demand fast, iterative release cycles and end-to-end API-driven automation, legacy TDM approaches are often no longer sufficient.

Reliance on a traditionally manual, ticket-driven, request-fulfill model creates time drains during test cycles and slows the pace of application delivery. Consider the payments industry, in which agile technology companies using optimized DevOps processes can release new code hundreds of times per month. In contrast, traditional banks with slow IT ticketing systems may take months to release new features. These manual, legacy TDM approaches exist in contradiction with modern DevOps practices and CI/CD processes that depend on automation and fast feedback to development teams.

TDM for the DevOps Era

DevOps teams rely on TDM to evaluate the performance, functionality and security of applications. However, while processes including storage, compute, and code have all been automated, data has eluded the reach of most DevOps toolchains.

Now, DevOps TDM can help accelerate app releases and increase compliance.by automating the delivery, provisioning, and compliance of data. These practices provide both development and testing teams with data APIs, including the ability to refresh, rewind, bookmark, group, tag, branch, and share test data, to accelerate DevOps productivity and improve application quality. DevOps TDM also includes copying production data, and the masking (anonymization) and virtualization of data through the DevOps pipeline, which helps accelerate app releases and increase compliance.

And as the pace of application development quickens, so does the pace of privacy regulations and efficiently ensuring compliance in DevOps has become a significant challenge for enterprises. Non-production data used for testing software applications, reporting, and analytics can contain up to 80% of an enterprise’s sensitive data. To solve this, DevOps TDM provides integrated data masking to de-identify personally identifiable information (PII) and other sensitive data in non-production environments, eliminating the risk of sensitive data exposure.

The World Quality Report 2022-2023[1] by Capgemini stressed the importance of an enterprise wide approach to test data provisioning (a core component of TDM). The report states, “Over the years, with stringent regulatory and security requirements around data, organizations have increased their focus on provisioning test data safely and securely.”

The report shows that secure test data provisioning remains a challenge, with only 20% of respondents having a fully-implemented enterprise test data provisioning strategy in place to address security and compliance requirements.

Data is the catalyst to innovation

Automation is fueling myriad digital transformations within the financial services sector, but without the right data, these application innovations cannot succeed. DevOps TDM can help further accelerate DevOps initiatives by automatically delivering fresh, complete, and secure test data wherever and whenever it is needed, in minutes. With DevOps TDM, banks and financial institutions can innovate faster, reduce time-to-market for updating legacy applications, and accelerate development and testing of disruptive fintech.

 

[1] Source: https://www.capgemini.com/insights/research-library/world-quality-report-wqr-2022/

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Banking

Is traditional business banking the best option for SME finance squeezes?

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Airto Vienola, CEO, AREX Markets 

The pressures facing business and personal finances alike have been well documented.

Stories are now starting to emerge about how smaller enterprises around the UK – which make up well over 90% of the companies in the country – are coping with that mounting stress. The picture starting to emerge suggests, not well.

Personal borrowing is bridging gaps in business books

One survey released recently suggested that one in five of the country’s small businesses have taken out personal loans by the business owner to try to cover gaps in their incomes and profit margins. A further 43% said they were considering doing the same. This rush to secure additional funds by any means may be understandable for businesses feeling the pinch, but it’s neither sustainable nor savvy. Many of these enterprises are already burdened with additional debt from the Covid relief scheme, and given rising interest rates, soaring energy costs and rising cost of goods, taking on additional debt is not an attractive prospect. Add to that the fact that rates from traditional business banking providers are proving steep, smaller enterprises could be forgiven for looking to personal means to shore up the balance sheet. A recent study from members of the Federation of Small Businesses found that one in five small businesses are struggling to find business lending rates under 11%. To help these companies to survive, something clearly has to give.

Not all Alt-Fi options are equal

Alternative finance services have been proliferating in recent times, and yet almost half of small business operators have concerns about pursuing this option, despite actively seeking additional funding support. Clarity over terms and conditions is an often-cited reason for this reticence, which is only natural when undertaking proper due diligence on financial lending. This is a wise choice, especially as it has become so easy for business owners to quickly and simply access new services through embedded finance services, just a few clicks away on existing digital accounting and bookkeeping services. Many of these are still not clear about any detailed fine print, lengthy contract terms or potentially high fees, and yet these too can look like accessible and viable options to business owners facing mounting financial issues.So, it can be hard to pick the right provider without a lot of research. Those wary of the long tail of taking on debt should be particularly careful when it comes to business Buy Now Pay Later or BNPL offers, which are currently entering the UK market, though that isn’t to say that other alternative financing services won’t suit their specific needs whilst mitigating fears over risk.

A fresh perspective on an established technique

So, if debt should not be an option, and embedded finance can have downsides, where should SMEs turn if they don’t want to kick the can of cashflow problems just a few months down the road? One area to reevaluate, which has seen a tremendous shift given the fresh thinking from alternative finance is invoice financing or spot factoring. No longer the imbalanced option of last resort it was traditionally perceived to be, the option has become much fairer to the SME, in addition to providing a swifter and more flexible alternative. In years gone by, invoice financing was the purview of the banks, which led to low rates of return for businesses looking to unlock the value in their organisation, and often much better value flowing back instead to the lender taking on the risk. This is no longer the case. Likewise, invoice financing earned a bad reputation among some for tying businesses into lengthy contracts – another area which current services in the market have since addressed. Our service for example allows businesses the flexibility to access cash back on just a single invoice of their choosing – which could be the difference for struggling SMEs between dipping into loss or keeping the lights on.

One answer to the late payments problem?

Perhaps the most important area which services like invoice financing assist is overdue invoices – the bane of the British SME. Barclays claimed earlier this year that over a quarter of SMEs are finding late payments to be on the increase, and this was an already notorious issue for many business owners. Estimates show that SMEs on average have £6500 in unpaid invoices at any given time. Financing these invoices ensures that the cashflow of these strapped SMEs is healthier, gets the money back into the business without the concerns of lengthy payment terms or endless chasing, and certainly in our case, has no impact on the relationship with the other organisation. Our platform acts as a marketplace between SME and likely investors, with extensive insight provided to make sure that those investing in the invoice are matched to the right businesses. We take on the intermediate risk – removing any suggestion or potential concerns around unwanted debt collection, for additional business owner peace of mind.

While the pressures may be mounting on the SMEs around the country, one thing is clear. No business should rush into making long term financial decisions simply as the cashflow is drying up. Any savvy business would be well advised to make sure they understand the implications, short and long term, of any lending solution they look to employ. However, knowing that there are options and the business’ bottom line does not simply have to rely on traditional banking services, should provide business owners with a lot more options at their disposal to help them to face the coming months with greater cash liquidity confidence.

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