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.
Month: January 2014
A la carte your cloud
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.
Coping with compliance
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.
http://www.channelnewsasia.com/news/business/international/jpmorgan-compliance-costs/919604.html
Also read our blog on the Simplicity as a banking trends
Making Social Count
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.
http://thegallupblog.gallup.com/2013/05/banks-stop-missing-sales-opportunities.html
https://www.gartner.com/doc/2274115
http://www.computerweekly.com/news/2240181110/Banks-need-to-improve-social-media-interaction
Also read our blog on the Apps as a banking trends
From 'Mobile Also' to "Mobile First'
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