Banking Industry Status Q&A with Frank Sanchez

March 19, 2018         By: Michael Millington

What is the current status of the banking industry?

More than 62% of U.S. consumers currently use digital banking as their primary method of banking.1 Consumers have embraced digital banking and have come to expect a certain level of seamlessness when accessing their money.

Banks are now at the dawn of Intelligent digital banking.  The industry has already moved beyond simple transactional banking which began with the Internet and extended through mobile banking as the newest way to bank anywhere, anytime, on any device.  

Intelligent digital banking expands on the promise of digital banking.  Many banks currently associate digital banking with mobile devices. And to an extent that is correct, and consumers are empowered and enabled through the self-service features digital channels offer. However, the potential is far greater.

Intelligent digital banking moves beyond self directed transacting on the browser and the mobile device.  It transcends expedited services like remote deposit capture (RDC). Intelligent banking foretells a day where customers can live their lives with confidence that their bank will anticipate and fulfill their requirements based on real-time monitoring of their needs, understanding of the options, then selecting and executing the best option under the circumstances.  If this sounds familiar, it is how industry disruptors see the world, and the services they provide are setting the benchmark for customer expectations.

 

What is the driving force behind banks reevaluating their cores?
The reason banks must evaluate their core systems is because they are integral to the infrastructure that allows banks to evolve.  Business models increasingly rely on agility, on rapid deployment of innovative and differentiated services that target customer value.  If this can be done at low cost and low risk, banks will drive higher margins, which can in turn be used for more innovation, and more marketing.  Finally, the delivery platform must be able to do this with dynamic scaling options and minimal operational requirements and overhead.

Supporting intelligent digital banking ultimately requires a complete redesign of the core processing systems, or Systems Of Record (SOR).  Concepts like real time, big data, Internet Of Things (IOT), continuous availability, instant scalability, etc. are beyond the capability of legacy core processing systems.  As such banks are starting to recognize that their legacy systems were designed for a different banking era, and while they can be incrementally enhanced or wrapped with other applications, there is a limit to what can be achieved.

Laptops are a good analogy here.  Today our WIFI supports multiple simultaneous, high-def video streams.  We have terabit storage in the cloud supporting solid state storage on our laptops.  We have multiple high-resolution screens for editing pictures, videos, and even making video calls. Imagine if we had never upgraded our laptops beyond DOS?   Could DOS handle spreadsheets and word processing, absolutely. But could DOS handle gigabytes, real time video, or the bandwidth of today’s routers, absolutely not.   Similarly, banks can’t expect to run their digital channels, with AI, IOT, and big data on core systems that were designed in a different era and for a different purpose.

 

What do you see as the top trends that could impact the banking and payments industry in the near future?

The biggest trend we will see is an acceleration in banks launching new initiatives either under new or existing brands.  This trend is being driven on the one side by the need for banks to come to market faster, with greater innovation, and with less risk.  On the other side, the trend is being driven by customers who demand more Uber-like, Alexa-like, services that are constantly improving with value-add innovation.   

Most experts agree that banks spend over 50% of their time in the care and feeding of their current systems, launching new parallel bank initiatives will allow other banks to leap forward.  These new initiatives offer customers novel features enabled by AI, big data, and real-time bank-driven algorithms at the core level.

Intelligent digital banking could allow banks to offer services like predicting and managing customer cash flow and liquidity requirements. The intelligent feature may include automatically scheduling or deferring payments, just-in-time funds between asset categories, optimizing interest, dividends and fees, and determining credit options.   With a more modern technical platform including their core systems, banks will add value across their entire customer base.

 

How can banks prepare themselves for these trends and what’s next?

The best way to prepare for all this is to think ahead, then determine what elements must be in place to execute, what features need to exist.  Presumably technology modernization will be needed, and the business will ultimately migrate to the new platforms. Migrating customers and lines of business onto a platform that supports future AND current capabilities is the goal, decommissioning legacy systems and operations is a benefit.

Banks can get a jump on the process by creating a new initiative and committing to testing a new approach.  This means realizing that the playing field has changed, and while many vendors are stuck in the Windows era, it is time to transcend outdated systems with shiny new veneers and instead, embrace the cloud.

Starting with a proof of concept in the cloud means low cost and low risk in terms of time and money.  These efforts could scale into full-fledged offerings of their own and/or provide a proving ground to be the new platform for migrating data from less agile operations.  Either way, banks will have an innovation platform from which to evolve their business model in any direction.

 

Should banks fear disruption?

Banks have an opportunity to embrace change and disrupt themselves.  With the hindsight of industries that did not take action, banks know what they need to do.  But it is important for banks to embrace disruption as a fundamentally different way of doing business versus seeing disruption as something that needs to be managed.  

The music industry tried to manage disruption with technology barriers which were quickly eliminated by enterprising consumers.  In the end, consumers simply wanted songs on demand and the industry was stuck in an album paradigm.

The retail industry tried to manage disruption with new consumer experiences and cheaper pricing both of which are mutually exclusive. In the end, consumers have become better informed, want more options, and are willing to pay a bit more for convenience from a frenetic lifestyle.  As retailers close their doors, the online innovators are delivering better consumer experience – often at cheaper prices.

Disruption comes from realizing that the real need is not being able to buy one song at a time, but rather being able to listen any music, without having to buy it at all.  The new way of thinking is the service, not the song.

Disruption also comes from realizing customers don’t want a better retail experience.  They want to buy (or maybe just use) the best products, at the best price, when and where they want.  

And finally, disruption comes from realizing that customers do not want to bank.  They don’t want the best branch experience or the best banking advice or a new mobile experience.  They want to know they will have the freedom to live their lives, transacting as needed (within reason), without the risk or fear of not having the resources or real-time ability to do so.

Banks are at a new dawn of intelligent banking, protected by regulations, and entrusted by customers.  The time is now to embrace disruption as a radical departure from banking as we know it and a new business model that calls for a new approach to becoming the new center of their customer’s transactional lives.

 

  1. Bank of America Trends in Consumer Mobility Report 2016