Insight

Accelerating Change in Financial Services

What exactly do we do with our money? Aside from daily purchases, we store it. Mostly in banks. Then we shuffle money between companies and people as we transfer, invest, borrow or lend. Finally, we trade it off for other assets.

In “The Future Is Faster Than You Think,” futurists Peter Diamandis and Steven Kotler explain how converging technologies are fundamentally reimagining each of these areas – with bits and bytes replacing pounds and pence. Neither economics nor the way we live our lives will ever be the same.”

COVID-19 has exposed operational and technical flaws in many financial institutions. Banks must respond to the immediate crisis while adjusting for their long-term strategic plans. Many underlying problems will outlive this moment in time.

Robert Eriksson, digital CTO at Lloyds Banking Group, points out that many organizations with complex technology solutions are having trouble keeping up with today’s fast-moving world.

“This is particularly evident within financial services where many companies have been built over decades, if not centuries, with core IT systems still running on Mainframes,” Eriksson said. “However, by investing in its employees to ensure they stay on top of the latest trends and technologies it is possible to transform not only the technology estate, but the entire organization, setting it up for success in a modern and digital world.”

Financial institutions must rise to the challenge by changing their business strategies. The successful banks of tomorrow need to reimagine their role in the world today. In the face of exponential technologies, new growth models, fresh ways of thinking and original solutions have emerged.

Massive acceleration is on the horizon. Understanding how banks will change is indispensable. Here are just seven important ways banks can prepare for the impending changes to financial services.

1. Embrace ‘The Jump Model’

Legacy banks are under more pressure to become more aggressive, risky and disruptive than before. It is no longer enough to tinker with legacy infrastructures founded upon the basics of a bygone era. Large engineering and architectural evolutions have not reaped the expected benefits so banks are looking to new strategies.

New financial technology companies are competing aggressively with large financial institutions. Being more nimble and agile, this burgeoning competition can meet the needs of customers quicker and more efficiently. This spells trouble for legacy banks who cannot replicate key qualities helping newcomers succeed: cloud nativity, fintech-friendly architectures, customer-led cultures, efficiency enabled by straight-through processing and careful targeting of high-value digital-natives.

But banks will start to adopt what Publicis Sapient calls “The Jump Model”: building a new shell onto which the existing business can migrate – leaving behind older technologies that stymie agility. The Jump Model is far more likely to result in a substantial return on investment (a potential 20 to 40 percent cost-to-income ratio), address the customer’s needs and increase loyalty.

2. Become a tech company

Engineering transformation and cloud enablement have been top-of-mind for most if not all large financial institutions and rightly so. Old technologies and processes won’t be enough to address the rising expectations of customers. But it’s about much more than that – namely how the business views itself.

To remain competitive, banks need to see themselves as tech companies – otherwise they will be left behind. Without changing their frame of mind, legacy businesses won’t be prepared to handle the disruption from digital newcomers.

Simply updating old systems and processes won’t be enough. Businesses need to make engineering and cloud transformation central to their strategy – focusing on four key objectives:

New technologies are elevating the concept of cyber security and system resiliency in bank architecture to the next level. While building a system, testing resiliency with tools like Chaos Monkey or Gremlin can prevent outages and speed up recovery times.

3. Overhaul payment systems

Banks and other fintech players are looking into alternatives to traditional payment systems, which are mostly outdated, cumbersome and concealing transactional fees. Banks can truly differentiate themselves to customers by increasing the speed of real-time payments and moving all transactions to a service like Faster Payments, which allow customers to make electronic payments in hours rather than days and is available 365 days a year.

In “The Future Is Faster Than You Think,” Diamandis and Kotler invites the reader to consider what would be the fastest, most cost-effective way to transfer $9,999 from London to New York. Some might argue you should physically carry to cash in a bag on the plane since you only need to declare $10,000 and over to U.S. Customs. If you were to transfer the money through a bank it would travel through SWIFT, the network at the center of cross-border payment technology, which processes 24 million transactions per day. In addition to bank fees, the transaction could take up to five days and exchange rates can vary by over five percent.

As Diamandis points out, Stellar, a decentralized open-source network for transferring money, is pointing toward the future. It can process over 1,000 transactions per second (that’s over three times faster than SWIFT). Rather than five days, it completes the transfer in up to five seconds and bypasses exchange rate variability with an extraordinarily low fee of one cent per $600,000 transactions.

There is a great opportunity to leverage new regulations on New Payments Architecture (NPA) as a catalyst to drive this payment transformation. NPA is new conceptual model for the future development of the UK’s shared retail payment infrastructure. It will be the biggest change to the way payments are processed in the UK since the 1960s, ensuring payments are safe while encouraging competitive innovation and unlocking new business opportunities, such as smarter uses of banking and payment data.

4. Capitalize on data

In the new decade, we will see a shift toward systems of engagement (SoE): technologies that help businesses coordinate the customer journey through a series of personalized interactions. These touchpoints on social media channels, mobile apps and elsewhere drive greater engagement.

With a cohesive SoE in place, data collected during these interactions across platforms will not be siloed and disjointed. Rather, through the SoE, they will be easily managed and available in real-time. A functioning API ecosystem, in which collaboration enables superior experiences, will enhance the data’s potential.

Traditionally, banks have focused on system of record, a centralized, authoritative database that’s accurate and reliable. The more recent system of insights paradigm looks for greater understanding throughout various databases, which can handle complex queries and is highly scalable. But the trend for more channels of information, more dynamic analytics system will continue toward SoE.

Many companies capitalized on data and access to banking APIs to create innovative business models. Banks now realize they too can benefit from this trend. By treating APIs as “first-class” citizens, they can create partnerships and multi-sided platforms to offer new services.

5. Democratize machine learning

Once data is easily accessible from system engagement as described above, the possibilities for providing intelligent solutions are endless thanks to the expansion of machine learning: the development of programs that allow computer systems to access statistical models and other forms of data and use it without specific instructions from an operator.

Most banks are creating machine learning platforms dedicated to driving self-service and embedding controls and governance to ensure built-in compliance. This level of automation will completely upend banking as we know it, especially the pricing of products and the leveraging of customer signals to discover insights.

Banks will increasingly invest in technologies like Robotic Process Automation. The real power will be clear when failure scenarios become self-healing thanks to how RPA has been combined with AI.

6. Move to a ‘team of teams’ model

In recent years, businesses have appreciated the role of cross-functional teams in solving smaller problems. But this hasn’t helped banks solve their bigger problems, such as balancing their cost-to-income ratios or improving their net promoter scores.

To this end, it’s important for financial institutions to leverage the organizational model outlined by General Stanley McChrystal in his 2015 book “Team of Teams.” Essentially, teams cannot think exclusively of their particular roles and must understand the organization’s overriding goals.

Though not a new concept, the “team of teams” mindset will become even more significant as time goes by.

It’s important to define the organization’s metaphorical moonshot and make sure teams are moving in that direction at all times. Portfolio management is essential to ensure that every department’s projects are in line with the business’ core objectives.

Once teams are established, it’s extremely important to define the objectives and key results (OKRs). These may be supplemented with quarterly or even monthly reviews where appropriate.

7. Accept the prominence of blockchain

Blockchain, a growing database synchronized across many sites and institutions, shows tremendous promise but has always failed to scale at the speed many expected, largely due to the regulatory climate. Once regulators embrace blockchain, it will be an important tool for banks to prevent Internet fraud or data leaks.

IBM already started its Blockchain Accelerator program, which helps blockchain start-ups acquire resources. The Chinese government announced late 2019 that it would support blockchain research.