Banks are sitting on a burning platform and its time to jump off.
The financial services industry is in a period of fundamental change forced by the rise of fintechs, changing regulatory demands, and the inability to offer modern functionality due to the burden of legacy systems.
The damaging impact of this could result in up to 35% of banking industry profitability being disrupted by fintechs alone, according to IBM research.
Companies such as Workfront have forced the likes of Charles Schwab, an U.S investment firm, to drive down prices, however, it’s not all bad news because if banks fully embrace digital transformation programs then they could drive more than a 45% increase in profitability, at least 30% of which would come from improved productivity, efficiency, and cost.
Firstly there is the idea of being able to serve the customer better, something which many of the large retail banks have made some move towards.
Ideally banks would be able to provide a single view of the customer across all of the services and products that are being used, but that isn’t being achieved.
Likhit Wagle, Global Industry Leader, Banking and Financial Markets, IBM Global Business Services, told CBR: “It’s very expensive to do because of the way banks are set up in terms of legacy where you have lots of siloed organisations, lots of banks coming up through acquisitions, they’ve got zillions of data warehouses – they’ve never consolidated any of this.
“So if you’re a very large bank and starting from scratch it’s not something that is entirely straight forward and the view has always been do I really need to do it. There’s hasn’t been much of a burning platform until recently.”
That has changed, there is a burning platform and the sharks are circling underneath.
Banks have to change and if they want to see things like a 45% increase in profitability then they will need to look at technology.
This is where the idea of the cognitive bank comes in. IBM is one of the companies pushing this notion of a bank’s systems and processes being more intelligent, mainly with the help of Watson.
IBM Watson, the cognitive system that the company has been trying out in a number of different areas such as healthcare, finance, and even jeopardy, has a potentially important function in the area of compliance.
The problem is essentially regulations, they are constantly changing and most of it comes in an unstructured form that financial organisations have to go through manually in order to find out what their obligations are, before then translating those into the implications for all of their products, services, and advisory obligations.
To put some context to the problem, a bank like HSBC employs around 40,000 people and 10% of its global workforce is exclusively involved in this activity. This means that a lot of expense and man time is tied up doing a job which provides no competitive differentiation.
IBM’s solution has been to run proof of concepts with banks in the U.S to take the Watson technology and pass the information through it.
Although human intervention is still needed at the end of the analysis to determine what is really important and what is not, it is a fraction of the effort that is manually required right now.
“It’s much more value added intervention that is really taking advantage of human experience and human skill as opposed to a lot of very mundane going through reams and reams of paper. A lot of things that graduate lawyers are doing the grunt work, all of that is no longer necessary,” said Wagle.
The outcome is that a job which would take humans three or four days to do is reduced to three or four minutes.
Although Wagle can’t envisage a situation where technology is relied upon completely he says that what they are trying to do is take the low value added, time intensive job and convert it into something that can be done through cognitive capabilities.
While this sounds like a great deployment of technology it isn’t as simple as it sounds.