4 ways technology is transforming banking

Opportunities in disruption:

Opportunities in disruption: 4 ways technology is transforming banking

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O ver the last two decades, the introduction of flexible opening hours, automated payments and digital services has gradually

modernised banking. Today, the financial services industry is on the brink of a more fundamental transformation.

Millennial customers increasingly expect seamlessly-integrated, always-on banking, made possible by fast, ubiquitous mobile internet services. At the same time, regulators are forcing dominant banks to open up their systems to new competitors using new application programming interfaces (APIs) that are reshaping digital platforms.

Back office functions are also changing. The advent of cloud computing has freed financial services companies from on-premise data centres and long provisioning times for hardware, while the potential of big data is being unlocked by artificial intelligence within IT environments.

But traditional clearing banks face a major challenge. The sector embraced computerisation decades ago and has vast reservoirs of legacy code on out-dated systems. It’s an expensive problem

that has been compounded by mergers and acquisitions. Larger banking groups are still running various systems patched together or working alongside each other.

The result? The sector is exposed to disruption from nimbler competitors born in the mobile era with lower operating costs, that are not restricted by inefficient legacy systems. Indeed, two thirds of banking executives surveyed by Accenture and Oxford Consulting predict that in the next five years consumers will do most of their saving, investing and borrowing not through traditional retail banks, but through online companies like Amazon.com, Google LLC, Venmo (PayPal Inc) and SoFi (Social Finance Inc).1

But while new technologies are presenting security and skills challenges to the traditional banking sector, rapid innovation presents immense opportunities for the financial services industry to operate more efficiently and leap-frog legacy challenges.

In this report, we examine four key ways in which emerging technologies are driving transformation in the banking sector.

Opportunities in disruption: 4 ways technology is transforming banking

1Reinventing customer experiences

When consumers under 35 imagine a bank, they don’t necessarily think of branches, or even a call centre. Many think of an app. Banking services have become effortless and quick, from booking flights with facial recognition or getting your balance from Alexa. Virtual cloud-based wallets could make paying completely invisible.

Open banking regulations, which are spreading around the world, could push banks further into the territory of utilities, comparable to ex-state monopoly industries such as telecoms. BT in the UK or AT&T in the US might own the optical fibre and copper wires, but other phone providers use their infrastructure, competing on price and service.

In the UK, the Open Banking initiative already requires banks to make product and reference data available to authorised third parties to boost competition and service. With customer consent, UK banks provide secure access to specific current accounts, enabling others to read the transaction data and initiate payments.

The information is shared through an open API framework, with common standards that allow software from different financial institutions to interact and exchange data.

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To compete with new rivals, banks are providing more sophisticated, personalised services leveraging their huge pools of customer data and advances in AI. The biggest US banks, such as Wells Fargo, Bank of America and Chase, have launched mobile banking apps that provide clients with reminders to pay bills, plan their expenses and interact with their bank in an easier and more streamlined way, from getting information to completing transactions.

The next step is to shift from existing voice capabilities, apps and chatbots to the adoption of digital assistants with cognitive intelligence – allowing them to perform complex tasks beyond simple transactions such as on-boarding or mortgage applications.2 This will require advanced Natural Language Interfaces to process customer queries in different languages and dialects – as well as context switches – to change the face of customer engagement. A recent Accenture report revealed that 77% of banking executives expect more than half of transactions to be carried out on personal assistants in five years’ time.3

Opportunities in disruption: 4 ways technology is transforming banking

Opportunities in disruption: 4 ways technology is transforming banking

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Advances in machine learning offer the potential for banking software applications to become more accurate in predicting demands and outcomes, without being explicitly programmed. As the technology continues to “learn” by monitoring customer behaviour, its accuracy and relevance increases.

Indeed, intuitive and connected services will be something customers increasingly expect from any company, argues Dirk Hafke, Industry Solutions Consultant at HP, but incumbent banks are in a strong position to deliver it.

“Today, customers feel that a product is relevant for them if it suits their very individual needs in their individual situation. An off-the-shelf standard product, which only fulfils some of the requirements and lacks certain characteristics will be perceived as inferior and just a compromise.”

Using big data analysis, banks are in a position to determine and predict a customer’s needs, and pro-actively offer appropriate, tailored products – from loans to investments or insurance services. “Digital technology allows banks to offer ‘parameterised’ products, which can be adjusted to individual needs much more than the fixed, pre-packaged products of the past,” says Hafke.

2 Optimising security and scaling data

Data and cyber security are priority concerns for decision-makers in the banking industry, driven by increasing regulation and the sophistication of fraud techniques. Regulatory requirements around personal data privacy and electronic Know Your Customer (KYC) rules are being tightened across the world, with severe penalties for non-compliance.

“Banks need to realise the risks to customer data that come with offering more cutting-edge digital services and how these challenges can be both addressed with proper security,” explains Simon Healy of Unisys Financial Services.

The financial services industry is already one of the biggest spenders on security – but advances in AI and cloud services offer innovative ways to lower overheads, drive efficiencies and reduce operating costs.

One of the ways that organisations are leveraging these technologies is through the use of machine learning. For example, banks can sift through applicants and use algorithms to determine fraud risks. By combining supervised learning algorithms trained on historical data with unsupervised learning, digital businesses gain a greater level of accuracy and clarity about the relative risk of customers’ behaviours. AI supports this with decisions to accept or reject payments, stop fraudulent activity and reduce risks.

“ Digital technology allows banks to offer ‘parameterised’ products, which can be adjusted to individual needs much more than the fixed, pre-packaged products of the past.” - Dirk Hafke, Industry Solutions Consultant at HP

“ Banks need to realise the risks to customer data that come with offering more cutting-edge digital services and how these challenges can be both addressed with proper security.” - Simon Healy, Industry Director at Unisys Financial Services

Opportunities in disruption: 4 ways technology is transforming banking

Banks are also looking at innovative ways to access security solutions. Security-as-a-service (SecaaS) from cloud-based service providers can address a range of business issues, such as sourcing the latest anti-virus and software patching. These providers can invest in top-level professionals, upgrading their systems so they’re running state-of-the-art equipment.

But security isn’t the only data challenge banks face. They also need to be able to scale their data services cost-effectively. Cloud computing has been a transformative technology that has revolutionised organisations widely. The possibilities of the technology are enormous: cloud-bursting to deal with the demands of peak periods; having the ability to handle huge amounts of data for in-depth analytics; and the nimbleness to cope with emerging demands.

One of the factors that has hindered the growth of cloud applications in the financial services industry is not technological, but regulations around data security. For example, the credit card security standard PCI DSS means that a cloud provider must follow a rigid set of guidelines if it’s to handle card payments.

However, evidence suggests that cloud services could be just as secure as private data centres. In recent years, leading cloud platforms have improved the capabilities of their systems, reaching a level of security and reliability expected by regulators. Providers show that their internal security processes are effective in storing and protecting data using independent third-party audit reporting.

Singapore’s DBS is one of the first to make a wholesale move to the cloud, using Amazon Web Services – by far the biggest public cloud provider. As a result, it could shift its main data centre to significantly smaller premises, which are a quarter of the size of its existing data centre and 75% cheaper to run.4 Firms following a similar path include Spain’s Bankinter and UK challengers such as Starling and Monzo.

For the financial services industry, cloud computing offers considerable gains in terms of efficiency and reductions in costs, as the technology requires banks to pay solely for the services they use. Ultimately, this means that for testing new applications, it is currently much more cost-effective to do so on the cloud than on existing IT infrastructure.

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Opportunities in disruption: 4 ways technology is transforming banking

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3 Transforming back-office processes

In recent years, analysts have predicted that disruptive new technology, from AI and automation to cloud computing, would be a way of dramatically reducing staff costs in the financial services industry. A significant report predicted job losses of up to 30% in the sector as a result of AI.5Today, there is less focus on lowering headcounts. Instead, the focus is on how new technology can streamline internal processes to reduce overheads more broadly.

For example, banks and fintech start-ups are using AI and machine learning to automate the process of assessing risk. Machine learning can analyse more data in less time than humans, determining credit-worthiness faster and more accurately than before.

Lenddo looks at a potential applicant’s entire digital footprint to determine their creditworthiness. It does this by having individuals download its app and analysing over 12,000 variables – including their social media use, internet browsing, geolocation data and other smartphone information. A machine learning algorithm turns all this data into a credit score, which banks and other lenders can use.

Another example is Nordic bank SEB, which has seen increased customer satisfaction and been able to avoid 544 hours of escalations to customer support since it implemented IPsoft’s AI solution, Amelia.4

The potential for automation to reduce costs in routine back office functions is also huge, especially when combined with AI. Robotic process automation (RPA), which uses AI to tackle repetitive, rules-based work, is already helping banks generate cost savings of over 30% a year in certain functions, from account closures to payments. RPA software can plug into legacy systems, helping to fast-track innovation and cost savings.

Payment transactions are also being disrupted by the technology behind crypto-currencies. There’s been so much hype about Bitcoin that its underlying “blockchain” technology was initially overlooked. However, blockchain could prove extremely valuable to the financial services industry in a number of applications.

The system is built on distributed copies of a ledger, making it almost impossible to amend, making it extremely secure. Blockchain technology provides a way for untrusted parties to come to an agreement on the state of a database, without using a middleman.

By providing a ledger that nobody administers, a blockchain could provide specific financial services — like payments, or securitisation — without using a middleman, like a bank. For example, it allows for the use of tools like “smart contracts,” which could potentially automate manual processes, from compliance and claims processing, to distributing the contents of a will.

Ultimately, blockchain could result in faster, cheaper transaction costs while improving transparency. However, the potential for blockchain goes beyond payments. By tokenising traditional securities such as stocks, bonds, and alternative assets — and placing them on public blockchains — blockchain technology could create more efficient, interoperable capital markets.

Banks are already exploring the use of blockchain. JP Morgan, for example, has set up its own private blockchain system, known as Quorum. This uses the Ethereum protocol to speed up the processing of private transactions within a closed group of bank customers.

Nordic bank SEB has saved 544 hours of customer support escalations since it implemented IPsoft’s AI solution, Amelia.4

Opportunities in disruption: 4 ways technology is transforming banking

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4 Attracting next generation talent

One of the factors that could inhibit the development of improved technology in banking is the lack of relevantly skilled staff. This is not a problem restricted to banks – many businesses are finding it difficult to attract the right AI, machine learning, data and security specialists. For banks, the competition to attract younger, digital-savvy, open-minded, creative and assertive talent is a particular challenge.

This generation of talent expects their work to be meaningful, something that they can genuinely contribute to. To succeed, the financial services industry needs to communicate their digital and technology strategies clearly and enthusiastically.

“Banks need to be clear about what they are building, and how that proposition might interest today’s engineers, DevOps and security professionals,” says Marcus Corner, consultant and ex-CIO of Modulr Finance. “Too often, traditional banks are managing a very slow, predictable software delivery mechanism which simply won’t attract top talent.”

How HP can help

The financial services industry is being shaped by challenging new regulations, mounting digital competition and ever-more-demanding customers. This means banks especially need secure, high-performance and easily-managed hardware and software solutions if they are to compete, thrive and build customer trust in this testing, difficult environment. To meet these needs, HP has created an FSI portfolio that delivers solutions to support today’s priorities. SecurityHP business hardware, with built-in resilience, protects sensitive customer information and keeps critical anti-virus systems running – helping ensure strong security and assisting with regulatory requirements.

SpeedOur hardware supports the adoption of new technology. Z by HP workstations guarantee speed, processing power and storage capacity for data-rich, split-second insight capture and decision making, and are powerful enough to support AI and machine learning-enhanced processes at the edge.

SimplicityHigh productivity is necessary in the modern banking environment. With flexible, mobile workspaces that make anytime, anyplace task completion possible, HP devices with built-in collaboration and conferencing modules, promote easy and highly secure remote working. HP Workflow solutions help streamline banking processes, like account opening, and HP service led approaches like Managed Print Services and Device as a Service* ensure employees stay equipped with appropriate solutions, devices with simple set up and smooth upgrades, for maximum uptime.

As nearly every industry simultaneously clamours to capitalise on the opportunities emerging from the AI revolution, the market for data scientists has never been more competitive. If they’re unable to attract talent on their own, banks could partner with other specialists. It’s an approach that many of the retail banks are following with fintech start-ups, and it’s a way that the financial sector may move in the future. For the traditional banks that don’t want to set up their own divisions for some of these more complex technologies, partnering will be the way to go.

“The talent is out there, it’s just not working for banks,” says Daniel Meere, Managing Director of Axis Corporate. “Banks would be better advised to buy in these services (and talent) from external partners rather than try to become technology firms themselves, as their market is confined to financial products and services, and related areas.”

“ Too often, traditional banks are managing a very slow, predictable software delivery mechanism which simply won’t attract top talent.” - Marcus Corner, Consultant and ex-CIO at Modulr Finance

1 Accenture and Oxford Economics, Retail Banks Are Prepared For Digital Innovation, January 2019

2 Financial IT, How Digital Assistants are Transforming Banking, June 20193 Accenture and Oxford Economics, Retail Banks Are Prepared For Digital Innovation,

January 20194 DBS Bank, First Bank in Singapore to Launch new Cloud-Based Data Centre, Novem-

ber 20175 Citi Research, Digital Disruption – How FinTech is Forcing Banking to a Tipping Point,

March 2016

Sources

© Copyright 2019 HP Development Company, L.P. The information contained herein is subject to change without notice. c-06472838, October 2019

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