The digitalization of banks is advancing by leaps and bounds. Financial institutions are responsive to current trends in financial technology and are actively investing in the development of new solutions that would allow them to remain competitive.
What challenges banks are currently facing and what technology is the answer to them, we will tell you in this article.
According to the media, this year banks’ total IT budgets are expected to reach an unprecedented $297 billion. That’s because the industry is ripe for big change. Increased competition from Fintech companies and the consequences of the pandemic require banks to change the concept of work, learn to be flexible in managing resources, reduce operating costs and abandon rigid organizational structures.
The shift from industrial to digital economy creates new profit opportunities through the emergence of digital ecosystems. They focus on customers and a new level of data collection and processing about them. But building such ecosystems is impossible without a profound digital transformation of banks.
Types of Banking Ecosystems
The Alibaba example has shown how added value can be extracted by seamlessly integrating e-commerce, logistics and finance together. Depending on the industry, the tops of this “triangle” may vary, but finance is central among them, making banks a key element in the process of service convergence.
The transition to an ecosystem model can happen in different ways. The choice of a particular scenario directly depends on the ambitions and capabilities of banks.
The first way is independent creation and development of the ecosystem on the basis of their own projects. This is the option chosen by the creators of Alibaba, who have staked on a single brand policy.
Services in such an ecosystem are developed or acquired by the parent organization and remain under its full control. At the same time, they serve as data sources for the bank and each other, which makes it possible to create complex infrastructures with broad personalization opportunities and great potential for attracting new customers. The whole process is like a custom writing, where both sides benefit.
In essence, this is the most attractive way for the bank. But it requires huge investments and is therefore only available to the largest market players.
The second way is a combined ecosystem model. In it, the bank may position itself as a central integrator and platform owner. At the same time, a financial institution may create services that are connected to it itself or engage third-party companies as partners.
This option requires less investment than the first one. At the same time, the bank needs more organizational flexibility, and extra value from the set of services is associated with a lot of questions about the exchange of data about audiences between partners.
This path would suit second-tier banks that are ready to invest in their own future, but have limited funds.
A third way for a financial institution to evolve in a world of emerging ecosystems is as a provider of its banking products and services to third-party digital platforms. Payments, lending, scoring, card acquiring and other traditional services are needed by many services that are not ready to get a banking license.
This path will still require a limited but important investment in technology-enhanced services. The main priorities for such a bank should be low cost of service and maximum productivity – the speed of operations and readiness to handle a huge flow of appeals.
This option could be chosen by relatively small niche banks ready to compete for their share of the market where technologies rule.
In principle, for all of the above options for development there are common requirements in terms of technical solutions, without the introduction of which you can’t do. Let’s look at them.
1. Open API
API is an interface that allows third-party developers to access a specific digital service. For example, we can leave comments on websites using the Facebook authorization service.
In the context of tasks specific to financial organizations, it is a question of creating a universal digital interface in a bank’s IT infrastructure, through which any other element of the ecosystem, whether it’s an online store, a do my homework service or a cleaning service, could receive a banking service fully automatically.
It is the API that provides maximum opportunities for integration of ecosystem parts and enables the concept of banking-as-a-service. At the same time, the word “open” implies that any interested company can use it without long preliminary negotiations with a financial institution.
2. New network technologies
Any bank already has a developed network infrastructure covering its entire branch network. A lot of money has been invested in it, but new challenges require a change in approaches to the operation of this technical facility.
The pandemic is forcing digital empowerment in front offices. To make this possible, and at the same time to reduce the operating costs of leasing expensive communication channels, it makes sense for financial institutions to consider implementing software-defined wide area network (SD-WAN) technology.
SD-WAN enables virtualization of links by adding a new level of abstraction in the formation of network connections. SD-WAN capabilities can help eliminate or minimize the number of costly leased circuits by moving branch and ATM networks to secure virtual tunnels that run over the normal Internet.
3. Cloud technologies
The heart of any financial institution is an automated banking system (ABS). Usually it is based on technologies of the previous generation and expensive equipment, the total replacement of which is simply impossible, both for financial reasons and in connection with the inadmissibility of suspension of activities for the period of modernization.
The way out of this situation is the creation of advanced digital banking platforms based on cloud technology. A private cloud deployed in the bank’s own data center would become a convenient environment for developing, testing and implementing new types of services that are in demand.
At the same time, they would interact freely with the ABS, but would be based on next-generation technologies – “data lakes”, containerization, micro services architecture, etc.
4. Predictive analytics
The transition to cloud infrastructure opens up a direct path for banks to implement big data analytics technologies. Based on the history of transactions and other incoming information about the client, applying the methods of mathematical statistics, you can move on to using predictive analytics tools.
Identification of typical behavioral patterns will help banks predict future customer needs in advance and make them hyper-personalized offers at the most appropriate moment. In addition to its direct economic impact, this approach will have a positive impact on loyalty and satisfaction.
5. Robotic processes automation
Reducing transaction costs, personnel costs, and speeding up transaction processing can be achieved by implementing robotic process automation (RPA) technologies. They are based on “digitization” of numerous routine tasks both in the backend (at the level of interaction with the ABS) and in the frontend (at the level of back office tasks).
Modern RPA-platforms allow to algorithmize almost any internal bank process and transfer it to the program agent, that can, for instance, receive the e-mail, look through it, choose the necessary table, extract from it the selected data and transfer them to the ABS.
RPA solutions also minimize the number of errors made by office employees in their routine work.
6. Artificial intelligence
Automation of internal banking processes combines well with artificial intelligence technologies. They can be applied to different parts of the infrastructure, but they are probably most in demand for tasks that require optical character recognition (OCR).
Digitization of paper documents is one of the most noticeable bottlenecks hindering the productivity of banking operations. Modern OCR-platforms based on AI on the market allow to completely eliminate this limitation.
Enough has already been said about biometrics. Facial recognition, voice recognition, fingerprints, palm vein pattern – all these are technologies that open the way to accelerate service, reliable protection against fraudulent documents and, in the long term, to confirm payments using bio acquisition.
The development plan should correspond to the general strategy of the bank and take into account its organizational constraints – the duration of the approval processes, the real capabilities of the IT department, etc.
Finally, the immediate start of the transformation process should be preceded by the creation of working groups responsible for each of the areas. At the same time, it is important to ensure that the motivation of these groups coincides with the goals of the bank.