Where Are the Banks Going in the Next Decade?

Three factors determine the next development of a successful banking digitalisation: banking regulation, market capacity and potential for modern financial products.

The article was written by Valentin Sabev and published in CIO Media on 19 November 2020. Read the original in Bulgarian.

Three factors determine the next development of a successful banking digitalisation. They are banking regulation, market capacity and potential for modern financial products.

The development goes from minimising the role and handling of non-virtual items as banknotes, hard copies, or paper documents, through the modernisation of routine financial products and services to the formation of partner conglomerates of banks and their vendors and service providers. The achievements of the ITC sector further accelerate the respective achievements in the banking IT activity.

Significant digital transformations in the coming decade will start in the following technological directions and their derivatives:

  • Open banking

  • Digital currencies of central banks (CBDC) or distributed ledger technology (DLT)

  • Artificial intelligence or robotic process automation (AI, RPA)

  • Omnichannel banking

Many of the transformations would lead to complicated technological solutions and industrialised platforms. Their smooth functioning is unlikely to be within the capabilities of a single financial institution. This requires the synergistic partnerships of banks, vendors, and service providers.

Open banking ecosystem

The Payment Services Directive (PSD2), which regulates technical, operational, and business rules, plays a catalytic role in creating an open banking ecosystem.

According to a study cited at www.backbase.com, almost 70% of banks create API portals to accelerate their digital banking, 41% of them consider the APIs as an opportunity for an ecosystem with partners, while almost 38% - as a chance to open to third parties.

Open banking manifests itself in three directions:

  • Unprecedented API access

The first direction provides unprecedented API access to a bank's data for its competitors. However, it opens the chance for a bank to be a user of itself by using its APIs. The benefit is in improving its products and services, for example to the extent of shared service.

  • Direct channel for information exchange

The second direction relates to corporate clients. The effect is in establishing a direct channel for the exchange of information between the corporate client and the servicing bank. There is a possibility for a symbiosis of banking systems and ERP systems, which fully automatically serves the banking products and services used by the companies. As a result, human participation in this transfer is avoided, no matter how simplified it is now with internet banking.

An Accenture analysis shows that 86% of the companies in the survey are interested in building open platforms for banking ecosystems. On the other hand, 50% of the banks in the survey expect open banking for corporate clients to provide revenue growth between 5% and 10% over the next 3 to 5 years.

  • Fintech partnerships

The last but perhaps the most discussed direction covers fintech companies. In compliance with the regulations, these companies become exclusive assistants to banks to increase customer satisfaction. Fintech companies are expected to provide modern financial services by incorporating conventional banking products in a diverse, innovative, or non-standard way.

The effect is in enriching the relationship between banks and their customers with modern technological solutions by fintech companies. The expected benefits are cost savings, increasing business volume or market shares. From this point of view, growing revenues would be greater than the threat of losses. For this reason, fintech companies should not be considered competitors of banks, but their supporting partners.

Regulated digital currency

Private and corporate initiatives have led to the entry of cryptocurrencies or digital money into some business models, such as bitcoin and libra (Facebook). However, several central banks are stepping up or consolidating their actions to "issue" their digital currencies.

The digital currencies of the central banks (Central Bank Digital Currency - CBDC) are traditional money, but in digital form, issued and managed by the central bank of a country. Cryptocurrencies and CBDC have in common is the use of a general ledger, also known as a blockchain. This digital book ensures that transactions are recorded and available in real-time from multiple parties/participants.

Distributed ledger technology (DLT) is generating an intensive interest for use in a variety of industries and domains ranging from banking, finance, insurance, and accounting to healthcare, legal, retail and trade, etc. Its capability for transforming financial sectors also paves the way for other uses such as emittance of central bank digital currencies (CBDC), generation of new products for entering new niches or for onboarding potential customers or implementation of a new way for banking services.

DLT may radically change the assets operations and maintenance, the charging of obligations, the production cost reduction/optimisation, the risk management, etc. The technology ability could transform financial services and markets by:

  • Reducing complexity.

  • Improving end-to-end processing speed and thus the availability of assets and funds.

  • Increasing transparency and unchangeability in transaction record keeping.

  • Reducing operational and financial risks.

The side-effect of DLT provides an enhanced approach for electronic document handling and digital archives.

Digital wallets

Currently, digital wallets are mainly connected to the electronic form of bank cards and the information stored about them. They are a variety of mobile wallets, preferred by people when shopping in the store, instead of carrying a leather wallet and a mobile phone at the same time.

Mobile wallets will soon be treated as a digitised version of every item stored in leather physical wallets. Such elements are, for example, digital money, electronic identity, electronic signature, driver's license, health information cards, loyalty cards, transport cards and tickets, etc.

The convenience of mobile digital wallets will be felt if they are interoperable with the integrated financial infrastructure of the urban environment.

Video or biometric identification instead of graphic specimens or digital certificates

Static specimens, popular in the past in graphic format, or digital electronic signature certificates are gradually giving way to biometric identification and authentication. The advent of 5G communication in the presence of productive servers will catalyse the use of real-time software solutions for facial recognition or video link analysis for snapshots/selfies, characteristic facial expressions, gestures, lip-reading, voice messaging or fingerprinting.

The relevant two-factor processes for real-time recognition and unnoticed by the user of the banking application prevent the making of a false payment, without restricting the business when stopping the correct ones. As a result, refunds are avoided, the risk of closing accounts or cancelling cards in case of fraud is eliminated. The benefit is that you save money on attracting these customers.

Retail banking payments

The effect of the mass penetration of mobile wallets, digital currencies of central banks and services from fintech companies will be felt in the offer of numerous payment transactions, especially in retail banking. But this requires a standardised environment with a sufficient customer base. Otherwise, technological solutions remain boutique and limited in scope.

One of the tasks of the Euro Retail Payments Board, formerly the SEPA Council, is to facilitate the creation of an integrated, innovative, and competitive pan-European environment for retail payments in euro. Its leading features are instant payments and mobile person-to-person (P2P) payments. Interoperability between competing payment solutions is expected to lead to the widespread use of P2P mobile payments. For example, using mobile numbers instead of IBAN.

The massive population of digital money and mobile P2P payments is gradually minimising the use of cash payments. As a result, the number of mobile transfers is increasing at the expense of cash payments. This poses another challenge to provide a relevant platform with adequate capacity and relevant performance to handle future mobile transactions.

Switch to omnibanking

In multichannel banking, the emphasis is on the banking product or service, where the channels usually operate independently of each other until the processing is completed.

Each channel is associated with a separate vision and strategy as a stand-alone distribution opportunity. In addition, the channels are accompanied by their own set of operational processes, architectural design, maintenance and more. This means that the development of the same functionality is repeated many times, refracted through the prism of technical features or capabilities.

Unlike multichannel, omnichannel banking focuses on the customer, integrating marketing, sales, and service. In this case, during customer service, data can be dynamically transferred from one channel to another without re-entering. Potential technical capabilities are a portal, platform, or other IT solution for organising and maintaining the interaction of customers with banks from any point of contact.

With the advent of different IT achievements, transaction costs per channel decrease, but are differentiated by each of them. Omnichannel banking provides an opportunity to optimise processing for cost, time, and quality through the use of a dispatcher with built-in artificial intelligence. Depending on the complexity of the operation, the dispatcher transfers it to the most appropriate channel at the lowest cost. As a result, human labour is used for more complicated cases, and routine operations are performed by systems.

Introduction of artificial intelligence

Banking computerisation in the current decade will be exclusively dedicated to the use of artificial intelligence (AI) systems. The goal is to replace human labour with machines that minimise risk, improve precision, reduce costs, and increase productivity without reducing current customer satisfaction.

The indirect benefit is that experts are reassigned to other jobs in the front office, back office, or another banking area where natural intelligence is needed for a more lucrative business.

The implementation of AI is manifested in the following areas:

  • Incorporation of techniques in the used expert systems, which are based on static rules, to evolve to dynamic self-settings without the participation of specialists.

  • Implementation of platforms built-in to realise robotic automation of routine processes from the back office.

  • Use of Turing systems that have passed the test to communicate with bank customers in a natural language inherent in humans.

The architecture of the banking technology platform

Banking computer systems are subject to permanent transformation and improvement. In terms of their functionality, they go through various stages of change: from bank-accounting to customer-oriented, through product or channel support. Architecturally and structurally, banking systems are initially characterised by their monolith, then by strongly connected modularity, and more recently by componentisation of functional building blocks with interface access.

Standardisation and componentisation with the accompanying microservice architecture provide several possibilities for homogeneous granulation, interoperability, or functional interchangeability of building configuration elements.

At the same time, it is necessary to solve two optimisation architectural tasks:

  • Maximum throughput when processing requests with minimum latency for their transfer by components.

  • As close as possible to a regular pattern instead of one resembling a "spaghetti or risotto plate".

Solving them blurs the line between today's CBS and its satellite mantle. The desired effect is in the construction of a "desire machine" through the diversification of services by components. The benefits are:

  • Reuse of software, saving time and cost.

  • Maintaining the defective component of an application in "local anaesthesia" while the application is “up and running”.

  • Solving business problems by isolating degraded technology.

Cloud solutions

Cloud services are increasingly being used. Banks successfully use private clouds or data centres belonging to their financial group. In contrast, the public cloud remains in its infancy except for the use of public data centres in collocation mode.

Concerns about public cloud perceptions stem from security, regulatory constraints, and problems with reliable connectivity. However, with the advent of open banking and regulatory compliance, data should not be considered a critical barrier to cloud banking. In addition, cloud platforms now support encrypted data. All this presupposes that cloud banking platforms will become a reality in the medium term.

Vendors of banking applications, including CBS, offer standardised cloud services. This possibility requires a broad-spectrum analysis to determine the level of tolerable business risk caused by reduced recognition between competing banks with an outsourced banking system at a given provider. For example, mitigating potential solutions for obtaining bank-specific services and products are:

  • Additional development of inherent products and services for the given bank at additional costs and payment.

  • Integration of standardised cloud services with open banking solutions.

Switching to synergistic partner groups

Some of the mentioned changes in banking automation led to an entirely new industrialised environment for financial services. In chronological terms, the development of banking automation in this century has undergone three major transformations, going through relevant phases, each of which has left its positive mark.

  • The first phase was characterised by the "exploit everything by us" approach.

  • The subsequent optimisation of operational efforts and costs led to the next phase, whose main approach is "outsourcing the general or common activities as outsourcing". This has sparked new business relationships between banks and their service providers with appropriate quality controls and bilaterally agreed service delivery levels (SLAs).

  • The approach for the next phase is to "form synergistic partnerships for industrialised platforms". The strength of this approach is in the cooperation, which more fully reveals the potential and capacity for shared provision of financial services, jointly by participants for a given ecosystem. In addition, remote work in recent months has supported the smooth operation of processes in partner groups.

Before the establishment of synergy partnerships, a bank should move from maintaining relationships with vendors to managing interaction with partners. The latter requires the categorisation of partners, such as strategic, tactical, operational, or commodity.

About INDUSTRIA

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