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Big Tech – Lessons for the banking sector

By Andrew Beatty, Head of Global Next Generation Banking

In banking, a core contains vital records for the business, such as customer records and account details. It is the most important piece of technology in the back office; the bank’s heart, a place central to the smooth running of all operations.

According to McKinsey, approximately 70% of banks are reviewing their cores to enable real-time processing to remain relevant in our digital world. But with the pace of change always accelerating, are new and updated cores simply legacy systems in waiting? Not necessarily. As long as new technologies and deployment models are leveraged to guarantee that this new core is continuously updated, core infrastructure can be ‘future-proofed.’

This is vital as customer expectations in the digital age are always increasing. Consumers are both fickle and demanding – studies show that many retail consumers would consider switching banks for seamless online access and digital advice. Traditional banks need to be ready to make bold changes to attract and retain customers in this digital age.

To show what’s possible, look at the world’s largest and most successful technology companies.

Banks need to learn what big tech teaches 

Apple, Tesla and Netflix redefine what’s possible with technology, while Amazon and Google took customer service to a whole new level. All are digital-first pioneers, disruptors and master innovators, and all are largely unencumbered by legacy technology. They embrace technology not just to do the heavy lifting but to define, deliver and enhance the full spectrum of experiences on offer.

Take the smartphone for example – be it iPhone or Android – it’s not the hardware that’s great, but the way millions of services have been neatly packaged together in a small device. Those services put an amazing amount of power and capabilities literally into the palm of your hand. And to ensure the technology underpinning those services is top-notch, software updates occur frequently without diminishing the user’s experience.

While many users remain in blissful ignorance of which version of the operating system they are using, they welcome new features that are part and parcel of the nonintrusive upgrades installed while they are asleep or at any another time of convenience.

Similarly, smart-equipped cars from brands such as Tesla regularly receive over-the-air software updates that bring new features and increase functionality. It’s unlikely that anyone asked for the addition of Tesla’s Sentry Mode when the car was designed – it was an afterthought (albeit a brilliant one), delivered as part of a continuous upgrade. Tesla drivers can now monitor their car regardless of where it’s parked and receive instant alerts whenever a security incident occurs.

Lastly, let’s talk about Netflix – the largest video streaming service in the world. The Netflix delivery model is based on personalisation and excellent user experience. With over 180 million subscribers, Netflix invests heavily in research and development and uses machine learning to automate millions of decisions based on data it gathers on its users. Without bespoke recommendations, users would have to scroll endlessly through literally thousands of movies and TV shows to find something they wanted to watch.

It’s easy to draw parallels to the banking industry. Back in 2000, Reed Hastings, CEO of Netflix, approached the former CEO of Blockbuster, John Antioco, and offered $50 million to buy the company. John declined the offer and closed negotiations. Fast forward two decades, Netflix is the largest video streaming service in the world, and movie rental stores no longer exist. The banking industry has been heavily disrupted by smaller, more nimble players after the 2008 financial crisis. This has, in turn, changed how the larger legacy banks interact with customers, how technology is thought of and what is used for.

These tech disruptors show the advantages of a digital-first approach. The availability of new technologies and methodologies means banks no longer need to be afraid of tackling core modernisation and continuous updates.

The three pillars of a future-proofed core banking system 

Modern technologies, agile development methods, and continuous delivery enable solution providers to deconstruct larger applications into slimmer, more agile components. In time, banks will be able to move away from an isolated architecture to a flexible, conversational infrastructure. The brilliance and commonness of application programming interfaces (APIs) allow banks’ applications to harmonise and share data across networks and with third parties – a central principle of open banking.

Another key element for future-proofing the core is the cloud. As banking technology continues to transition away from the back office and towards the front, the need for computer power will steadily increase. After some initial reticence, the cloud is now mainstream in financial services as it offers the potential for unlimited scale, elasticity and availability needed to implement continuous development. What is more, by migrating to the cloud, banks will no longer need to manage their own physical data centres, something few will miss.

This is particularly true in times like these, when physical access to data centres, storage locations, and physical tape handling are all challenging due to the lockdown. The pandemic has put additional pressure on banks as data environments are less monitored and more vulnerable to opportunistic cyber-attacks. Over the past few months, banks who had already invested in the cloud have shown better resilience, largely because they addressed and mitigated these risks before their business operations were adversely affected.

Banking services can now be separated into individual constituents, which can be monetised, marketed and exchanged. Ultimately, a bank may choose not to run its own core banking technology and instead subscribe to a Banking as a Service (BaaS) platform that is regularly updated to keep pace with changes in regulations and market practice. In this way, the bank is insulated from technology change and can focus on its customers.

New technologies and methodologies have already redefined other industries, and now it’s now time for banking to step up. While some may argue that banking digitalisation is almost done, in practice it has only just begun. APIs, the cloud and BaaS are set to change the way customers engage with their financial services providers. But for banks not willing to harness the power of continuous delivery, they risk the same fate as Blockbuster in a thriving Netflix age.