Challenges and challengers
Incumbent banks no longer enjoy a monopoly in the financial-services space, pressuring the sector into creating agile products and ecosystems that meet a widening range of ever-changing consumer demands and experiences unique to customers. It is specialist, digital and challenger banks as well as third-party fintechs (financial-technology firms) that are providing the solutions, whether in partnership or competition with those incumbents.
As the market becomes increasingly saturated, banks are being forced to rethink how to maintain their competitive edges and adapt their product-development models. Instead of building solutions prior to finding buyers within captive audiences (in other words, their existing customer bases), banks are faced with identifying the needs of their consumers and then working backwardsto find the best solutions. This is often referred to as “front-to-back development”—a process reinforced by external pressures, such as evolving regulatory landscapes. To remain compliant, banks have to be increasingly agile. And for international banks, that means complying with varying regional and national standards.
New regulations concerning data are also arising. To create the highest-quality experiences, whether in fraud prevention or user personalisation, a large amount of data is required. And as data sharing develops, from open banking to open data, banks are grappling with another layer of complexity in their compliance operations.
All in all, banks are facing a range of pressures as they look to the future, which can be summarised into four key priorities:Ensuring security, compliance and resilience and meeting all global standards,
Improving customer experiences in a saturated market,
Optimising the use of internal data by enriching it with external data and
Building front-to-back digital infrastructure.
Of course, technological improvements—what we would perceive as the fifth wave of technological development in banking—provide obvious solutions to all these pressure points.
The fifth wave: banking on the cloud
The first wave of banking technology revolved around replacing manual processes with machines, including mainframe computers and card machines. Much of this technology was used for record-keeping, general ledgers and calculations, resulting in banks being able to handle larger transactions with greater efficiency. The second wave saw the introduction of mini-computers and terminal desktops, furthering efficiencies and developing automation for branches and back-end operations. And the third wave, during which software began to play a more vital role, involved banks running on servers accessed by clients over networks.
The fourth wave was marked by the emergence of service-oriented architecture (SOA) and object-oriented programming, which paved the way for developing applications (apps). Here, consumer demands started shaping the banking industry, with increasing expectations that consumer banking should be done anytime and anywhere via apps and other branded front-end capabilities. This wave also saw the shift toward more modular and flexible software architectures that could be used on a wide range of devices.
This brings us to the fifth and current wave, inspired by all-around services such as Amazon. Beginning with the rise of cloud computing—complementing a more flexible, incremental software-development style—the fifth wave has seen the creation of marketplaces and ecosystems that bring together a range of services and applications, allowing consumers and corporations alike to access a full suite of capabilities in one location.
The fifth wave of banking technology paves the way for a new, innovative era in which interlinking software can create seamless services by updating and tying together existing legacy infrastructures. This wave also allows for greater connectivity and collaboration, as well as the emergence of new business models and opportunities.
Why put banking on the cloud?
While historically, larger “high street” banks have enjoyed a monopoly on innovation in the banking-technology space (especially in the earlier waves)—partly due to the scale of investment required—cloud-based banking, with its minimal upfront costs, changes everything.
Cloud banking enables banks of any size to receive on-demand delivery of hosted computing services—from servers and data storage to communication tools and applications—via the internet. The benefits of banking on the cloud—including mass scalability, better compliance, improved market time and easier integration—make the transition not only viable but advantageous.
Regulatory compliance alone justifies the commitment, with cloud-based banking technology aiding privacy, open finance and jurisdiction-related regulatory standards. Indeed, many cloud-based ecosystems come with controls in place to ensure that all products are already fully compliant with any relevant regulations.
Furthermore, a bank can leverage these capabilities via a single ecosystem by using a cloud platform with third parties and fintechs already integrated rather than enduring the arduous process of integrating with each fintech on outdated systems. And should a new fintech or challenger develop a desirable product, the composability of cloud banking means that the new solution can simply be added to the existing suite rather than requiring another full round of integration.
Finally (in terms of benefits), a bank can take new offerings to market faster by offering a pre-integrated ecosystem through a marketplace. While partnering with a fintech (by a bank alone) can take months from germination to implementation, adding a new partner or product via a cloud-based banking system by leveraging its existing marketplace can reduce the processing time to a few weeks. In an increasingly competitive consumer-banking arena, such speed is invaluable when competing head-to-head with challengers.
Cloud and open finance: a terrific combination
Imagine this: You’re a bank trying to onboard an SME (small or medium-sized enterprise) for financing. Just a few years ago, this meant the SME would have to travel to a physical branch to hand over up to 20 documents. These documents would likely include a certificate of incorporation, tax statements and proof of address, among other items. They would be passed to the back office and credit department, where they would be run through a handful of algorithms. Finally, a credit decision would be taken depending on the customer and the facility required: all in all, a process typically taking more than 10 days.
With a cloud-based open-finance platform, the SME no longer needs to enter a physical branch. Instead, the SME is directed to a simple, branded microsite or even a mobile app to start their self-onboarding. They can enter basic information, such as a phone number or tax identification, which can be leveraged (with their consent) via a third party to extrapolate further data, perhaps from a government website. Verified data can then be obtained via a simple API (application programming interface).
The process can also be scaled, meaning that data can be gathered from various sources via separate APIs and then triangulated. And this combined data can then be used to make a credit decision using an algorithm. Rather than taking 10 days, approval in principle can be provided in an hour—and without the arduous process of the SME organising and handing over physical documentation.
Looking to the future
The wave of innovation sweeping the financial services sector is unlikely to slow down. Indeed, it is speeding up as more banks move toward fifth-wave cloud computing. Cloud-based open-finance platforms are set to become the norm, while in the next few years, it is likely that APIs and architecture will continue to break new ground and shape the banking services of the future.
Looking further ahead—and perhaps even into the components that could build the sixth wave of banking technology—quantum computing could be harnessed to solve problems and build algorithms too complex for current computer models. Furthermore, the growth of the Internet of Things (IoT) could extend banking ecosystems further and provide even smoother customer experiences.
Whether Wave Six will see an explosion of interlinked online services, wearable tech or quantum computing, one thing remains clear: Cloud computing is the stepping stone to the future that banking so desperately needs.
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