Only a year ago anyone wanting to set up a meeting on BitCoin with a major bank would have received a hand colder than the absolute subzero freezing point. Today not only banks but also venture capitalists and entrepreneurs are flocking around the pound like Canadian gooses, loudly advocating their presence and showing off their feathers.
And feathers it is, still. Very few can yet claim to have produced commercially viable code that constitute the desired distributed ledger protocol called blockchain, other than for pure BitCoin transactions. San Francisco based FX platforms Ripple and Kraken are two early adopters. But BitCoin as a means of yet another currency is not the main reason why banks suddenly have become interested in blockchain technology.
Banks struggle with brand and with customer perception, often measured as the Net Promoter Score, Customer Satisfaction Index or Customer Value Management, finding them self at the very bottom of industries. Banks are associated with being slow, being difficult to get in contact with and offering non-transparent and overly complexed products and processes. They are deemed old-fashioned and most banks recon they need a fresh look. Hence, notably amongst other actions taken, an interest in new innovative and customer-friendly technologies beyond recent year’s basics of building self-service mobile apps for customers.
The basics have been accomplished
The visual fronts of most banks has been updated with increasingly user-friendly interfaces. In addition, branch offices no longer look like the well-used office of a city college and staff is being told and trained to be service-minded. The graphic profiles and marketing promotional materials has received as many overhauls as there has been agencies involved. Web pages has seen a similar overhaul and self-service apps has been introduced over the last couple of years as the banks new (mobile) customer interface.
Digital is another word for automation; i.e. customized yet fast, transparent and efficient through-put processes. Unfortunately, none of those being core to banks that almost without exception have non-interconnected internal IT-subsystems, cumbersome credit processes and extensive manual labor of century old products that has been tampered with over the years and hence has become increasingly difficult to understand and maintain also to many bankers. Banks excel at physical client relationship engagements, structured transactions, treasury operations and credit management.
A tremendous amount of effort is currently put in place to modernize incumbent and largely non-flexible IT-systems. US-based JP Morgan Chase, German based Deutsche Bank, Swiss based UBS and Swedish based Nordea and SEB are only a few examples of such banks. Initially being the task of the IT departments and now increasingly involving the entire banks. Partly with the objective to support this transformation, product strategies are also reviewed with the aim to materially increase standardization and hence simplify customer offerings as well as internal operations and IT.
Most banks are now gradually becoming ready to take the next step in developing their digital business model, beyond the surfaces of repainting, beyond basic technologies like self-service apps and alongside modernization of IT and staffs service training. Ready meaning from a perspective of an increasing urgency to react to customer, employee and investor pressure to offer fresher, faster, easier and cheaper services. Ready also from the perspective of gradually available scares resources in specialized project management, product specialists, coding and testing.
Merchants and consumer payments
Credit card wallets are being developed, not least because MasterCard and Visa has decided so. The close to cash less society with heavy use of debit and credit cards also for minor purchases is particularly true in Scandinavia hence an interest to test wallet application to simplify amongst others the online purchasing process. Think PayPal were you store your credit card details, invoice and delivery address and only need to verify a purchase with a mail address and a pin-code, but now it’s gone be a biometric fingerprint.
In the US and the UK on the other hand cash bills are still common and hence opens the market for new entrants like Apple Pay and Samsung Pay that will allow customers to use their credit card with their cell phones. While stil incrasing the network of new card readers these latest generations of card readers include Near Field Communication technology (NFC), that is core to Apple Pay and Samsung Pay. The experience will be similar to MasterCards and Visas online wallets, communicating with the stores cash register using NFC-technology and signing off with a biometric fingerprint. The credit card industry and the smart phone industry will offer similar new and simplified way to execute consumer payments.
A bit further down the road banks are expected to offer ancillary payment services to add value and hence retain customers. Competition will increase within the corporate segment where billing, coverage, recovery and payments are a hazard today with the need to enter different supplier software to perform administration. With high probability companies like Microsoft and VISMA will start compete directly with banks in terms of own billing and payment solutions and later even with own credit scoring offers backed with securitized bonds. With equally high probability other entirely new companies will also enter the billing, payment and working capital market for corporates.
The savings propositions
The saving business is another area where nearby technology leaps can be expected. The primary driver being new MiFID regulations in Europe leading to considerable standardization of products and services to be offered. The secondary driver being current low-interest rate environment forcing banks to rationalize products and processes hence saving costs and possibly attract market shares with more attractive customer experiences and processes.
The new MiFID regulation that enters into force January 2017 include massive qualification and documentation requirements on banks doing financial advisory. The aim of the regulators is to make the saving industry more transparent and more consumer friendly than before. Given the increased cost of service banks reaction is to standardize the saving advisory business and its products and processes because cost will only allow traditional tailor-made, personal advisory services and multiple asset classes to high-end private banking clients.
Standardizing the saving products and advisory processes, walking away from traditional tailor-made financial advisory for each customer is not at all that defensive as it appears at first glance. To a majority of customers, financial advisory is close to rocket science. Incomprehensible. At best the advice of the personal banker is taken on face but rarely followed up with monitoring and actively managing the savings instruments purchased. Creating a few generation funds, e.g. a specific fund for individuals born in the 1950’s and another fund for those born in the 1960’s is a huge step towards standardization and simplification for customers, to have their actively managed mid- to long-term saving portfolios, the generation fund, while at the same time allowing for the banks to radically automate not only the front-end advisory tools, including self-service advisory apps, but also the straight through investment execution and eventually the fund management processes.
With a bit longer time horizon banks can be expected to digitalize not only the customer interface and the advisory tools as a consequence of product standardization and a request for simplified and more user-friendly advisory services, but also the underlying fund management business. Like algorithm robot-trades has replaced the stock broker business of the 1980’s and 1990’s, algorithm robots will soon manage mid- and long-term fund management. Competences in the fund management industry will remain similar in terms of macro-analysis and investment strategy but the way to execute this through algorithm operation will dramatically change the fund management industry in the same way the stock broker business changed.
The lending business
Consumer credits already use automated scoring models that make more than 90% of the credit decisions and credit pricing upon public data against pre-determined metrics. The remaining credit applications falling outside the pre-determined criteria are either rejected or manually processed for possible exceptions.
The next step in the evolutionary process is corporate credits, a business much more sensitive to bankers with deep routes of tradition, huge staffing and internal organizational structures and with histories of individual credit failures from time to time. Digitalization is already ongoing, in particular with regards to the credit process that involve data gathering, decision making material and storage/reuse for future annual prolongations. Lead times in credit processing are being massively reduced with the positive side effect and question of how to engage corporate credit sales people, analysts and administrators –acquisition of market shares or staff reductions?
The future step in corporate credit digitalization is scoring models, like in consumer lending. Analytically, technically and from a portfolio management point of view it is not that difficult for a majority of the number of corporate credits. However, it will be a massive challenge to current tradition, banking DNA and corporate culture. It concern powerful lines of work within any bank, challenge almost every previous carrier made by today’s senior-most decision makers and expose Boards and Credit Committees to their knowhow on digitalization, scoring and portfolio management (as opposed to pointing single credit failures towards single client executives).
The debt capital market
The debt capital market (DCM) is at core of high profile investment banking with well-payed client executives, sales and origination staff equaling the 1980’s stock broker era, working with equally high-profile blue-ship corporate clients. Transacting and originating a corporate bond takes the fair amount of a quarter of a year, a little less if excluding the client decision process. Documentation is tailor-made by exclusive law firms and marketing and pricing is a process highly dependent upon experienced and well connected individual bankers.
Tradition is present and few if any of the investment bankers, or for that matter the treasury staffs at the corporate clients, have an interest in rationalizing them self. To senior decision-makers the product is complexed and although important it is not that important compared to other business lines, hence the pressure for change will remain limited for still some years ahead. At least in the mid-term unless external pressure is being built by new much more digital players building advanced and integrated scoring, guarantee, settlement and secondary-market trading platforms.
Possible near-time new business opportunities can rather be find within the mid-cap corporate market. If documentation is standardized and if banks would offer investor meeting day’s with, say, 20 issuing mid-cap companies, to allow for investors to cost-efficiently cover their bond investments. Again, making this happen is not that difficult but it requires a more retail-style way of working which is not really what well-payed investment bankers is currently looking for.
Trade Finance and FX
Trade finance and FX has gone deeply sour in terms of profit pools compared with the glory days only a few years ago. Substantially increased capital and liquidity requirements is a main reason, but also alternative competing solutions challenge the once so profitable businesses.
Exporting companies have for long been looking for alternative trade finance solutions that simplify trade and export finance. Today’s process to agree and obtain export letter of credits is a highly manual process at the bank-end, taking day’s and sometimes weeks to organize and settle. Once that is done however, most banks offer quite efficient online trade finance solutions but only for administration of various letters of credits and export and import payments.
Startups like Stockholm based Mitigram challenge the banks with new platforms for financial institutions and corporates that speed up the trade finance pricing process. Other startups like already mentioned Ripple and Kraken but also Stockholm based Cryex work on digital settlement platforms for FX transactions trying to bypass traditional interbank structures.
Most likely banks will focus on modernizing existing IT-platforms enabling for their increasingly massive burden of reporting and monitoring, and only at a later stage look into new digital business models for trade finance and FX. The trade finance and FX products are needed for important clients but the transactions themselves are no longer the big profit pools they used to be, hence sliding in priority in terms of business development and digitalization resources.
Customer relationship management
Surprisingly many large banks lack up to date sales support systems with even basic relationship management tools. One of several explanations lie in the fact that most client executives are far from tech savvy but rather long-term bankers with core competences of executing meetings and building relationships with clients. Another explanation is that few client executives have worked for other employees than their current bank and by that have seen little or no tools used in other industries. A third explanation lies in corporate, merchant and investment banking cultures were corporate client executives to some extent have had an autonomous position. Few senior most decision makers in large banks “manage” client executive’s performance in the way that, for example, large consultancy firm manage their consultants, or industrial companies manage their blue-color workers.
Modern CRM systems like Salesforce, Microsoft Dynamics, Zoho or Nimble are not yet common with banks, although several of them are in concrete dialogues with each other. Like most IT at banks, the CRM systems are either legacy systems build in-house, or simply personal Microsoft Excel sheets. With increasing regulatory requirements on documentation and with steeper performance requirements banks are increasingly interested in updating dated CRM tools. Not only to measure and track leads and to evaluate client executives but also to explore the massive data available to them in order to support and customize sales and advisory efforts.
Operations, backbone IT and administration
A big challenge to banks is connecting customer applications to middle and back office processes. Straight through processes automation will not only improve customer experiences and substantially reduce time needed to transact, but also massively reduce the banks administration costs. Hence this is an area that most banks will target and give high priority despite initially not being as visible as many other digital initiatives.
Important processes like the mortgage loan process, the investment advisory process and the corporate credit process will be first in line for fine-tuning, standardization and further digitalization.
These transformation processes will in most cases be made quite slowly and step-by-step under careful supervision, although exceptions are being noticed like Deutsche Banks and Nordeas big-bang overhaul ambitions.
Banks internal legacy IT systems that distributed ledgers spokespersons threaten to replace are challenging to change by the banks from quite many perspectives. IT-architecture, or rather the lack of it, is a major challenge. Competence usually within the heads and hands of a few key employees is another major concern as is lack of documentation including traceability between inter-dependent IT-system. To name a few.
Most banks have old IT ledgers originating from the eras of Cobol in the 1960’s through 1980’s. On top of old coding languages these major IT ledgers has been graced with years of additional functionalities more or less tailor-made to an endless row of new product and process variations. The task to unwind and refresh these codes without jeopardizing ongoing businesses is possibly one on this decade’s most interesting challenges.
Adding to core IT challenges is a huge increase in demand for regulatory and business reports. Regulators decides to collect massive amounts of daily data that simply has not been available and now needs to be extracted, categorized and summoned in more or less real-time. From mentioned legacy IT. In addition, the business side of the banks increasingly request business data previously not asked for amid increasing performance requirements. Aligning business data, credit data and compliance data will be a third data challenge to be addressed if to be able to standardize and make data management effective.
Having said this notably these old IT ledgers do their job. They transact massive amounts of data, they are reliable and they are stable in terms of runtime and operation. That is one of the challenges. How much should be replaced?
Thank you for reading. Please feel free to like, comment, share, tweet, email, etc. Hopefully the Pareto principle, also known as the 80-20 rule, will apply. I.e. 80% agree and 20% will give a constructive challenge.