The financial services industry is navigating an unprecedented set of challenges: a sea-change in consumer expectations, an extended period of regulatory upheaval, onerous new capital and liquidity requirements, and - crucially - the rise of challenger banks and other new disruptive market entrants.
Already underpinning familiar offerings such as Netflix and Amazon, cloud technology has the potential to transform some of these challenges into opportunities for the industry, promising greater agility and innovation to enable financial institutions to remain competitive.
“Cloud providers have evolved considerably in recent years,” says Derek Lum, UK head of cloud advisory at Capco. “Their proposition meets the very specific requirements of financial institutions, prioritising security and regulatory compliance. In turn, those institutions increasingly view the cloud as an enabler of change, offering scalability, innovation and greater ease of operations.”
Cloud technology offers institutions the power to gather, store, analyse and leverage data from millions of customers more effectively and cheaply than traditional in-house or on-premise systems.
As Rob Deakin, partner and UK head of digital at Capco, notes: “Infrastructure has historically been a necessary evil for banks, but thanks to cloud that is no longer the case. Why compete with Google’s thousands-strong infrastructure engineering team when you can instead deploy their offering at a low cost and refocus your time and energy on real banking activities, product innovation and the customer experience?”
The cloud will be central to fostering the data-driven, innovative and above all customer-focused environment that large financial services organisations recognise as key to their future competitiveness, says Mr Lum.
“With cloud technology, banks can react quickly to changing dynamics while also remaining profitable,” he explains. “If a bank wishes to target a particular demographic, they can build solutions, experiment and then scale much faster than on-premise systems would allow. That is a huge and vital differentiator in today’s world.”
With challenger banks rapidly amassing market share, there is a renewed sense of urgency among established incumbents to transition to a more customer-centric, cloud-based digital business model
Mr Lum stresses the importance of collaboration: “A critical distinction is that on-premise infrastructure is a walled garden, hindering innovation and collaboration. Moving outside those walls via the cloud opens up a more expansive ecosystem where collaboration is the norm.”
An offering such as Starling’s app store-style Marketplace is proof that partnerships and co-operation need not be a zero-sum game for the banking sector; rather they are very much the future. This is not simply down to an influx of new market entrants, however, but also due to legislation.
The UK last year saw the introduction of open banking, to be followed later this year by the implementation across European Union member states of the Second Payment Services Directive (PSD2). Both are designed to foster innovation and accelerate competition by opening up the client data held by banks to other providers.
Sharing this data with third parties has sparked concern in some quarters. However, it offers incumbent banks the opportunity to tap new revenue streams through connections with large technology providers and smaller fintech partners, capitalising on their new perspectives and brand power to launch new services, improve customer experience and, crucially, enter new markets.
As Jonathan Fenwick, UK head of digital engineering at Capco, says: “These platform businesses that seamlessly connect services to people, in the process making their lives easier, are ultimately the big winners. We see a number of financial organisations looking to build new services as platform models, and a cloud-based approach is key in enabling them to do this efficiently and effectively.
“The cloud is utterly transformational in that it federates empowerment rather than centralising it, as has traditionally been the case. It inspires an entrepreneurial spirit and is the reason why challengers can react to market developments so quickly.”
Capco’s own track record supporting established banks as they embrace digital solutions includes the launch of Mettle, the Royal Bank of Scotland’s innovative small business bank. Mettle is designed around digital principles of speed, access and ease of use; for example, allowing customers to open a business current account more easily and quickly, forecast their business performance or create invoices from their mobile phone.
The growing ubiquity of the cloud, says Mr Deakin, will push technology much higher up the business value chain. On-premise technology is seen as the domain of specialist IT departments. Cloud technology by contrast offers a user-led and user-friendly experience, where impact and value are much more tangible and therefore more easily appreciated.
Yet, despite the undeniable benefits it offers, cloud uptake has been slow. As Mr Fenwick points out, a combination of security concerns, lack of in-house knowledge and the burden of systemic regulation has blunted widespread cloud adoption among banks.
“Early iterations of cloud technology did not place compliance at the heart of the solution,” he says “For financial institutions, which operate in a heavily regulated environment and handle sensitive data, compliance is key, and on-premise technology was perceived to offer greater data protection and security.
“Banks have been hesitant to commit to a single cloud vendor and in any case there is no one-size-fits-all approach. Cloud providers are accordingly looking to make it easier for organisations to use multiple cloud services. It is also very likely that regulators will insist on a multi-cloud environment to reduce the concentration risk that comes with placing all your business with one provider.”
Given the complex and monolithic infrastructures that underpin most bank operations, migration to the cloud is often approached with trepidation, as firms fear it will be hard to manage. Attitudes are now shifting, however. With challenger banks rapidly amassing market share, there is a renewed sense of urgency among established incumbents to transition to a more customer-centric, cloud-based digital business model.
To maximise the potential of cloud-based solutions, financial institutions must adopt a cloud-first mindset. “Clients acknowledge there is a skills gap around the cloud, so it’s about retraining employees, bringing in new talent, exploring new ways of working and collaborating with the right partners,” says Mr Fenwick. “We often hear that technology has to understand the business, but the business must also understand how the cloud works to truly harness its benefits.”
The onus is on banks to keep innovating and embracing change. “It may not yet be in their DNA, but the greater cost going forward lies in doing nothing,” he says. “Certainly, migrating to the cloud is not without its challenges and will require a mix of strategy, knowledge and cultural change. In taking that step, however, banks will enhance both their customers’ experiences and their own revenue streams, and redefine their standing in today’s rapidly evolving financial services landscape.”
For further information please visit www.capco.com
Q&A: A question of digital disruption
Lance Levy, Capco chief executive, shares his thoughts on the future of banking
What are the main disruptors you are seeing within the banking industry?
The banking industry globally is responding to an increasingly disrupted and turbulent business environment, and we expect this disruption to increase with time.
Many banks are coming out of a period of increased regulation and are subject to burdens around liquidity and some of the highest levels of scrutiny seen by any industry. Regulation in the shape of open banking and PSD2 is requiring banks to open up their client data, allowing tech giants and smaller fintechs to challenge
The agility of these challengers, coupled with consumers’ desire for greater transparency, flexibility and usability, is creating a gap between the banks that have embraced the digital future and those that haven’t. Customers are now not only tech savvy, but also have a far greater understanding of what they want and what they expect from a bank, and the legacy business models of many incumbents don’t meet these expectations.
Banks are asking themselves, “What is the risk of not moving?” At this point in the evolution of financial services, the race to stay relevant is very real and standing still is not an option.
With all this disruption, what are banks doing to innovate and apply digital to their working practices?
Banks have realised they need to be looking at their business through a digital lens. In the past, technology was simply a cost centre but now, with new digital innovation, it is at once transformative and a differentiator.
The cloud, for example, has the potential to transform many of the core functions of banking, providing agility, scalability and power in cost-effective ways. It is also increasingly being seen by financial institutions as a risk mitigator rather than a risk multiplier as was previously the case.
The pressure to innovate will only increase as large tech firms make moves into the financial services sector. Big tech already knows how to use big data, analytics, artificial intelligence and machine-learning to maximise and personalise the customer journey.
Given the fierce competition in the sector, it’s no surprise banks are refocusing on winning new business and strengthening their relationships with existing customers. As a result, we are seeing some established incumbents creating their own disruptors to challenge both themselves and the fintechs, RBS’s Mettle being one such example.
How are banks transforming their legacy frameworks and infrastructure?
The rate of change will inevitably be slower in larger institutions with significant legacy infrastructure, than in neobanks. But a focus on technology is only half the battle; for banks to fully realise the potential of digital, digital transformation needs to be much higher up in the value chain, and this includes looking at broader working practices and corporate structures.
The workforce will be a major deciding factor in determining the success of digital transformation. Building diverse teams and upskilling existing workforces, as well as recruiting employees, particularly Gen Y, with digitally native skills and experience will be key to fostering innovation. With the right tools and knowledge, the workforce is better placed to build the optimal digital experience both inside and outside
This combination of emerging technologies and new ways of working will be a critical combination that will set market leaders apart from the rest of the field.
Do you think banks and fintechs can co-exist happily?
The relationship between the two is changing. Each side has a different focus and different strengths, but we are starting to see symbiotic relationships forming. As I mentioned, some banks are launching their own challenger brands, while others are taking on the features and the working practices of startups.
We are increasingly seeing greater collaboration between the two groups as banks and fintechs look to draw on each other’s strengths to create new marketplaces for consumers that bring together innovative financial services on the one hand, and products from established and trusted brands with long-held relationships on the other.
Importantly, who will be the winners in all this?
The costs of maintaining and upgrading infrastructure, along with a desire to keep abreast of customer expectations, means banks are increasingly embracing innovative digital technology. For banks, this creates cost efficiencies, flexibility, new deployment models and accelerates the pace of change.
For the customer, the news is equally positive, with the banking model pivoting towards an enhanced customer life cycle and user experience. With all this talk of technology, it is easy to forget that banking, when all is said and done, is still a relationship business. It’s all about people, which is where the personalised, high-touch elements of a digital offering come to the fore.
As more businesses move to the cloud, and as technologies such as blockchain become more prevalent, we will see increasing connectivity and collaboration that allows disparate organisations to work together in ways which reinforce co-operation and build mutual trust. This will ultimately be what shapes the future of banking.