Rapid change is the constant. Challenger banks, neo banks and new fintech rivals are digitally native and are increasingly threatening to cement their competitive advantage. As a result, retail banks are increasingly looking to create a platform for innovation. In today’s fast-moving financial services market, banks struggle to predict the future. According to a recently-published research report from FNF Research, the global neo and challenger bank market was estimated at US$ 18,604 million in 2018 and is expected to reach US$ 578,143 million by 2027. The market is expected to grow at a compound annual growth rate (CAGR) of 46.5% from 2019 to 2027.
At the same time as dealing with this intensifying competition, banks are having to manage rapidly-shifting customer expectations. Generation Z expects instant responses, advice and processing of products and services. And there’s no doubt they will be the first to completely drop cash and cards in favour of mobile and e-wallet payment services. However, it’s not just this generation that banks need to concern themselves about. According to EY, COVID-19 prompted a 34% increase in contactless payments by all demographics, along with a 57% fall in cash usage. So, banks simply cannot afford to stand still.
Security is critically important too. In the age of high-profile data breaches and cyber-security attacks, customers are becoming increasingly aware of how their personal data is protected. And protecting it should be a key issue for any retail bank operating today. Added to this, keeping infrastructure up and running at all times can be a business-critical challenge for every bank. It is not easy to do this. According to a recent report from global cyber-security leader Trend Micro Incorporated, the banking industry has been disproportionately affected by ransomware, experiencing a 1,318% year-on-year increase in attacks in the first half of 2021. A key reason for this could be that the attackers are more confident of receiving larger pay-outs from banks.
Traditional on-premise infrastructure is often not the best way of providing the security banks need, especially if IT support provided to the bank is not at the optimum level and there is not a 24×7 security team on hand.
Scalability is also important to retail banks, particularly given the fast-growth of customer bases and digitalisation of traditional banking services. The ability to adapt and flex, in line with changes in demand and requirements will depend on having the right infrastructure that supports growth rather than slowing it down.
Time for a rethink?
Ongoing changes in user behaviour and preferences, coupled with the rise of fast-moving competitors and the need for enhanced security and scalability, are forcing retail banks to rethink their approach to systems and technology and find ways to innovate quickly. They need the agility to flex systems and services and that means finding a practical approach to overcoming the barriers posed by legacy IT and reshaping infrastructure once and for all.
Most banks recognise the need to change but all too often their over-reliance on traditional legacy systems makes it hard for them to make meaningful progress. In the legacy world, any development would typically require a whole new suite of systems a new hardware environment and the skills needed to run and operate all that.
Banks know that there has to be a better way. They are increasingly looking to build an environment that enables them to develop the agile applications that allow them to innovate in the future. That simple belief and desire is one key driver of change. But they are also being pushed in that direction by the complex pressures they face.
Retail banks are being driven to increase bandwidth to deliver the connected, personalised experiences today’s consumers yearn for. They need to simplify their business and operating models to enhance customer service and structurally reduce cost, while also extending their global reach. At the same time, they need the ability to unlock and analyse data, not just to increase agility, but to inform strategy, launch new services quicker and aid decision making.
Building a more agile environment
So, what’s the solution for retail banks? How can they build a flexible but resilient IT environment that will allow them to compete effectively in the rapidly changing markets they are now confronted with? Accepting the status quo is no longer an option.
They will need to strengthen their focus on managing their data because in retail banking, data is the new gold and harnessing its value should be a priority. It is crucial to a diverse range of activities from everyday account management, to verifying user identities, displaying balances and analysing spending habits. To become agile, banks are reviewing what data they hold, where it is stored and how they can apply analytics to mine it for insights and deliver new services.
The challenge for these banks is that the data they hold today is often siloed and difficult to access and leverage. They therefore need to find a way of improving the speed of data collection and analysis. At the same time, however, much of the data banks hold, especially that related to user identities and spending habits is sensitive and private – and it is hard for banks to balance compliance and security requirements against the need to improve the speed of data collection and analysis.
To meet their needs, cloud, with its ability to deliver scalability; advanced data management and enhanced security, will need to be part of the mix. But a cloud-only approach is not necessarily the answer. While cloud-native strategies may have proven to be successful in mature fintech markets such as Asia, incumbent banks have their legacy environments, often built up over many years, to think about. Also, with cost a key consideration, it is important that they don’t invest in areas of innovation that subsequently fail to deliver the competitive edge needed.
A hybrid approach
To future-proof their business, retail banks need an IT infrastructure that facilitates fast and seamless connectivity between the cloud and internet service providers, enabling them to ingest and process data at speed and maintain competitive advantage. A hybrid approach is likely to prove the dominant choice, consisting of a mix of colocation and cloud.
By hosting their IT infrastructure in a colocation data centre, retail banks can benefit from enhanced agility and flexibility while also leveraging fast and secure interconnections to cloud services, enabling them to control the migration process, keep on top of regulatory demands and keep a lid on costs.
More importantly, by deploying a combination of cloud and colocation strategies, banks can create a resilient and secure foundation for growth. This will enable them to flex and scale operations when building new services and innovations to meet future demand, while also ensuring they provide their customers with a responsive and high-performing service. And by choosing a colocation facility in close proximity, banks can benefit from reduced latency and faster data processing to enable real-time big data analysis. In the future of banking, we confidently predict the hybrid approach will prove the dominant choice.