Banks must stop experimenting and make their entire infrastructure digital-first or face greater competition from fintechs and risk disappointing a demanding customer base.
Santosh Thomas, president of global markets at Cognizant, told attendees at a community conference in the Hague: “There was a time when banks could afford to experiment with new technologies in parts of the business, but that time is now fast moving behind us. The time for digital experimentation is over.” They need to digitise their entire enterprise, from operating models to core technology, he said.
“Banking is being disrupted from many angles: digital-first, cloud-first banks, and fintechs, as well as the proliferation of digitally-enabled service providers who have changed the landscape of services that customers have come to expect.”
While IT has experienced five major generations of disruptive technology, said Thomas, the digital wave has been substantially more powerful and more disruptive than anyone first thought. “In the past technology supported the business, but now technology is the business,” he said.
“Banks have to improve efficiency, improve their service delivery, improve back office performance, add automation and enable smarter decision making. This is a very expensive proposition. It’s a big undertaking, and it requires a broad and deep understanding of the processes necessary.” Banks and their IT teams, he added, need to supercharge their heritage technology, roll with periodic missteps and fail fast.
According to Thomas, there are more Cobol transactions per day than there are Google searches, indicating that many banks are still stuck with legacy systems that need to be rebooted. Reuters data suggests 43% of banking systems are still operating on Cobol, while 220 billion lines of the 50-year old code are in use every day. An estimated $3trn flows through Cobol-run systems daily.
“The number one challenge for banks - as well as leaders in other industries - is to find new technology opportunities for sustainable and profitable growth,” Thomas said. “It’s not just about improving revenue and margins, either, it’s about differentiating yourself from your competitors.”
Banking in a box
Appearing on a digital banking panel later at the event, Jihyun Lee, head of IT for Asia Pacific at Julius Baer, said that the modernisation of the core banking system is almost a prerequisite for making things digital. “Being able to streamline the business and make it digital end-to-end is almost necessary before you go live,” she said.
According to Lee, when it comes to successfully launching new digital banks in different geographies, which Julius Baer has done, it requires the use of a modular “bank in a box” and an ability to get things up and running in a matter of months, not years.
Also on the panel was Friso Westra, head of IT and core banking development at ABN Amro, who said that with a bank as a box model institutions must learn along the way. “You learn what you want to keep on this shared platform and what you want to put outside the box,” he said. “In our situation it was regulatory reporting, which can be difficult. We tried to set up a specific system for it and ended up creating an exception for every country we operated in. It was almost an entirely new bespoke system, so we kicked it out of the box. As always a project requires careful planning before you start to even build your digital platform.”
“We have amazing regulators in Asia,” said Lee, referring to the need to produce fintech-like services while the public sector encourages innovation. “They are very encouraging when it comes to fintech and provide many examples for us, opening up APIs, setting up sandboxes and experimenting with new technology like blockchain. It’s a great place to host everything in the cloud, but the difficultly comes from being an international bank – our clients in Zurich aren’t keen on it for confidentiality reasons.”
“We believe it’s best to focus on a hybrid cloud situation,” said Westra. “One where we can test systems in private and spin things up, and then bring it into our technology environment. It also allows us to keep the data where it is. After all, when you’re running with data from nine countries you have to deal with nine regulators.
“The vision of cloud and digital has changed dramatically,” he added. “But there are still some questions when it comes to the public cloud. If you’re hosted on Azure, or AWS and your system fails in the middle of the night, Microsoft or Amazon will say, ‘okay, we can destroy your virtual machine or we can restart it, which do you want?’ So it still has some way to go.”