The increasingly rapid movement of technology out of back offices and into the hands of most of the world’s population has profound effects. Even though the pandemic is widely credited with accelerating digital uptake, the full progression is really just beginning to shift from linear to exponential.
As bank technology consultant Shanker Ramamurthy likes to point out, most of the world’s population now walks around with “trillion-dollar” computers in their pockets.
Ramamurthy is Global Managing Partner, Banking for IBM’s Global Business Services group, the giant tech company’s banking and consulting practice. 15 years in total with IBM, and 12 as a PwC banking consultant gives him a broad perspective.
Adding to that, IBM itself has been humbled by the same forces of digital transformation impacting the businesses it serves. The difficult experience of reinventing its business model a few decades ago has given IBM’s consulting arm keen insight into what financial institutions find themselves deeply embroiled in.
The Financial Brand interviewed Ramamurthy about the most significant tech-related developments banks and credit unions face. The consultant identified several key areas, grouped under four broad themes.
Tech Trend 1: The Rapid Advance in Cloud Computing and Artificial Intelligence
What are the top technology issues retail banking executives should prioritize?
Shanker Ramamurthy: Clearly digitization on the back of cloud computing and artificial intelligence (AI) is a key focus. Also blockchain.
For the foreseeable future, banking will operate in a hybrid, multi-cloud world. Most financial institutions are in the process of transitioning parts of their workload from their data centers into a private cloud and into multiple public clouds. [The private clouds are operated within the institution, while the public clouds are offered by suppliers like Amazon Web Services, and, more recently, IBM.]
Only about 20% of the migration has already happened, typically for less-regulated workflows. The rest will happen incrementally, driven by business value.
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What timeframe do you see for the rest of the migration to cloud?
Ramamurthy: The rate and pace are picking up, but the big issue — externally — is with security and privacy regulations. Internally the big roadblock is making the business case for cloud migration. It can’t just be what we call “lift and shift” — taking stuff that runs in the data center and moving it to the cloud. It requires transforming the business process. Given that a typical large or midsize bank has hundreds of millions of lines of code to be migrated, it will be a years-long transformation.
Key to Success:
The more financial institutions invest in business process transformation, the greater their return will be from moving to the cloud.
Is IBM’s partnership with Bank of America to create a public cloud for financial services just for the largest banks?
Ramamurthy: No. It’s meant for a much broader range of financial institutions. Large and small banks and credit unions use hundreds of independent software vendors, and ensuring that those vendors are compliant is vital.
What we’re doing with Bank of America is building a regulatory-compliant public cloud. Then multiple financial institutions will be able to use them.
Would the service include traditional bank core processors?
Ramamurthy: It will include traditional core processors, for sure.
What’s the front-office potential for banks and credit unions from use of AI?
Ramamurthy: It’s massively large. AI is going to have a transformative role to play not only in retail banking, but in every industry.
In retail banking, one of the biggest impacts will be with digital agents. These AI-powered agents, or bots, will handle the multi-channel banking world of today and tomorrow. They will also materially increase the productivity of human call center agents, because the bot will be able to handle 80% to 90% of the calls.
Risk management is another huge area of AI impact, particularly for fraud intervention as banks and credit unions move towards real-time payments.
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Tech Trend 2: Turning Today’s Bank Technology on Its Head
What’s the significance to retail banking of “transforming the business process”?
Ramamurthy: You can think of today’s bank technology — much of which is decades old — as a pyramid. 70% to 80% of all the bank tech spend is for middle and back-office operations. Maybe 20% is spent on the front end, what we call the customer-oriented, multi-channel ecosystem.
Tomorrow’s banking is going to upend that pyramid. Cloud and AI together will enable a dramatic reinvention of banking so that more and more of what happens is customer-facing — i.e. bringing technology to bear on consumers’ financial needs.
If you just do an ‘outside-in’ transformation – setting up cool front-end features using APIs – the back-office complexity will cripple you longer term.
Has anyone made significant progress in that type of massive transformation?
Ramamurthy: The larger U.S. banks have a lot more invested in older automation. So they have a much more difficult transition. But they’re making measured progress down that path.
For regional and midsize institutions, on the one hand they are able to move much more nimbly and quickly. On the other hand, they have smaller amounts of capital to invest.
A Simple Truth:
The sophistication of what consumers expect is the same, whether they are a customer of a small bank or a large bank … or a fintech.
Some financial institutions that have been standing up entirely new brands — Goldman Sachs and Marcus, for example — have the luxury of being able to start from a much more integrated perspective.
Tech Trend 3: Blockchain – Still ‘Linear,’ But on the Move
How do you see blockchain technology impacting banking in the next year and beyond?
Ramamurthy: Blockchain is a technology that will have a transformative impact, but in the short term, it’s taken off more slowly than anyone expected. There is much happening in banking with blockchain, but it’s looking like a linear change. But the disruptive, transformative nature of what people call “DeFi” — distributed finance — is just starting to hit its stride from an S-curve standpoint.
In addition, the OCC’s stablecoin interpretive letter will alter the rate and pace at which changes happen to core and payment systems in U.S. banking.
The step change is really going to happen in the next few years with both distributed finance and blockchain tokenization. Everything is going to get tokenized. That might be three to five years out.
Blockchain is an example of exponential technology, it’s very hard to see the difference between linear and exponential in the early years. But in the “out” years, the change becomes very stark.
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Tech Trend 4: ‘Extreme Digitization’ and Exponential Change
What is the significance to banking of moving from linear to exponential technology change?
Ramamurthy: Up until now, the goal of many financial institutions has been, in effect, to see how much of their manual processes can be automated and digitized. Tomorrow’s world turns that approach on its head. It starts from the premise that pretty much everything is able to be digitized and so then the thinking becomes, “What are the exceptions where I need a human to intervene to provide value?” In other words, financial institutions will “design for no operations“. We like to call that “extreme digitization.”
Keep in mind, since 1969 we’ve had something like a two to the power of 32 increase in computing capability for the same dollar. When everyone is walking around with a trillion-dollar computer in their pockets we’ve entered what the tech community calls the second half of the chessboard — when exponential growth occurs. That’s where we are.
Amazing things will start happening with AI, machine learning, blockchain and much more, and it’s really exciting for the banking industry. But also challenging.
There will be more value created and destroyed over the next decade than in all previous decades put together. You’ve already started to see that in financial services.
At $330 billion, PayPal is the third most valuable financial services entity in the U.S., after Visa and JPMorgan Chase. And Square, at about $130 billion, is catching up.
Companies like PayPal — and all fintechs — started with disruptive, exponential digital-first models. And so the rate and pace at which they scale is something to behold. Traditional financial institutions on the other hand started their transformation from a distributed — branch-based — retail banking model and are trying to package digitization on top of that — which is far more difficult.