On the one side there is the legacy; a complex patchwork of disparate technologies integrated at random, upgraded incrementally and rooted in an era when product-centric silos were avant-garde. On the other is the new paradigm of banking under unrelenting pressure from customers, regulators and competitors.
In the past, there might not have been too many competitive incentives for banks to modernize their legacy systems. They were fairly justified in holding back given the risk of disruption in big bang transformation or the prolonged anxiety of phased modernization.
Today, many banks are handicapped by their legacy systems as they attempt to compete successfully in a world gone digital. So, even as modernization looms inevitable, the layers of complexity in their IT environments is turning out to be the biggest barrier to core systems transformation. The good news is that for banks compelled to modernize, emerging trends in technology are opening up new possibilities that can significantly reduce the cost, time and risks involved in transformation. In 2014, many banks around the world will embrace progressive or componentized modernization as a more practical and productive approach to transformation.
This is a components-based model allowing for controlled transformation at a granular level. In the new model, enterprise systems, which have evolved from monolithic to modular architectures, will be reinvented around components. It will enable banks to focus their modernization efforts on specific lines of business or functionalities, while simultaneously minimizing disruption. It will also allow them to align modernization with exigent business objectives and to deploy components that will enable those opportunities.
In a recent EFMA-led study, 78% of respondents say that adopting enterprise-wide systems would yield significant benefits, while 58% indicate that componentized deployment is the preferred route to modernization. There is little doubt that componentized modernization would enable banks to bring their technology systems up to speed with the demands of today’s banking ecosystem. More importantly, it would also help create an architecture that can assimilate future technological developments without embarking on a transformation cycle all over again.
According to an IDC Infosys global cloud adoption study conducted late last year, the top two sectors to have formalized cloud strategies were telecoms and financial services, in that order. But when it comes to hybrid cloud adoption, financial services were the clear forerunners.
Clearly the sector’s cloud agenda has moved significantly beyond a debate on issues of security and compliance.
The versatility of the cloud lies in its ability to offer nuanced variation even within the predominant private and hybrid structures. For larger banks with existing best-in-class IT infrastructure, designing, securing and managing a private cloud is the logical next step. It gives them access to the capabilities and functionalities of a public cloud minus the security and compliance concerns.
For the smaller banks that need best-in-class IT infrastructure, the cloud is the logical next step too, minus the heavy investment. The shared services feature of public cloud gives these banks access to industry benchmark software that instantly levels the playing field.
It’s almost tempting to argue that the latter approach, which drastically slashes CAPEX and immediately energizes performance, ranks higher on a transformational scale. But that’s besides the point considering the larger disruptive impact that the cloud will have on the banking industry as a whole. Traditional banking structures will be transformed by the emergent possibilities of big data, in-memory analytics, social integration and mobility, to name a few.
In fact the mobile capability of the cloud is already taking banking into hitherto non-financial territory; mobile operators and postal networks are leveraging their reach and customer base to build a niche financial services business.
The likelihood of a mass migration of core banking to public clouds lies only in the future. But in the here and now, banks have a choice of cloud configurations to suit their IT profile, their growth aspirations and their competitive streaks. Core banking on the cloud will only be the culmination of a transformative process that’s already underway.
Every year strategic branding agency Seigel+Gale compiles a Global Brand Simplicity Index, across 25 industries, to generate separate brand and industry simplicity scores. In 2012, retail banking came in at #15 on an industry simplicity listing headed by online retail and closed by health insurance. This year, that ranking has slipped to 19th. And some of the industries that beat out retail banking? Shipping/mail and automotive!
It’s true that banking is one of the most systemically complex industries in the world. But when it starts underperforming mail in simplicity it’s time to introspect.
For the sake of banking customers who, as the study points out, are willing to pay up to 4.4% more for a simpler experience as well as be more inclined to recommend the brands.
For the sake of banking profitability, with research suggesting that up to 20% of potential profits are inaccessibly tucked away under layers of complexity.
For the sake of cost savings, which could be as much as 50% and 30% on application and total IT costs respectively, if IT complexity were reduced.
For the sake of innovation, with a majority of banks citing technological complexity as a barrier to it.
Whatever be the sources of complexity in banking, it is becoming increasingly clear that it is an impediment to business value. But as the demands for simplicity – from customers, regulators and bankers themselves – keep getting louder, simplification becomes an exigency.
In 2014, simplicity will become a leitmotif for all banking activities. Banking leaders will focus on simplicity to enhance operational efficiency, competitive advantage, customer-centricity, innovation capability and compliance. Complexity, it is said, is a natural byproduct of sophistication. But sophistication that precludes value is merely style without adequate substance.
Also read our blog on the Legacy as a banking trends
Banking’s systemic complexity is often cited as one of the principal causes of the 2008 financial crisis. But the tidal wave of regulation set off by that event is, ironically, secreting a new layer of complexity on the business. Apart from adding complexity, emerging regulatory norms will considerably inflate the cost of compliance for banks. For instance, US multinational JPMorgan Chase now expects compliance costs to touch US$2 billion in 2014, almost doubling its previous projections.
The sheer complexity of regulation, spanning applicability, ambiguity and interpretation, will place existing compliance structures in the banking industry under a lot of stress. Furthermore, some of the new provisions, on liquidity and capital reserves for example, are creating a huge drag on banking balance sheets already under pressure from shrinking fee incomes and cost inflating consumer protection safeguards. The steady trend of two -digit Return on Equity has also taken a nosedive in the post-crisis era and may never fully recover given the new standards of supervisory stringency.
The reporting requirements of emerging regulations demand granular, instantaneous and holistic views into all aspects of banking operations. This will obviously necessitate a rethink of existing banking structures going beyond just compliance and governance models. In short, compliance will gain as much prominence as any of the other drivers of business strategy, like changing customer expectations or competitive dynamics.
Another trend to emerge amidst all this regulatory disruption is that of the super-regulator, a unified regulator to exercise oversight over all components of the financial services ecosystem including banking. This idea has already become reality in Russia where the Central Bank of Russia took charge as the country’s market regulator on 1st September this year. Late next year, the European Central Bank will also complete a similar transition to unified supervisor of all banks in the Eurozone. Even in India, the idea of a unified regulatory agency independent of the Central Bank has already been mooted in the Financial Sector Legislative Reforms Commission (FSLRC) report submitted to the finance minister earlier this year.
Time, cost and quality of banking compliance will be front and center in 2014, as the lines of the regulatory landscape continue to be redrawn. With the full force of the Dodd-Frank regulations coming into effect this year, compliance is set to increase in importance in the strategic compulsions of business leaders alongside other challenges like digital customers and oblique competition.
Also read our blog on the Simplicity as a banking trends
According to a 2013 analyst report, the banking sector ranked second, behind media & communications, in terms of Big Data investments. The report estimated that 34% of banks were already invested, while an additional 24% expected to do so in the near term.
The conviction is justified given that data has for long been a key value driver in banking. Big Data technologies have the potential to further enhance that value as banks navigate a transformed landscape characterized by exploding data varieties and volumes.
But technology is only as valuable as the outcomes it empowers. And 2014 will be the year when banks fully apply the buzz of Big Data technologies to the business of delivering competitive and profitable outcomes.
Enhancing customer experience, engagement, intimacy and loyalty is a critical component of banks’ competitive strategy. But customer expectations from each of these practices can be quite divergent. With Big Data, banks will be able to go beyond traditional segmentation models to group customers by shared expectations, preferences and needs. This more granular approach to segmentation will open up new possibilities in individualizing personalization and therefore, experience.
Big Data-powered data-driven business models also empower banks to look beyond traditional datasets and build customer profiles that are about individual lifestyles rather than transactions. Delivering personalized offers around these lifestyle needs will not only enhance experience and build engagement but also engender loyalty.
But even as Big Data enables banks to unlock new customer value, it also creates the capabilities to drive stronger risk management processes. It helps banks to harness insights buried in unstructured data and activity patterns to generate risk assessment and fraud detection models that deliver more robust results. These techniques can even help identify customers who are actually bank-worthy but until now have fallen outside the ambit of credit scoring models.
However, the biggest challenge for banks on the road to analytics-driven business value is talent. According to one analyst estimate, by 2015, the shortage of data and analytics talent will be two-thirds that of actual demand. Banks should institute structures and processes that generate the necessary skills so that they can move from Big Data hype to Big Data value.
Also read our blog on the Compliance as a banking trends
It can now be stated with empirical certainty that enterprise cloud adoption is more practice than prediction. There has been an average 10% increase in the number of companies using at least one cloud platform, and an estimated 60% of enterprises are now integrating cloud spends into overall IT budgets. In 2014, spending on cloud software, services and infrastructure will exceed USD 100 billion.
The banking sector, thus far held back by warranted concerns about security and reliability will get in on the game in 2014. By 2016, more than 60% of all global banks are expected to process a majority of their transactions on the cloud. More than two thirds of banking executives who participated in a recent study indicated plans to increase investments in cloud computing.
Now, rising security and reliability standards in the cloud ecosystem are definitely helping to heighten interest among banks. In 2014, banks, who thus far preferred the relative safety of private clouds, are expected to scale their operations into the public cloud domain. This move is also in line with the prediction that by 2017 at least half of all enterprise cloud systems would be hybrid.
But there are also significant competitive considerations behind the shift to cloud. Firstly, the cloud allows banks to redress the legacy IT drag without having to commit to huge upfront capital investments. Secondly, it enables access to best-in-class technology systems and services so that traditional banks can match wits with the new more technologically adept competition. Thirdly, the cloud is almost critical to banks’ ability to cater to the demands of digital customers and their preferred touch points. And finally, banks need the versatility and agility of the cloud to succeed in an age characterized by data-driven decision making.
Also read our blog on the Big data as a banking trends
For a lot of customers, mobile banking is no longer just a convenient fallback option to check balances and receive account alerts. They are increasingly expecting their banking applications to enable much more than the basics. The versatility of mobile banking services – which is tied to the mobile app – rather than just availability, is becoming a determining factor in customer choice as well as satisfaction.
Customers want mobile banking – that much is obvious. But banks need to ensure that their mobile strategies and offerings are in tune with these wants. Here, their IT architectures and delivery models are often a barrier. The world’s leading IT research and advisory firm cautions that banks’ IT applications, which are inflexible and reactive, are coming in their way of remaining relevant to customers.
Clearly, banks need an alternative approach, which is both flexible and proactive. One such approach is emerging in the form of the flexible API platform for mobile app development. This has the capability to create services based on need and tailored to customers’ context, location and technology.
Ask yourself how a bank would respond to a request from a small subsection of customers for an app to track medical expenditure. To get straight to the correct answer, consider the case of French bank Crédit Agricole (CA) – customers post the app idea on CA’s app store and third party developers work with the bank’s API platform to create the app. Capital One, on the other hand, is offering an API for merchant partners to deliver deals directly to their users.
API technologies allow banks to align the app needs of their customers to the capabilities of third-party developers to optimize the time, cost and effort of getting applications to market. Given the growth of mobile banking and the stringent demands of customers, API technologies will have to be a key part of any bank’s mobile development strategy. Starting right away.
Also read our blog on the cloud as a banking trends
The banking sector’s approach to social media thus far can broadly be described as ‘willing but watchful’. That’s understandable, considering the compliance risks of committing to a medium where regulatory boundaries are still fuzzy. The reputational backlash to some first-mover efforts also hasn’t helped.
But that picture is changing rather rapidly. A leading analyst predicts that almost a third of retail banking customers would have purchased social integrated products or services by end 2016. In three years, social media will become a significant channel of retail banking in Europe, which currently lags Asia-Pacific and the US in this area.
Globally, around 44% of people already rely on social platforms for information on banking products and services. According to a US poll, information made available on social media delivers the highest conversion rate (~18%) amongst customers with intent to buy. In contrast, conversion rates from banking websites, CSRs (Customer Service Representatives) and even branches are in single digits. Banks cannot afford to overlook this customer acquisition opportunity.
Today, although banks have some sort of social media presence, it is mainly used for delivering marketing content. In 2014, banks will embark on more comprehensive social strategies that explore the complete range of possibilities in the medium including transactions, personalization, trend analysis, credit risk management, customer service and crowdsourced innovation.
The regulatory ambiguity is also beginning to lift. Early last year (2013), the Federal Financial Institutions Examination Council (FFIEC) released a guidance document detailing a broad structural framework for US banks to consult for their social media programs. In India, the Institute for Development and Research in Banking Technology (IDBRT) has launched a similar guidance for Indian banks in their social media efforts.
So in 2014, banks will step up the scope and pace of their social media plans. Regulation also shows definite signs of catching up. But the important thing to remember is that the customers are already there and waiting.
Also read our blog on the Apps as a banking trends
A recent report from Credit Suisse predicts that wearable technologies could be a USD 3-5 billion market over the next three years, ten times what it is today. As the market for these new technologies explodes, it will set off user expectations for an instantaneous seamless transition of everyday digital activities – banking included – to these new devices.
Wearable technologies will disrupt a banking industry still racing to keep pace with relentless innovation in the smartphone space. Though the smartwatch really did not take off this year, that segment is expected to witness some vanguard developments next year.
But all eyes are on the scheduled Google Glass launch in 2014, which would represent the first true mobile hardware innovation since the iPhone and the iPad. Banks will need to build the capabilities to engage with a new breed of customer who expects to ‘Ok, Glass’ his banking transactions. This at a time when banks that have integrated voice recognition capabilities into their mobile banking applications are still in the minority.
But many banks and payment providers have already kickstarted application development around the Google Glass phenomenon. Intuit has adapted its mobile card reader application for Google Glass. Spanish Bank Banco Sabadell’s Glass app allows users to transact via voice commands, even as work on a check deposit app is underway. Ukrainian PrivatBank’s Glass app allows fund transfers and bill payments by clicking pictures. In New Zealand, Westpac has already ported its balance update app to the smartwatch and is working on extending the app’s functionality.
Banks will need to innovate their presence into the wearables segment in order to engage with their customers as well as protect at least their payments turf to begin with. The biggest challenge will be to stay abreast of the immense scope of possibilities in wearables. Sony has already patented a SmartWig concept that as of today is not backed by commercial intent. But who knows about the future? Clearly, 2014 will herald only the beginning of the wearables disruption and its limitless possibilities.
Also read our blog on the Social as a banking trends
Mobile hardware sales and shipment statistics are arguments that have now become peripheral to the case for mobile banking. So let’s hone the focus a little bit.
Around 590 million customers banked on their mobile phones in 2013. In just four years that number will cross a billion, equivalent to about 15 percent of all global mobile subscribers. Mobile payments, meanwhile, have been bounding along – from USD 202 billion in 2012 to USD 410 billion in 2013 and projected to cross USD 1 trillion by 2015 and USD 2 trillion by 2017. That same year mobile purchase volumes will reach USD 1 trillion.
But mobility’s role in banking may be truly understood only when it is viewed through the prism of customer expectation.
More and more customers are basing their stay-or-switch decisions not on the availability, but on the quality of mobile services that banks provide. This distinction becomes acutely relevant in the case of younger customers. Innovative mobile services are also emerging as a significant driver of satisfaction among banking customers. Most importantly, customers want banks to innovate services around uniquely mobile opportunities like location to deliver personalized offers.
From a banking channel strategy perspective, especially in emerging markets, the mobile is just another channel even today. That will change soon, given that mobile is expected to eclipse online as a preferred channel by 2017.
Banks have to transition their strategies to acknowledge and account for customer expectations and the unique possibilities of mobile banking. Banks have to understand that mobile is just not an alternative channel delivering convenience but a game changing opportunity for innovation, customer engagement and experience.
In 2014, banks will invest in innovations that will deliver more consumer and enterprise value by leveraging the native possibilities of mobility. Mobile banking will go beyond delivering the convenience of access to leveraging the unique characteristics of the mobile ecosystem.
In 2014, customer expectations will compel banks to evolve from an entry level ‘Mobile Also’ tactic to a game changing ‘Mobile First’ strategy.
Also read our blog on the wearable devices as a banking trends