Fintech: Creaky core systems. Challengers at the gates. Regulation everywhere. How can banks upgrade for the future without breaking the bank?
The banking industry is considered fertile ground for the consultancy industry.
This is because it is faced with challenges that range from continuing crisis fallout, ageing infrastructure and challenger banks emerging in every geographic and business domain.
Michael Steinharter, is VP and GM for Banking and Capital Markets at services firm CSC. The company issued a report as part of its fintech engagement strategy. The report is called: Redress the Balance, How can IT leaders stop spending too much on ‘Running the Bank’ and start spending on ‘Changing the Bank’?
Mr Steinharter and Mr V. Balasubramanian, CTO Banking & Capital Markets at CSC were in London recently and we discussed the current and future state of banking.
What are the top technology issues in banking? The top issues in banking are governance, risk and compliance. Add to that the competitive battleground in customer experience because power has changed hands to the consumer from the bank.
Mr Steinharter says: "You [the bank] need to be where your customer is. Payments disruption is in early stages of maturity but it is remarkable watching what Google Apple and Paypal are doing."
This all points to the need for greater efficiency. Efficiency is not a strategy but is a result of the pressures being put on the industry.
"The banks have never had to strive for the kinds of efficiency that they must try to achieve today. Banks with cost income ratios that are in the 60s and are in a panic to get to the 40s. In some parts of the world banks are in the 40s. Australian banks and some of the Nordic banks are in good shape as are some of the Spanish banks. But even here they are in a panic to get a cost income ration into the 30s because they are thinking: "One day I’ll have to compete with Google," he says.
This is important in IT terms because by some calculations all the compute power of the biggest banks in the world would fit in the corner of one of google’s mega data centres.
Steinharter says: "It could be managed by 10% of the people who currently manage the IT at particular banks."
"The overriding challenge is the ratio of how much they are spending on running the bank versus how much they are spending on changing the bank."
The pressure that banks are facing are around customer experience and the need to find customers and start serving them well.
This quickly becomes an IT conversation because it requires investment in the system. Its creaky old core systems may not be capable of providing multi-channel access and social media based services. For many banks, the systems have been set up in silos over many years.
This question being posed is: "How do you do serve the customers in required way if you are spending 60-70% on running the bank?"
The answer, says Steinharter is by reducing cost to income you can use that to fund the necessary changes.
"A simple but effective strategy but one that can be hard to execute given the existing infrastructure," he says.
How can banks become more efficient with infrastructure? The problem is complex because it isn’t just moving money from one pocket to another. "You have to do it while reducing the total spend," says Steinharter.
He gives the following example. Today’s spend is 100 quid split two thirds and one third. That 100 is getting reduced to 60 or 70. And if you follow that traditional split of two thirds and one third you have very little with which to change the bank with the necessary innovation to keep up with the upstarts.
"So bank IT leaders are getting squeezed from both ends and that’s a conundrum for a lot of people," he says.
See next page for more on why banks risk failing if they don’t control capital costs