Transformation in the banking industry depends on so many technologies that it becomes a challenge to prioritize implementations in the context of the economic and social needs for the next decade. In this blog, IDC shares its thoughts on which technologies will be most important to the continued transformation of the banking industry, and best position the institution for life in 2029.
The Green Bank
The trend towards a green economy will likely intensify even more, as the cost of not meeting the climate goals will become more obvious. Financial institutions will have to react to this trend in two ways:
They will need to become greener organizations themselves. The carbon footprint of FIs is dominated by energy consumption in data centers and buildings. The cloud and energy efficiency programs will be key to solve this.
This one is the elephant in the room- the carbon footprint caused by lending and investing in energy intense sectors such as fossil fuel sector, manufacturing, construction, chemical, and food production.
Factoring lending and investment into the carbon footprint, financial services no longer are very green industry. A 2019 report by Friends of the Earth and Oxfam, for instance, reveals that the carbon footprint of four main French banks represents 4.5 times the greenhouse gas emissions of entire country France. As a result, banks will risk reputational damage and potentially regulatory ones, should they not reprioritize their lending strategy to factor carbon emissions of their customers.
Recommendations for tech buyers:
- Move to the cloud: Banks largely rely on their own data centers and infrastructure often is not necessarily energy efficient. Moving more workloads to the cloud will allow a centralization of processing power to the most efficient data centers. Cloud providers will invest heavily to make their infrastructure energy efficient and plan to move to sustainable energy.
- Factor carbon footprint into lending models: FSIs need to modernize their lending models to factor the higher risk of energy intensive industries. Companies not modernizing and neglecting their carbon footprint have higher risk than peers that do invest in green technologies. As a result, lending should be more expensive and restrictive to these sectors.
Going Digital All the Way
The digitalization of financial services will move forward rapidly. The recent COVID-19 outbreak will drive adoption of digital technologies and consumer acceptance of digital channels. FSIs should try to benefit from this dynamic and invest in new tools, channels and move to a fully digital product lifecycle. This will go hand-in-hand with higher to full automation levels in operations as back office automation will be a critical success factor to enable near-real-time digital experiences.
However, open banking and new ecosystem experiences will have a more fundamental effect on financial services. Customers will be looking to consume products and services that matter to them, the financial component – whether that’s payment, credit, insurance – will move to the background and increasingly become invisible to the customer. This means that FSIs need to collaborate with the ecosystem and make their services and products seamlessly available via APIs and elevate their capabilities to ensure security, suitability, and risk management in the digital ecosystem.
Recommendations for tech buyers:
- Proactive open ecosystem strategy: Financial services will need to get much more integrated into the digital ecosystem. This means FSIs need to open, modularize and unbundle their products and make them available through APIs. This also requires a fully digital product lifecycle, fast turnaround times – particularly for credit decisions, and partnerships to reduce the client onboarding burden.
- Services instead of products: Customers will also turn to FSIs for advice and support to make better financial decisions, rather than just looking for basic products. This will create additional revenue streams for FSIs to offset margin compression of traditional products.
- Branch strategy: While branchless banking becomes more popular, and as neobanks and digital spin-offs develop momentum- traditional banks will likely continue to reduce the number of branches. However, branches remain valuable assets for the bank. For this reason, future branch concepts should be designed to support the advisory, sales and value-added elements, particularly for the small business customers who depend on local financial support. Micro-branches, shared branch networks, branch partnerships- such as co-location with partner, will allow banks to reduce cost while maintaining physical touch points.
The Virtual Infrastructure
The COVID-19 pandemic has exposed challenges in the flexibility, resiliency and costs associated with legacy bank infrastructure. For example, the unprecedented need for lending and new types of relief loans has overwhelmed the capacity of older, COBOL-based systems to be changed to accommodate market needs. Although a lot of progress has been made to transform the back office into an architecture with more agility and speed, the industry still has a long way to go.
Recent IDC research points to a large adoption of public cloud, for instance, (WW Industry CloudPath 2019, IDC, April, 2019 indicates 34% of total IT budget is allocated to public cloud deployments), but most critical workloads still remain on premise in the bank’s own datacenter, or on legacy platforms supported by managed services providers.
By 2029, a best-in-class bank will be supported by a hybrid architecture consisting of cloud-based infrastructure and partner-provided services to create existing and new sources of value for customers.
Competitively differentiating workloads and privacy-sensitive data may continue to exist within the walls of the organization, but the institution must prepare to create and manage a virtual infrastructure that is no longer defined by location. Open API, microservices and containers will be the critical technologies to adopt in the early 2020s to enable the creation of a fluid infrastructure that can more easily and quickly respond to any market need or disruption.
Recommendations for tech buyers:
- If you own it, modernize it: Most banks fall into one of two categories: those who own and run their own infrastructures in-house, and those that subscribe to managed services providers who maintain all or most of their banking systems. The former kind of institutions have, for the most part, already begun working on moving workloads to open API-based architectures using microservices, but the pandemic will force an acceleration of this kind of work to more quickly adopt cloud frameworks to improve agility and resiliency.
- If you rent it, ask for transformation: Smaller institutions, who rely on managed services providers to support their banking systems, are often behind the latest, and in many cases, modernized versions of their systems. These institutions should prepare to upgrade their existing systems to the latest versions, or, in the case of a provider that has not modernized their offerings, move to a technology partner with more modern solutions.
- Prepare the organization for change: The move to a virtual infrastructure means the bank organization must change the skills it brings to the table. The average institution will have less need for IT-related skills, but that’s balanced by the need to add governance and risk management to new forms of operations with which today’s institution is not familiar. Change without management will have the same value as no change at all.
The Data-Driven Bank
It’s said that mathematician Clive Humby first uttered the phrase “Data is the new oil.” IDC believes that today’s axiom is better articulated as “Data is the new water” as data will be the driver for every essential phase of transformation in banking. Data as a resource is an asset that the bank has never been able to fully leverage. Looking forward to 2029, it is unfathomable to think that an institution will be able to continue to survive in an era where not only the bank relies on the data it collects, but not participate in data shearing with other institutions and industries in an open environment. The EU has already forced banks to share data to support innovation and convenience in payments (PSD2), and this will be just the beginning.
Of course, the transformation of the institution to data-driven bank is easier said than done. There are a number of challenges to overcome to fully realize the potential of data.
- Data ownership – the siloed nature of banking organizations acts as a disincentive to collaborate and “give up” ownership of the data for the good of the enterprise.
- Data management is hard – and few banks can attract and retain the talent necessary to create data architectures, clean the data, and generally put their data house in order.
- Data without analytics is useless – If and when the data is sorted, AI-based analytics can bring value to the data to support the lines of business. Here, again, analytics must cross organizational boundaries to bring the most value to the enterprise.
Recommendations for tech buyers:
- If the infrastructure is the engine, data is the fuel: The same guidance laid out for infrastructure transformation can apply to data. If the bank is of the size that can attract and retain the right talent, particular attention should be paid to the hygiene of the bank’s data. Even with internal resources, large banks should seek out support from 3rd party partners that can accelerate this effort. This guidance is especially important for smaller institutions that rely of managed services providers. Data quality and availability will be critical criterion in evaluating long-term partnerships with these providers.
- Analytics: can be considered the GPS of the enterprise, to stretch the analogy further. Every aspectof analytics should be set by an enterprise-wide strategy that aligns the needs of the lines of business with the needs of the institution. Only in this way can the institution set a course for success on an agile infrastructure and quality information.
- Governance & Trust: The bank has a responsibility to maintain trust and stewardship in its business. This is particularly true when it comes to data. Europe, again, has led the way with its GDPR regulations, but will have to be a part of the bank’s data policies even if not mandated. Security and privacy will need to be managed through centers of excellence within the organization to ensure that trust is not violated.
The Best-In-Class Bank of 2029
The successful bank of 2029 will operate under these principals. The keys to that era of banking will based on open access, multi-industry ecosystem partners, virtual, agile and resilient infrastructures, digital technologies, social awareness and more.
Fundamentally, IDC believes the products and services will look much like they do today, but will be enhanced by new and innovative offerings developed through the very agility, openness, and knowledge we will build between now and then. Within the IDC Financial Insights 2020 Webinar Series, IDC Financial Insights analysts developed a webinar around this topic, specifically designed to offer guidance through the continued transformation of the banking industry.
Be sure to join us for the Critical Banking Technologies for the 2020s webinar on Tuesday, May 26th from 11:00am -12:00 pm ET.