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Neil Ainger investigates how banks are investing in the short-term on cloud computing and FinTech collaboration, and longer-term on blockchain and AI technologies, as part of a digitalisation drive

“Financial services is ripe for disruption,” says Dilan Rajasingham, Head of Emerging Technology at Commonwealth Bank of Australia (CBA), when discussing the key technology trends in banking, and the threats and opportunities from artificial intelligence (AI), augmented reality and so on.

“The most forward-thinking institutions are reorganising to meet the threat – and find the opportunities – by bringing business and IT closer together,” says Rajasingham. “This can remove impediments to change, deliver a high level of efficiency, and dramatically increase responsiveness and velocity.”

Cloud computing is one short-term way to bring IT and the business closer together, if security, resiliency and legal data protection concerns can be overcome. According to Ambreesh Khanna, Group Vice President at Oracle Financial Services, “organisations have put aside $1.77 million for cloud spending this year [with them, in US –Ed.] to move processes off-site”.

“AI has the potential to reshape analytics,” he adds, “and offer more accurate risk-based pricing by improving default and delinquency predictions, boosting margins”, while blockchain could “create value and authenticate digital information” in end uses from “crowdfunding to supply chain auditing, to name just a few.”

Collaboration with FinTech startups that are willing to partner – rather than compete – is another way to meet enhanced consumer, corporate and institutional data-centric demands and expectations of a fast 24×7 service. Regulators too want intra-day reporting capabilities these days, so that’s another driver for more flexible IT architectures and data-centric systems.

“The technology trends in themselves are not important,” says CBA’s Rajasingham, whether it’s AI, blockchain or whatever other technology you’re interested in. “What is important is the problems we apply tech to – and what new value we can deliver via ‘meshing’ them together. For example, can a [manually-supported –Ed.] lending process be eliminated using Robotic Process Automation (RPA) and AI in conjunction to automate the decision-making? How can inter-organisational delays in settlement and reconciliation be eliminated using blockchain and smart contracts? These are the important questions.”

According to Rajasingham CBA has “a fairly large portfolio of experiments and projects” in the emerging technology space, including:

  • Visualisation projects, such as augmented reality.
  • Internet of Things (IoT) projects, involving drones, and AI projects that use deep learning techniques to get better results from predictive behaviour models.
  • Cyber security is important too, including creating a rapid innovation capability to bring in the best the FinTech world has to offer, in an agile way.
  • This technology is being explored to automate processes, such as procurement; and explore new secondary market opportunities, such as data sharing with counterparties to eliminate reconciliation. Monetisation and commercialisation opportunities are also actively under investigation.
  • Longer-term, next generation quantum computing is being explored. As is how to train professionals to think in new ways in order to best utilise the technology and cryptography in a post-quantum computing world.

“Our aim is to mesh all these technologies together to create new value,” concludes Rajasingham.

Threats and opportunities
Technology is a double-edged sword in that it presents a displacement or disintermediation threat, as well as a cost-cutting or new market opportunity. How FIs choose to identify the technologies that are important to them and to deploy cloud computing, open source software or to partner with FinTechs in the short-term will decide if they’re successful or not in fighting off newcomers, or indeed more tech savvy rival banks. The same applies in the longer-term when utilising AI, DLT and so on.

It’s important how FIs align new technologies with their people and processes. Banks can no longer support the expense of aging, siloed IT systems that are expensive to run, especially with internal staff, so they are increasingly looking to more modern digital platforms and cloud-based solutions and partners. The initial driver was the post-crash environment at the turn of the decade where return on equity fell, compliance costs rose and operational savings had to be made. Know Your Customer (KYC) and other financial utility platforms also had to be introduced to get economies-of-scale savings on shared solutions.

But a later driver has been the need to transform banks’ internal IT to meet the displacement threat from FinTech-enabled digital-only neo-banks, such as Starling or Fidor in the West, and numerous other such challengers in Asia and the Middle East. A more flexible digital platform is required to compete with these newcomers. Meeting enhanced customer expectations of a digital ‘always on’ 24×7 service at a reasonable operational price is often not possible with the legacy systems and silos at Western banks. If others can do it, at a cheaper price, then eventually Millennial and other customers will move, necessitating the need for a new core.

FinTechs
“The banking landscape is changing very rapidly. FinTechs are disrupting the market by delivering services much faster and with less friction than traditional banks,” says Sonny Singh, Senior Vice President at Oracle FS. “It is more important than ever for banks to expand their digital capabilities by modernising their business architecture and technology infrastructure.”

For instance, a new tech-based FS player such as Ripple with its DLT-based Interledger protocol could potentially displace an incumbent infrastructure such as the SWIFTNet cross-border payments network. This is why SWIFT has this year launched its own third stage global payments innovation (GPI) DLT Proof of Concept (PoC). The market will decide whether it is in time or not to protect its dominant position on cross-border payments. Many Tier 1 banks are already partnering with Ripple during their early stage developments of blockchain technology. They’re hedging their bets to see which platform, and DLT protocol and platforms, will be the most useful in the future – externally with partners, and internally to optimise procedures. Infrastructure providers can be displaced, as well as retail or investment banks, if they don’t meet the needs of customers at an acceptable price.

Banks have the same advantage as SWIFT in that they already have scale, pre-existing clients and business models. These count for something, but don’t guarantee continued dominance. However, it is only the minority of FinTechs that want to displace existing FIs. The majority simply want to be bought out for their good idea or product, rather than face the challenge of scaling up to compete with incumbents.

In order to effectively outsource their R&D to outsiders, banks must possess a flexible core banking system and architecture that can easily and quickly incorporate new tools and/or FinTech developed services. The collaboration trend is another driver for the digital transformation of aging core banking and IT systems as banks seek to make their systems more flexible to co-opt the innovative zeal of startups.

This will no doubt be supported in future years by the drive towards open application programming interfaces (APIs) in banking which is being encouraged by moves like the UK authorities Open Banking mandate and the EU’s Payment Services Directive (PSD) 2. However, these regulations could be seen as a threat, as well as an opportunity, because they will mean more new players are allowed to enter the marketplace by regulators than was previously the case. Banks will have to release more data than they have previously too.

According to Rajashekara Maiya, Head of Infosys Finacle’s Product Strategy, the response of FIs to the various challenges of new entrants; the need to cut costs; to collaborate; and to meet enhanced customer and compliance demands can be summarised in just one word: “digitisation”.

“The rapid evolution and adoption of digital technology is posing a very real threat of disruption to the established banking business as customers continuously reset their expectations based on their experience in other businesses, and new competitors prove more agile than incumbents in fulfilling those demands,” he says, while adding that regulators are gradually lowering the barriers to entry for newcomers, even as they demand better reporting capabilities.

“At the same time, however, digitisation has also thrown open undreamt of opportunities for FIs,” says Maiya – if they can match newcomers’ technology capabilities then their scale advantage come into play. “Digitisation has smashed the cost and efficiency benchmarks in banking operations, for instance, and for those that have already moved it has enabled unprecedented service and experience expectations to be met. It has also enriched decision making with real-time, actionable intelligence by improving data capabilities.”

Infosys Finacle has identified “the on-going tech trends” that it believes will be prevalent during 2017, including: Open APIs and Open Banking; Cloud-first policies by design; Simplified technology, driven by open source, componentised architectures; AI and associated building blocks of AI such as machine learning and natural language processing; Blockchain/DLT. The race to production will be evident during 2017 as pilot schemes mature or are scaled up.

There is a lot for banks to get their heads around – and to ensure the crucial alignment of people, process and technology is achieved – but a digital core banking transformation that is flexible and open to technological advances is a good place to start.

Maiya cites Alipay, Ant Financial, Paytm and Airtel Bank as exemplars setting standards for innovation for other global banks to follow. “We see ICICI in India and RBL bank as reaping the benefits of the latest technologies they’ve installed too. Banks such as DBS in Singapore are also creating different business models to increase their reach and strengthen their position.”

If banks don’t rise to the challenge, there are many FinTechs waiting to nibble away at their business. For instance, Caxton is a company that uses hybrid blockchain and core banking-type technology for foreign exchange (FX) end uses. Its CTO, Russell Stather, is convinced that smart contracts and DLT will disrupt the commercial banking environment serving corporate treasurers. “Smart contracts allow you to move an asset with multiparty involvement in a single transaction, which makes it cheaper, quicker and traceable end-to-end,” he says.

The key benefit for a payment or trade finance end use is that not everyone in the chain is taking a transaction fee anymore, as blockchains – unlike correspondent banking ones – are fast, irrefutable and traceable.

Settlement mechanisms and structures for investment banks could also easily be disrupted – or improved – by DLT, which is best defined as a distributed ledger that is secured by mathematical algorithms and provides a record of events shared by multiple parties. The ledger can be public, open source and available to all – as per the original Bitcoin (BTC) crypto-currency ledger, with its attendant cyber-security worries – or it can be a private ‘permissioned’ chain that enforces standards and vets and manages invited participants. The latter is more popular in banking, but reduces the full network benefits of the technology.

According to Conor Ogle, Vice President at Sapient Consulting experiments with emerging technologies like blockchain or AI “must be tethered directly to the core infrastructure and core purpose of a bank. If they are not, these initiatives can too easily mobilise activity around ‘the new’ without sustainably progressing the core viability of the enterprise.”

In other words, make the technology relevant and useful by finding end uses and make sure experiments have that goal in mind.

This article first appeared in our monthly magazine, IBS Journal. To subscribe, click here.

by Scott Thompson
Scott is Senior Editor at IBS Intelligence. You can follow him on Twitter and contact him at: Scott.Thompson@ibsintelligence.com
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