How fast and how seamlessly a bank can facilitate those desires are key. But it’s fair to say they’ve struggled. As chief data and transformation officer at Singapore’s DBS bank, Paul Cobban, once overheard a taxi driver observe: “DBS? – you mean damn bloody slow”. Ghose was one of a series of analysts who sought to address how such banks could future-proof their businesses in last year’s Citi Global Perspectives & Solutions Bank Of The Future report. It looked at how traditional banks could use new technology and business models to improve the client experience and, hopefully, make them more profitable. The report’s analysts identified what they called the ‘ABCs of digital disruption’. In this lexicon for change, the first entry was ‘A for artificial intelligence (AI) and automation’. The financial sector was one of the leading early adopters of AI, which promises to reduce payment processing times, cut costs and boost efficiency. But for the intelligent software to work effectively, it needs massive data sets to ‘learn’ from. “Banks are all about data. That’s the heart of banking,” says Ghose. However, the problem for traditional banks is that much of this data is siloed and inaccessible due to both regulatory constraints and decades-old mainframe technology, which is product-based rather than customer-focussed. Challengers, on the other hand, can acquire, sort and store big data from the very start of the onboarding process.
AI in payment processing Spanish bank BBVA has successfully addressed this discrepancy by putting data at the heart of its modernisation programme. By the end of 2017, 92 per cent of its entire product and service offering was available on its mobile app, allowing it to learn about its customers’ specific needs across the group. This data could then be used to offer AI-driven solutions, such as categorising purchases to aid budgeting, to help make its customers’ financial lives simpler and easier to manage. Although it is worth noting that other banks often cited as being at the forefront of digital transformation are typically single-country focussed, or run along simple business lines, such as Capital One. AI and automation also have the www.fintech.finance
potential to reduce payment processing times and speed up product cycles while simultaneously boosting operational efficiency, particularly in labour-intensive areas such as compliance. It is useful in fraud detection, too. Traditional systems may consider a range of variables, including location, amount and merchant type in determining fraudulent transactions, but they can lead to false positives. AI can reduce this number of false positives by between 60 and 80 per cent, according to studies by Citi Global Banks Research. B in the ABCs of digital disruption stands for ‘big tech’ (not blockchain – Ghose believes ‘actual transformation’ through distributed ledger technology is some way off ’). The big in this instance refers to established global giants such as Facebook, Alibaba and Amazon. Many incumbent banks struggling with innovation and speed have sought to ‘buy innovation’ by teaming up with new entrants such as fintechs. But the real threat today comes from the big tech players, which often have an existing scale and client reach that matches, or even surpasses, those of the banks themselves. Web-based platform companies, aided by favourable government policies and a growing middle class, are beginning to make their mark in the payments sector – particularly in emerging markets like China. However, their endgame is less about disrupting the financial system and more about seeking to be all things to all people as part of a broader, holistic customer engagement drive. Tencent’s WeChat social messaging app, which has more than a billion active monthly users and also offers payments services, is a prime example. As such, incumbents would benefit from examining and learning from the business models of big tech firms, ‘particularly the idea of platform companies, and putting the client, not the product, at the heart of everything you do’, says Ghose. But if banks really want to use AI, or big data, and become more like the big tech companies, they have to rely on C: ‘core banking, the Cloud and challengers’. “If you want to be more like the big tech companies, you have to transform
your core banking services, because that’s the underlying foundation on which most of banking sits,” says Ghose, referring to the often 50-year-old legacy systems of many incumbents. The Bank Of The Future report forecast that core infrastructure overhauls were likely to become more common as integration of older systems became too expensive. Faced with increased competition, evolving customer expectations and greater regulatory burdens, incumbents will need to address system limitations to successfully compete with new entrants and boost profitability, it added. US and Australian banks, which were less hindered by the fall-out of the financial crisis than their European equivalents, have led the way in doing this. But as the financial ecosystem is becoming increasingly integrated, thanks largely to technological innovations and the influence of big tech players, banks are no longer guaranteed their spot at the top of a disrupted system. This is particularly the case in markets such as India, where WhatsApp is seeking to capitalise on its 210 million monthly users with the launch of a digital payments feature. To stay relevant in the fast-changing financial services sector, incumbent banks will need to become faster, smarter and more efficient, and achieving this will involve learning from new entrants such as challenger banks and big tech companies, argues Ghose. Not only will more traditional financial institutions have to update their core infrastructure, they will also need to learn vital lessons on business model, company culture and organisational structure from their rivals. Change is possible. DBS is now a prime example of a bank that made a successful, not to mention profitable, digital transformation. So much so, it was named Best Bank in the World in Global Finance World’s Best Global Banks Awards 2018. Euromoney also awarded it World’s Best Digital Bank and World’s Best SME Bank. Technology is all about making lives easier and banks need to transform services from the bottom up to stay relevant in the digital age, says Ghose. It’s no use staring at the screen until the picture clears.
If you want to be more like the big tech companies, you have to transform your core banking services
Issue 2 | ThePayTechMagazin
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