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Much of what is spent on technology is swallowed up by compliance – a cost that increases for banks operating across many jurisdictions. As a result, they are under pressure to ensure what is left over is spent wisely, to ensure the investment delivers the maximum bang for their buck.Banks and the corporates they serve have always been keen to invest in technology. But the speed of regulatory change in the finance industry has become a key driver for their technology investments.
Banks’ increasing cost of capital has also encouraged investment to be directed at technology that helps them manage their assets and liabilities more efficiently. Regulation has encouraged banks to spend more on systems that increase transparency and accessibility in reporting, something many banks did not do to any great extent in the past.
“The introduction of Basel III has created a strong business case for banks to improve their liquidity management, by investing in systems,” says Uppili Srinivasan, COO at iGTB, a provider of transaction banking technology systems for banks.
Banks are committed to maintaining significant budgets for technology investment. Deutsche Bank, for example, plans to invest more than a cumulative €1 billion by 2020. But there are always choices to be made as they look to prioritise.
“Banks have limited resources to spend on technology so there needs to be a clear business case,” says Srinivasan. “And there is quite a strong correlation between the level of investment and the clarity around the business case and ability to measure the benefits.”
According to Stephen Greer and Jean-Marie Ubigau, banking analysts at Celent: “Core banking migration has historically been a high-risk proposition. For many, this has stalled any large IT investments and platform migrations.” Many feel the cost/benefit analysis of migration is not yet compelling enough to convince many CIOs that the time is right. “Market demands can still largely be supported, despite legacy cores,” they say.
In consumer technology, company behaviour is often driven by the desire to keep pace with competition. For banks it is a little different. “If one bank modernises its payments system you probably wouldn’t see the same scramble of others doing the same,” says Srinivasan. “But in the digital space they do watch the competition because a modern digital offering directly impacts end customer experience and brand perception.”
Rick Striano, head of platforms and investments for trade finance and cash management corporates at Deutsche Bank, says the key drivers influencing banks’ technology policy are what the clients want, what the regulators want and what shareholders want. “Finding the right balance is critical to sustainability, and sometimes the importance of the last group is overlooked,” he says.
“When a bank decides to invest in technology it considers what competitors are doing in the context of products and solutions, but when it comes to technology investments in infrastructure it’s all about addressing one’s specific needs based on their unique architecture, in the context of generating an appropriate return for shareholders. The investment needs to make financial sense.”
Technology should integrate the client further into the bank. Building self-service capabilities such as the ability to access real-time information or research transactions reduces the need for staff and therefore cuts costs. That end-to-end automation increases client satisfaction
Srinivasan breaks the business case for banks investing in technology into five categories: revenue generation, the attraction of new customers and businesses; revenue protection, the retention of market share; risk avoidance, which includes considerations such as the risk of regulatory noncompliance; risk reduction, about better understanding of risk and taking measures to reduce likelihood of or exposure to the same; and cost reduction, by replacing old infrastructure or consolidating systems.
Corporates face the same pressures and must decide how to allocate finite budgets. “Technology is important to corporates because they want efficiency and automation, that improves their business,” says Cindy Murray, head of global treasury product platforms and e-channels at Bank of America Merrill Lynch (BAML).
That kind of efficiency and automation can make an institution that has invested wisely much nimbler. “In the past a lot of technology was hard coded into the system, so if you wanted to make any changes you had to go back to the code base, which was time consuming and very costly,” says Striano.
“Today’s technology offers much greater flexibility through configuration, so you can make a lot of changes at the front end, without rewriting the code, which reduces the maintenance costs and allows for greater flexibility.”
It can also reduce the gap between the bank and the corporate so it is increasingly difficult to define where one ends and the other starts. “Technology should integrate the client further into the bank,” says Murray. “Building self-service capabilities such as the ability to access real-time information or research transactions reduces the need for staff and therefore cuts costs. That end-to-end automation increases client satisfaction.”
One priority for corporates, for example, is making the best possible use of their data, says Murray. “They want to understand the data better, they want the bank to be embedded in their systems.”
Tom Durkin, head of digital channels at BAML, adds: “Data can make a big difference if you build the right infrastructure. Data points needed for client ERP reconciliation are all aspects of potential regulatory reporting. Creating the ideal infrastructure enables better adoption of technology across the institution. It’s also about improving analytics. It increases your customer insight and enables better modelling which can be used in many different ways.”
In deciding where to allocate their resources to technology, both banks and their corporate clients have to constantly consider the trade-off of improving their long-term stability versus overcoming short-term challenges in the allocation of resources to technology.
Different banks have different approaches, depending on things like whether they have grown organically or by mergers with other banks, which leave them with a number of different legacy technology systems.
Srinivasan says: “In a transaction banking context, technology investment is most frequently made in four key areas: digital; risk; payments and liquidity; and trade, supply chain and receivables.”
According to one Celent report, digital is the one with the most buzz about it, and is “increasingly top of mind for our clients over the last couple of quarters”.
Striano breaks it down into three groups: enhancements to the client experience via improved access channels, the trend that has seen banking migrate from tellers to mobile banking via ATMs and internet banking platforms; system automation, increasing straight-through processing and allowing greater scale and efficiency; and information management, making data more replicable, simplifying analytics and helping corporates make better – and quicker – decisions.
Striano says: “You need to really understand and define the scope problem you are trying to solve. Too often people don’t, which increases the risk that the solution will not work as intended. ‘Scope creep’ is just one example of the idea that while the patient is on the table you might as well make other changes, adjustments or enhancements to that system, which if not carefully considered and managed can create significant cost and delivery complications and jeopardise the overall project.”
Instead, it is important to maintain focus, says Striano: “If an off-the-shelf solution can fix 95% of your problems, then that is a very good outcome. Solving that final 5% is often where the problems come in, and can constitute the majority of the expense.”
Tier-two or regional banks, especially in emerging markets, are in a different position. They have fewer issues around legacy systems and are more interested in making themselves more nimble and better placed to offer bundled products
Uppili Srinivasan, iGTB
The problems banks tackle with technology can take different forms. “Tier-one banks in mature markets often invest in technology to replace legacy systems or fill a specific void in their offering,” says Srinivasan. “Investing in an integrated GTB system allows them to offer a broader product suite – especially in international or expansion markets.”
The world looks a little different to the smaller banks. “Tier-two or regional banks, especially in emerging markets, are in a different position,” says Srinivasan. “They have fewer issues around legacy systems and are more interested in making themselves more nimble and better placed to offer bundled products to their clients.”
Not every business is as ripe for technological improvement. Sometimes there is an urge to replace legacy systems that seem out of date but the benefits reaped by these investments may not be as revolutionary as expected.
There have been numerous attempts to automate letters of credit, for example. While these efforts have yielded improvements, it remains essentially the same, largely manually driven business. “Supply chain and other back-office functions have the capability to eliminate a paper-intensive process, but certain processes still cling to paper,” says Murray.
Banks often identify a new opportunity and invest in technology as a way to bring the opportunity to their clients. “The challenge is that new technology is usually aligned with new products and it can take years for those new products to gain traction with clients,” says Murray. “Benefits can have short- and long-term timetables. Where the product is on the maturity cycle will influence the adoption cycle with clients.”
But banks cannot force their clients to follow them into new areas. Murray says: “Banks will not pull the plug on cheques, as long as clients want to use them banks will continue to support them. But we can invest in new technologies with new capabilities and try to encourage migration to electronic or digital payments.”
Durkin adds: “Clients think about the future of technology opportunities and want banks to listen to them and provide a roadmap for the future based on innovation and efficiency. With Sepa [the Single Euro Payments Area] we rolled out a mass payment system in Europe and it presented an opportunity for clients to streamline accounts and increase transparency with a system with robust reporting capabilities.”
Responding to the clients’ needs is a recurring theme when talking to banks about investing in technology. They clearly see the involvement of their clients as the key to ensuring they spend in the right places. In some cases, banks are stepping back and looking to their clients to lead the way.
David Watson, head of GTB client access products at Deutsche Bank, says: “We want to bring the market closer to the product development process – market meaning not only our corporate clients, but regulators, competitors and even our own staff. By engaging and involving them throughout the product life cycle, we create solutions that truly solve their problems.”
Watson believes banks have traditionally “had a mindset where competing on, and providing better, functionality equated to the number of portal or product links on the left-hand navigation menu.” However, he says Deutsche has changed tack, instead stepping back to listen to what clients want.
“We found that what they wanted was simplicity and ease-of-use, not more menu items,” says Watson. “They were being forced to spend too long in systems where it took too many clicks to get to where they wanted to go. When identifying a possible solution, we looked to consumer technology and software markets for inspiration. The result was Autobahn. To date, it has consolidated 67 existing online portals and offers a single sign-on, intuitive interface through an app-based delivery model.”
Another change in mindset saw Deutsche think harder about the way it integrates its products. Watson says: “We had a lot of regional products with overlapping functionality. We were inspired by one of our car manufacturing clients, which has product managers not only for each car, but for each component of its cars. Through identifying its core strengths in component capabilities such as engines and brakes they were able to integrate the business horizontally across all of its models.”
It is as much about recognising what others do better than you, as what your own strengths are. A car manufacturer may not make a car stereo as well as a consumer electronics firm, in which case it is better to partner with a third-party provider.
“We have applied the same logic to our own organisation,” says Watson. “One of our component strengths is payment processing, so consequently we have invested heavily in that and made use of the technology across numerous products. And similar to the car manufacturer, we also don’t need to do everything ourselves; we recognise when working with partners to deliver a service may be more beneficial.”
Measuring the increased efficiency gained from technological investment can be more art than science. In some instances it is simply a matter of calculating the cost saving in delivering a transaction, taking into account the longer term maintenance costs or update costs saved with the introduction of a new system.
But not all improvements can be measured in dollars, euros or pounds. It is hard to accurately measure such intangibles as customer satisfaction and loyalty, system stability or the speed of problem resolution, let alone assess the impact on a company’s P&L. Investment in technology to enhance revenue generation is relatively easy measure compared to systems designed to improve a bank’s risk avoidance, says Srinivasan.
Technology can take the form of sophisticated algorithms that enhance a bank’s ability to cross sell its products, but it is hard to measure which business was done purely as a result of such cross selling. To get the most out of technology banks cannot look at it in terms of numbers alone, but must take a more holistic approach.
Client satisfaction is not easily quantified, but it goes a long way towards growing the business. “The most rewarding measure of success is client satisfaction, when you talk to clients and they tell you that they love using the product,” says Watson.
Value for money
The big concern of any institution investing in technology is to ensure value for money. Inevitably, investments in technology can prove wasteful, because the chosen technology is overtaken by other, better systems, or because they do not work or are unpopular with clients.
Such considerations are central to the question any institution must ask itself when investing in technology: should it buy systems from third party providers, or build the systems itself?
When buying third-party technology there is always a risk the provider will disappear in the future, creating problems with support. But developing technology in-house risks wasting resources finding solutions to problems others have already solved. And buying technology from third parties allows banks to try before they buy, reducing the risk that they will end up with a system that is not fit for purpose.
Srinivasan says: “When banks build their own systems they often lack the wherewithal to achieve the desired outcome across customer intimacy, operational excellence, product leadership and actionable intelligence. Our clients choose us because we have the ability to do so – helping them become principal bankers for their customers.”
Often it will come down to control. Banks will develop in-house the things they are most eager to retain control over, and buy in the more commoditized technologies. This means much of the regulatory and banking infrastructure technology is developed by the bank itself, as well as proprietary products developed out of the bank’s’ own financial expertise. Other business lines that are less strategically important to the bank, but which it needs to have the capability to offer its clients, are more likely to be bought in.
What [clients] wanted was simplicity and ease-of-use, not more menu items. They were being forced to spend too long in systems where it took too many clicks to get to where they wanted to go
Whichever way they go, there is no sign of any slowdown in the technological arms race. New systems are constantly emerging, be they of the cost reduction or functionality enhancement varieties. And while spend on technology is set to increase apace, so too will the benefits this expenditure delivers.
And while regulation may continue to dominate the way budgets are spent on technology, it cuts the other way too. As advances make new things possible in GTS, legislators and regulators will need to work hard to keep up. The advent of cloud computing is revolutionising the way banks and technology companies deliver services to their clients, and it remains unclear how data protection rules apply, or what the implications are in jurisdictions with strict rules about data being stored locally.
Striano says: “The benefits stemming from technological developments will continue to increase for the foreseeable future, even if the way they deliver value changes. As an example, technology has allowed some types of trading systems to operate at quasi real-time speed, so for those systems, technology’s next contribution will be in reducing the cost of that speed or increasing the scale of that speed.”
It means the kind of investment being made now is very different to the ones made 15 years ago, with the problems facing businesses today often nonexistent back then. Srinivasan says: “Today it’s not enough to build a system that makes faster or more efficient payments because that is a given; it needs to have solid funds control, an ability to consider the customers’ cash management structures, collaterals of various kinds and historic transactions for payment decisioning.”