The Banking Systems Legacy

Financial technology systems, like the banks they serve, have been built over decades through a long series of mergers and acquisitions. Already operating across a complex set of siloed departments and systems (core banking, payments, trading, etc) each merger or acquisition has resulting in further systems being bolted on to create ever greater and more complex IT systems connected by a maze of spaghetti. Most large banks are now creaking at the seams, with more budget devoted to supporting legacy systems than to innovation. Many banks have core banking systems as much as 40 years old, but these systems are so critical to their operation and so heavily integrated into other systems that they have become near impossible to replace. Doing so has been likened to trying to change the engine on a jet airplane mid-flight.

This does not mean that there is no new banking technology available, or that new entrant banks aren’t basing their operations on the latest technology. Often making significant use of cloud technologies, challenger banks typically see their IT operations as a major source of competitive advantage. At the same time most of the older retail banks are experimenting with newer technology in some of their peripheral operations, but at their heart in their core systems they are still stuck with what they have – that is until now.

Banking in the 21st century

Technology within the financial sector has changed considerably over the last decade. Information technology systems post the dotcom boom (those that survived) evolved into systems that were intertwined with nearly all of the other IT Services utilised within each respective organisation. This came with challenges and benefits post the outsource/offshore trend that amassed much confusion to everyone working inside the finance industry, as well as for the regulators. Virtualisation was still in its infancy with complex infrastructures that were, (and still in the majority are) replicated in its entirety to a separate location for contingency purposes. Automation of technology was cumbersome and Application Service Providers (ASP) were rife, wrestling with coding for crude web presences coupled with the continued efforts for centralization of IT Infrastructure made more difficult by the recent outsourcing trend.

What followed towards the end of the decade were phases of cost cutting and consolidation, that were inevitable post 2008 and the financial crisis. It was at this stage of technical evolution within the Finance sector that cloud technologies were truly realised. Starting with the easiest of services to untangle, outsourcing had started again but this time with an educated experienced head on the shoulders of the incumbent IT departments. Today the financial market place is a very different landscape and cloud technologies are common amongst regulated and non-regulated industries. You may have heard the phrase “Omnichannel Approach” on numerous occasions and if you haven’t, you will. In this age of digital transformation all business sectors are being affected, not just finance. It is extremely important to have a consistent approach across all aspects of technology and business. To put this into context, the these statistics will speak for themselves:

• 69% of customers already use the Internet to buy financial products – PWC
• Mobile banking usage will exceed 1.75 Billion by 2019 representing 32% of the global adult population – Juniper research
• Nearly 50% of the world’s banks will disappear through the cracks opened by the digital disruption of the industry – BBVA Chairman and CEO Francisco Gonzalez
• 72% of millennials would be likely to bank with nonfinancial services companies with which they do business (like Google, Amazon), compared to 27% for those over 55 – Accenture
• The digital transformation is upon us and every industry needs to change!

With the emergence of cloud technologies, the World has never seen such a constantly evolving state of technology as we do today. Just as other industries have changed over the past 5 years including (if you are old enough to remember) the Amazon and Borders struggle where Borders never saw the end coming by the new industry book seller chomping at their heels. The same can be said for many other industries where diversification and strategy go amiss.

However we do have the benefit of hindsight and thus, armed with the knowledge and understanding of more data analysis ever available in our history, the finance sector can not only stay in the game but ahead of the curve.

There are 3 main focus points to ensure you stay ahead of the curve:

1) Be customer focused and achieve excellent customer service. We are living in the “ME” generation and such should accommodate the demanding needs of the youth of today, across whatever medium that is convenient to them. “The majority of Millennials would rather lose their sense of smell than their technology” – Newscred

2) Make the IT Strategy shift to accommodate point 1. The need to change your roadmap of service delivery is essential. Do not think for one minute that the majority of your clients will even pick up the phone to you if they are unhappy, they will not and simply move to one of your competitors. “2/3 of contactless payments since October have been through Apple Pay” – Tim Cook, CEO Apple

3) Data is the new currency in this digital age. Banks have amassed huge amounts of data from their clients, use it. “The vast majority of data never gets used. Only 0.5 percent of all data is ever analysed” – MIT Technology Review

So, this leads onto some predictions for Financial Institutions and technology. We have compiled a “TOP 5” list of emerging trends that we believe will be seen over the next 5 years.

TOP 5 EMERGING TRENDS OVER THE NEXT 5 YEARS

1. ANALYTICS EVOLVED

Big Data is not a new concept and financial institutions have been using big data in one form or another via trading systems for years. Employ a data strategy to cultivate the unstructured information you have already. There are many providers, cultivators and providers of the technology and toolset that can be used. You may of heard of IBM Watson, the artificial intelligence computer that back in 2011 made the headlines by beating former “human” winners of the quiz show Jeopardy? This technology is now mainstream and available at a fraction of the cost of developing anywhere near the same results – cloud based!

2. APP DELIVERY

Application delivery of your products and services is key when your clients have used smart devices from the age of 12 years old. Technically speaking we are in a constant change of major IT Infrastructure, however you should be embracing this change as it will also drive down your cost of ownership. Open source technology, once shunned within regulated industries, is now a major driving force within any industry that requires enterprise IT. OpenStack has emerged onto the scene and has many benefits to your organisation for the orchestration and management of resources. There is also a new way of thinking based around container technology (Docker) which in essence share a single operating system (and binaries) for application delivery without the vast amounts of virtual machines that would normally be required. This technology is in its infancy but is definitely one to watch for the near future.

3. INDUSTRY CLOUDS

There is much debate around public/private and hybrid clouds. Rarely you do hear any talk around industry clouds and the massive benefits that they bring. Imagine a cloud based system that is designed for the financial industry, has the IT Governance applied to the infrastructure that meets regulators requirements and data sovereignty laws, is resilient and meets all of the check points set out by your governing body. Bringing cost synergies of shared implementations of bespoke and expensive vendor infrastructure that is secure. A cloud for your industry, designed by your industry specialists (with the regulators input) that allows you to reduce your expensive staff base of unique skills to manage and secure the technical environment. As well as allowing you access to previously unavailable products and services that would have required a large capex, we’re looking at this as a possibility within the next 5 years.

4. FINTECH INVOLVEMENT

Financial institutions have always been trusted with clients money. We see another potential trend that has started to emerge, financial institutions offering IT Services to accommodate the new currency, data. This would make sense to investigate this business model, just as other industries (tech) have done so offering financial services. We also see financial institutions being more involved, from a Venture Capitalist prospective investing in hi-growth tech startups. This too also makes sense to assist and guide these new breed tech firms, courting them at an early stage of development.

5. DRAAS – DISASTER RECOVERY AS A SERVICE

With the emergence of cloud technologies and providers also comes the reliance of governance from said providers. Disaster Recovery is mandatory for regulated financial firms and this will get more important when outsourcing to cloud providers. Specialist disaster recovery/business continuity providers will be emerging into the marketplace with the knowledge and understanding of not just your technology but also your business. This service is of course available today, however with the added security vulnerabilities that go hand in hand with cloud provisioning, specialist providers will undoubtedly emerge.

At FinTech Connect along with our Partners at Compare the Cloud we monitor the level of comment and debate on cloud in every technology and industry segment. While the use of cloud in the financial services sector is increasing all the time, there is still relatively limited comment and debate on cloud within banking. In the table below we highlight some of those that have been most outspoken on this topic in the last few months.

By Diaz Ayub