By Prakash Pattni, Managing Director of Digital Transformation, IBM Cloud for Financial Services
Businesses worldwide are navigating a sea of uncertainty against the headwinds of high inflation, rising costs, skill shortages and growing security threats. Established financial institutions, which sit at the epicentre of this economic turbulence, are also dealing with growing pressures on revenues, intensifying competition from digital rivals, rising expectations from consumers for hyper-personalised services, as well as requirements around sustainability progress.
Yet, banks also have huge opportunities to steer through these choppy waters and reach more fertile ground—if they can achieve a deeper level of technological modernisation. Banks that invest in this now stand a greater chance of emerging on the other side with competitive advantages such as expanded ecosystems and accelerated partnerships with fintechs (financial technology firms), strengthened cyber-security defences and meaningful progress on sustainability goals.
Embracing modernisation to enable transformation
But what does the next level of modernisation look like for banks?
The financial-services industry is moving towards digital-platform business models, a shift driven by technological advances, changing consumer preferences and the need to stay competitive in a fast-moving marketplace. Banks that become digital platforms that are fully integrated with their wider ecosystems will access faster innovation and new revenue possibilities, which together will help increase efficiency and enhance the customer experience.
To achieve this goal, banks are now paying more attention to modernising their core systems in their mid- and backends, following an initial wave of cloud migration and digitising the consumer-facing frontends of their businesses. To deepen modernisation at the core, banks need an IT (information technology) model that allows them to remain compliant with the highest security standards and regulations while innovating faster. That means building digital infrastructure based on the needs of the business—and where it makes the most sense to host data and applications.
Banks that are getting ahead on this journey are adopting hybrid, multi-cloud models that use a mix of mainframe and cloud platforms, allowing interoperability between different cloud providers—a key regulatory requirement in markets such as the United Kingdom—and between different cloud and on-premise environments. Using industry-specific clouds is also an important part of this mix, as cloud platforms designed with built-in compliance and security controls can ensure a bank’s most sensitive data is both protected and compliant with local regulations.
Through modern hybrid, multi-cloud platforms, banks can also draw upon technologies that have the biggest impacts on reducing costs and increasing productivity—such as intelligent automation—as well as AI (artificial intelligence)-powered capabilities that allow for hyper-personalised customer services.
Financial institutions that achieve advanced levels of modernisation stand to reap major competitive advantages. There are three main areas—all high on the agenda—through which banks could acquire tangible benefits.
Accelerating fintech partnerships and ecosystem expansion
The first area is quickly removing any obstacles to partnering with fintechs, which is crucial for banks to dial up their pace of innovation. This is especially important as competition from neobanks intensifies. Recurring surveys, such as the one conducted by the UK’s Competition and Markets Authority1, consistently underline the importance of both traditional and digital banks keeping up with digital-first customer expectations.
Tapping into clouds designed for the financial-services sector plays an important role in oiling the wheels of bank-fintech partnerships, as they can remove friction around regulatory and security requirements, which can stall collaboration. The time it takes a bank to onboard a fintech can be up to 18 to 24 months, but if the fintech in question is fully validated for the industry cloud platform the bank is using, this can be cut to mere weeks. The result: a flourishing industry ecosystem enabling banks to access innovation and create new offerings faster and more efficiently.
Strengthening cyber-security defences
According to the latest IBM research2, financial organisations globally incurred the second-highest costs from data breaches, averaging $5.97 million, after healthcare. Fortunately, with the greater modernisation of their technology infrastructures, banks can reduce their exposure to risks and lessen the impacts of successful breaches.
Adopting a hybrid cloud model and designing security to create a unified view across IT environments can lower risks, allowing organisations to better understand threats across their entire IT estates and lessen complexities. As banks increasingly look to partner with third and fourth parties, mitigating these risks becomes even more important. This is where industry cloud platforms come in, helping to de-risk digital supply chains through their enterprise-grade security standards and protecting banks and the vendors with which they transact.
Additionally, banks can take advantage of security software powered by AI and automation through their hybrid cloud platforms, which have been proven to reduce the costs of a data breach by around $3 million when fully deployed.2 Banks can also use the latest mainframe technology to leverage powerful new AI capabilities to detect and stop fraud attempts in real-time. But it’s not just today’s threats on which banks must focus. To protect their encrypted data from being stolen today and decrypted by quantum computers of the future, modern mainframes3 can also provide the latest quantum-safe security protection.
Driving progress towards ESG goals
This year, we’ll see financial institutions doubling down on environmental, social and governance (ESG) commitments and taking action. A recent IBM IBV (Institute for Business Value) study showed that 48 percent of chief executive officers across industries said sustainability would be one of their company’s highest priorities in the next two to three years. Yet, 51 percent also stated that sustainability would be among their greatest challenges in the same timeframe, with technology barriers among the key issues.
The good news is that modern IT infrastructure now offers businesses a tangible route to achieving their sustainability goals. A new generation of servers4 can reduce energy consumption and carbon emissions significantly, while AI-powered tools accessible via the cloud can help businesses track and measure sustainability metrics on a granular level.
At the same time, modern cloud technology is making it easier for financial institutions to collaborate with fintechs providing innovations that allow banks to offer new, sustainable products and services for customers. The UK-based fintech Yayzy is one such example. Through the bank-level security standards and scalability of IBM Cloud, Yayzy is able to deliver API (application programming interface)-driven technology for banks to integrate within their mobile apps, enabling carbon-footprint tracking for customers based on their spending as well as sustainable alternative suggestions for footprint reduction and carbon offsetting.
A year of change
Now more than ever, financial institutions must focus on creating new ways to make money while staying ahead of customer expectations, remaining secure and being positive forces for sustainability. Achieving this list against a backdrop of growing regulatory and compliance requirements, technical issues around integration and complexities involved with balancing multiple stakeholder interests is a formidable challenge.
Increasing investment in deeper modernisation offers the best route for banks to enhance their competitiveness in an environment in which shifting customer expectations and an evolving threat landscape are daily realities. Managing a transformative agenda during 2023 will, therefore, require expert help and support. To remain competitive, the financial-services sector will need to seek out technology partners with the tools, expertise and industry experience needed to navigate today’s storms in readiness for a bright future.
1 Gov.UK: “Customer survey ranks banks amid cost of living crisis,” Competition and Markets Authority, August 15, 2022.
2 IBM: “Cost of a data breach 2022: A million-dollar race to detect and respond.”
3 IBM: “IBM® z16™ technology is built to build.”
4 IBM: “IBM LinuxONE Emperor 4.”