“We fundamentally believe that the world is shifting from closed to open – closed architecture to open architecture, everything moving to the cloud; closed networks to open networks; closed systems to open systems.” – Derek White, Chief Design and Digital Officer, Barclays, “Barclays has two blockchain ‘labs’ in London and is planning 45 experiments with the technology”, Business Insider, 2015
In the past couple of years, open banking initiatives have gotten a huge push from regulators and governments alike. This October, the National Payments Corporation of India (NPCI) launched the Unified Payments Interface (UPI) that makes it possible to make payments with just a unique ID, which is very similar to an email ID. UPI enables cashless transactions with any service provider, through an interface of the customer’s choice; irrespective of the bank where the customer has an account. And it is not only the India, forward thinking regulations are getting implemented at a global level. PSD2 will be the European Union’s initiative to promote open banking. This regulation requires banks to open access to customer data to third parties that have an explicit consent from the customer. UK’s HM Treasury set up ‘The Open Banking Working Group (OBWG)’ back in September 2015 to explore how data could be leveraged to make it easier for customers transact, save, borrow, lend and invest their money.
These initiatives are a precursor to the future of banking – imagine a future where banks enable customers to share their data securely with other banks and third party service providers. Customers, in turn, will have control over their own information that enables them to get the most out of these service providers, and manage their accounts from a single user-friendly interface. The benefits gained out of the free sharing of data are immense. For customers, this sharing of data will provide them with opportunities to find relevant products/offerings easily and make informed decisions about their finances. Banks and financial service institutions also stand to gain from open sharing of data –for instance institutions can provide better lending terms to their worthy customers based on their credit and payment history. Banks can implement better fraud management processes with access to data about customer behavior.
Open banking will empower financial institutions to enhance their offerings by collaborating with third party developers and creating applications that are relevant to the customer base. There will be the added benefit of having an engaged developer ecosystem that will unlock innovation in the financial services industry. This developer ecosystem will be the creator of a next generation banking experience, which will be built on top of multiple bank APIs.
Banks are becoming more receptive to the idea of open banking and in the latest Infosys Finacle – Efma Innovation in Retail Banking report, 59% of the banks considered open APIs to have a high impact as a disruptive technology on banking business models. 67% of the banks also considered that open APIs are already/or will have an impact in the next couple of years. It isn’t out of the ordinary now for progressive banks to move ahead with open banking – for example, Citigroup has launched a global API developer hub that allows Citi to connect directly with developers and build innovative customer solutions with a faster time to market. Crédit Agricole has also unveiled its proprietary application marketplace that gives access to developers to an SDK, which they can use to build their own applications; Santander, Deutsche Bank, OCBC and several other innovative banks have followed suit.
The future of banking lies in open innovation and collaboration with the developer ecosystem, and banks are no longer waiting for the regulators to tell them so. In 2017, open banking will be driven by open APIs, applications, app stores, and the extended developer ecosystem, which banks and other service providers will build around their APIs. And it isn’t only the third-party services that will gain from this model; banks will also reap the rewards from this open banking model. As more and more third party service providers integrate banking APIs into their offerings, it will open the doors to more data for the banks themselves. Banks will channel this data back into their own processes to fine tune and personalize customer experiences for their customers.
We believe that the future of digital banking lies in open banking, with a connected ecosystem of financial and non-financial services. The business of banking is set to be transformed by open banking technologies – now whether that happens with initiatives taken by banks and their newer fintech competition, or by regulatory mandate, still remains to be seen.
“I don’t need a hard disk in my computer if I can get to the server faster… carrying around these non-connected computers is byzantine by comparison.” – Steve Jobs, late Co-founder and Chairman, Apple, Worldwide Developer Conference, 1997
Last year we talked about how banks should view cloud as an enabler for innovative technology implementation and not just see it as a commodity available for consumption. Recently, the mindset in the financial services industry has evolved and many progressive banks have started to build a coherent cloud strategy. According to IDG’s Enterprise Cloud Computing Survey, 2016, the typical IT department will have a portion of their apps and platforms (40%) residing in on premise systems by 2018.
While security concerns are still an area that need to be looked at closely – regulators are more open to relaxing some of the constraints around cloud deployments. Major cloud providers are also setting up data centers in different countries where regulations mandate that the data cannot reside in a space outside of its origin. Public cloud vendors like Amazon Web Services (AWS) and Microsoft Azure are becoming more compliance centric in order to cater to the requirements of the financial services industry, as a result of which, the push for banks to move to the public cloud has been strengthened – Microsoft has set up data centers in major Indian cities to tap into the financial services institutions that haven’t been able to use public cloud services on account of regulations around data sovereignty.
We recommend that banks should follow a three phase strategy for migrating to cloud in their transformation journey. The initial phase will be to test the waters and move non-critical environments, for example development and test environments, into the cloud. Banks can then implement hybrid cloud models to process peak loads with cloud-burst techniques, while continuing to process routine operations in-house. Progressive banks will leverage cloud techniques to optimize infrastructure investments and performance – for e.g DBS Bank recently announced that it will be running its cloud native applications on Pivotal Cloud Foundry. While not every legacy app might make it to the cloud, all new applications will be ‘cloud-first,’ which will mark the beginning of the third phase for cloud migration. New infrastructure and applications will be launched cloud first by design that is mandated by flexibility, scalability and ecosystem requirements. In case of existing applications, banks will have to re-design, and not just re-deploy these applications while adopting the cloud to provide a platform for innovation.
Whether banks like it or not, the new world with its open ecosystem will be banking on the cloud. The disruptive technologies that are the changing the face of business – big data blockchain, artificial intelligence (AI), IoT – will be powered by cloud computing. For example, Capital One Financial Corp. is using AWS to enable efficient development and deployment of the latest applications. Metro Bank has also recently moved its IT infrastructure to the cloud to keep up with the latest technologies and increase its business agility. With cloud as an enabler, banks are offering their APIs to the third-party developer ecosystem for creating innovative solutions for their clients. Cloud is no longer a second thought, but an essential strategy for banks to reinvent themselves as a truly modernized financial institution.
“I’m a big believer in the ability of blockchain technology to effect fundamental change in the infrastructure of the financial service industry.” – Bob Greifeld, CEO, NASDAQ, The Financial Times, 2015
Blockchain has come a long way from enabling bitcoin transactions. Banking and technology leaders are convinced of the authenticity, traceability, accountability and efficiency that blockchain offers as an infrastructure in the new digital banking world. 2016 saw banks engaged in a frenzied race to identify pilots to test out the applications of blockchain and the potential benefits. Many banks were announcing their own efforts to explore blockchain pilots, while others were participating in a consortium to form a private blockchain network.
Experimentation with blockchain reached significant proportions in the areas of know your customers, trade finance, remittances and inter-entity payments, supply chain finance, digital identity management, smart contracts, document security, collateral management, syndication of loans and treasury functions. Some of the examples include the recent Emirates NBD and ICICI Bank partnership to launch a blockchain pilot network for international remittances and trade finance, and IBM – Mahindra have debuted blockchain solutions for enabling supply chain finance.
In the Infosys Finacle – Efma Innovation in retail banking report, 61% of the banks perceived that blockchain/distributed ledger will have an impact on emerging retail banking business models in the next three-four years. Progressive financial service institutions are already on board with blockchain and are partnering with technology providers to improve on current business processes.
Now that the potential of blockchain is validated with proof-of-concepts, banks are going to move from pilots to production. We believe that 2017 will be the year when blockchain projects will get into production to enable banks address real-life problems – albeit in a small way for simpler use-cases.
It is not only banks that are on board with blockchain, but also the regulators, who are excited about this promising technology. Regulators are coming in to the blockchain party and providing thrust towards moving blockchain to production – in fact a significant endorsement to the blockchain technology was provided by the Dubai Government, which mentioned that there will be 100% blockchain for all government documents in Dubai by 2020. RBI and NPCI in India have shown openness to understand and implement blockchain on a larger scale in India, and IDRBT, which was established by RBI, is studying the benefits of blockchain technology for banks. The Monetary Authority of Singapore (MAS), which is Singapore’s central bank, has already announced a proof-of-concept pilot project on blockchain to assist in global inter-bank payments.
Financial giants like Standard Chartered, JPMogan Chase, and Barclays have already endorsed blockchain as a key driver for trade finance operations in 2017. The opportunities for cross-industry and cross-functional collaboration that are promised by blockchain offers a huge competitive advantage and the race to production has begun; it is time for banks to move out of the pilot phase, and define an implementation plan for real-time banking with blockchain.
“I truly believe Ai is the key to unlocking the full potential of human focused digital, so it is important that we understand what Artificial Intelligence is, in order to understand what it is going to mean for design. Because now that it is here, we have a solid foundation to start creating more intelligent, invisible experiences that make us more human by design. We are at the precipice of one of the most significant discoveries of development since we learnt how to light a fire.” – Pete Trainor, Director of Human Focused Design, Nexus CX Ltd., “Hippo: The Human Focused Digital Book”, 2016.
In the Infosys Finacle – Efma Innovation in retail banking report, 52% of the banks said that artificial intelligence will have a significant impact as a disruptive technology. In the Technology Vision survey conducted by Accenture, 86% of bank executives felt that the use of AI provided a competitive advantage beyond just cost. Progressive banks believe that AI is set to transform the way business is done; a good indicator would be the number of intelligent digital assistants that are introduced every month for a wide range of banking services. For example, Santander recently announced that it will be providing secure transactions enabled by voice recognition on its banking app; RBS has already trialled an AI customer service assistant, “Luvo”, to interact with the staff and it may potentially be used for customer interactions in the future.
Right now innovative banks alongside challenger banks and payment providers are leading the way with AI adoption. Remaining incumbent banks are expected to follow suit. As customers become more digitally savvy, AI is enabling banks to provide a differentiated customer experience on digital channels, as well as, help banks build a foundation of trust with AI’s integration into the banking infrastructure. Banks can transform their back office with the automation brought in by self-improving AI driven programs. While cyber criminals are getting smarter every year, banks are responding by integrating AI into their security framework to offer protection from theft and fraud.
The significant benefits offered by AI are already visible – Swedbank’s AI assistant Nina achieved an average of 30,000 conversations per month, and a first contact resolution rate of 78% – numbers that are unimaginable by human standards. It is not hard to see why AI has everyone excited.
Banks need to understand that the success of AI programs stands on the shoulders of data-led analytics. Hence the success of these AI projects will depend on the on the competent execution of all things digital, including big data, automation and cloud computing. In 2017 banks will be exploring more proof of concepts to integrate conversational interfaces onto their omni-channel strategy to improve upon customer live chat interactions – a good example is Digibank’s mobile app that is powered by Kai, an AI platform by Kasisto. Caixabank has partnered with IBM to implement a financial advisor for its business customers. From these examples it is pretty evident that in the future almost all financial advisors will be robots, who will be smarter than your average human beings. And as these robots keep interacting with humans, they will just keep getting smarter.
“[T]he Internet will disappear. There will be so many IP addresses, so many devices, sensors, things that you are wearing, things that you are interacting with, that you won’t even sense it. It will be part of your presence all the time. Imagine you walk into a room, and the room is dynamic. And with your permission and all of that, you are interacting with the things going on in the room.” – Eric Schmidt, Executive Chairman, Alphabet, “World Economic Forum in Davos”, 2015
In the past couple of years, mobile has been the key driver for innovation in the digital space. While it took some time, but banks ultimately moved from a “mobile-also” to “mobile-first” strategy; and this strategy did enable banks to innovate in their digital transformation journey. But as it is the case with technology, evolution is continuous and rapid – the mobile phone today is much more powerful in terms of capabilities, processing power, and embedded services, than it was a few years ago.
With increased capabilities of mobile, whatever was considered innovative for mobile-first banking a couple of years ago, no longer holds true for the current scenario. And technology hasn’t stopped evolving with only mobile either; there is a new breed of connected devices that has caught the customers’ fancy and these are the current crop of wearable technologies. From fitness trackers to fashion wearables – hyper-connected technology has captured the imagination of the digitally savvy segment. Take for example, the Levi’s Commuter Trucker jacket that was launched in collaboration with Google and allows users to complete tasks with a simple touch.
The humble mobile phone of yore has gotten a more conversational facelift. Today people engage with virtual private assistants (VPAs) that smartphones offer, which are more interactive than applications. Innovative banks are tapping into these interactive interfaces and are creating delightful customer experiences – for example OCBC Bank has integrated Siri into its mobile app, so now you can ask Siri to make transfers and payment. VPAs can also enable banks to reach customers, who haven’t been traditionally digitally savvy, and offer relevant services through voice-banking. Or there are chat bots for your personal finance management – the latest being ‘Val’ a collaboration between Kasisto and Varo Money.
And the range of offerings/services that banks can provide with these increased mobile capabilities also keeps expanding every day. There are immersive experiences offered by banks with augmented reality – like Axis Bank with its ‘Near Me’ feature on its mobile app; or Royal Bank of Canada offering video banking on mobile.
Banks have realized that technology is an ever moving target and they’ll have to keep innovating to make sure that they are available wherever their customers move. Progressive banks have taken the lead in innovating for their digital customers, and provided “banking on things” as a solution – for example, Emirates NBD has a fitness app that is compatible with fitness trackers and smartwatches; this app tracks the activity level to translate fitness level into interest rates. UnitedHealth has teamed up with Qualcomm to monitor their customers’ fitness trackers and rewarding people who hit certain goals. These financial service institutions are showing how advances in technology can be used to increase share of wallet with new offerings along with established products.
To keep pace with the latest technology, in terms of service delivery, banks will need to invest in creating a robust omni-channel hub, which can enable service delivery on variety of new channels and devices seamlessly. We believe, the channels for customer engagement and services delivery will continue to evolve – today we are talking about banking on twitter, smart watches and bots; tomorrow we would be delivering banking on smart cars, smart walls, smart attire – the possibilities are endless. Additionally, banks do need to realize it’s not only about offering existing products on these new channels and form factors. It’s about reimagining products and process to take advantage of new capabilities these new devices bring to fore. These expanded range of device capabilities are an opportunity for banks to re-imagine their internal processes and offerings so that they are able to offer relevant and contextual services/products to the customers on the channels that they prefer.
The challenges for banks will continue to increase in the coming year as customers will not relinquish existing channels while adopting new ways of banking – people will continue to use brick & mortar branches, ATMs, and call centers in at least the medium term. In 2017 banks will have to re-imagine their customer journeys around all of their channels, whether old or new. Consumers are adopting new digital technologies more readily than before; this means that banks will have to innovate their omnichannel banking strategies at an immeasurable pace to even stand still.
“Large banks are reluctant to undertake core modernization projects due to the risks and complexity of the effort. By componentizing their products, core vendors are providing banks with the flexibility needed to develop phased implementation plans that reduce this risk. Moreover, componentization allows banks to prioritize their efforts, improving the business case for core modernization by focusing on functions that provide the greatest short term benefits”– Robert Hunt, Senior Research Director, CEB TowerGroup, Launch of Finacle 11E, 2013
While progressive banks are making huge strides in the digital space, the outdated banking architecture has come under the scanner and banks are looking at ways to circumvent this barrier to achieve a truly digital transformation. The situation is perfectly summed up by Tom Groenfeldt, contributor to Forbes, “When 40-year old legacy banking systems meet the two-month old iPhone 6, the results aren’t pretty.” In this era of any-time banking and instant gratification, most banks aren’t able to keep up and deliver contextual customer experiences due to a complex IT landscape.
According to various industry researches about 75-80 percent of annual IT budgets are spent on supporting existing business operations and driving organic growth, which leaves very little room for business transformation and exploration of new revenue streams. Maintenance costs are high for such complex IT landscapes that have a few hundred applications residing in siloes. In our survey done few years ago, 79 percent of bankers feel that the biggest barriers to core infrastructure transformation is the complexity of current IT systems, and inadequate skill-sets within their organizations. The situation hasn’t changed significantly since then for most of the banks, particularly in Europe and Americas.
Considering the disruption banking industry is going through and consequent need to have an agile technology foundation to keep pace, simplification of the complex IT landscape can deliver massive advantages. To begin, banks can simplify the challenge of infrastructure maintenance by leveraging cloud technologies, and by introducing elasticity for increased demand.
Most progressive banks have already started leveraging cloud for non-mission critical applications. Taking the journey for core applications, we recommend banks to follow a three phase strategy. The starting point could be to implement cloud for testing & development purposes. Banks can then implement hybrid cloud models to process peak loads with cloud-burst techniques, while continuing to process routine operations in-house. Eventually the final phase would be to gear up to move production environments on cloud. During this journey, banks must take cloud-first strategy for all new processes and applications.
A complex IT landscape with a few hundred applications, which are sometimes duplicated across business groups, is a harsh reality today. In such a scenario, rationalizing applications by leveraging enterprise-class components offers a great opportunity to reduce IT costs and increase business agility. These enterprise components will allow banks to boost operational efficiencies by centralizing business operations across various product lines. These components will also reduce technology management costs by replacing multiple systems that are currently doing similar tasks, with a single one.
Similarly, the pace of technology innovation demands rapid modernization and upgrades. Most progressive banks and vendors have turned towards componentized applications design instead of the traditional monolithic architecture. The componentized structure with an expanding set of exposed micro services will allow banks to fully de-couple back-end and front-end capabilities and innovate rapidly across layers. The bank’s core services thus can be reused, shared, and monetized through open APIs. They will allow banks to extend the reach of existing services and create new revenue streams. These open APIs will also enable banks to collaborate with the external developer ecosystem for accelerated innovation.
Standardization will also be a critical focus area to enable plug and play applications, and reduce technology implementation and maintenance costs. Organizations like BIAN are creating interoperability standards so that banks can integrate solutions with the rest of the enterprise applications with greater ease.
As 2017 progresses, progressive banks will focus on simplicity in their architecture to drive operational efficiency for a greater innovative capability and compliance. This agility to innovate will in turn might just turn out to be the banks’ greatest competitive advantage in this disruptive environment.