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By Dermot O’Kelly, Head of Europe at Finastra,

Banking is experiencing a major shift, driven by seismic technology and market changes. Digitisation, advances in AI and Machine Learning, and higher customer expectations, are forcing retail banks to confront the truth: adapt or risk obsolescence. But, by exploring the cloud as an enabler to deliver newly-bundled services, data-rich analytics and augmented customer experiences, they can accelerate the transformation process and face a brighter outlook.

Challenger banks such as Monzo and Revolut are widely considered industry leaders, having built customer- and context-centric operating models, but the acid test for the retail banking industry is the response by established banks to the cloud. Attempts to digitise thus far have had mixed results. Unable to predict the scale and pace of today’s customer-centric innovation, many initial attempts to digitise were managed in-house. As the pace of market change and increasing customer expectations evolved, this transitioned to buying off-the-shelf point solutions. Yet, far from creating competitive advantage, these approaches left established banks weighed down by vast amounts of legacy code – and technical debt. This complexity impacts their ability to harmonise their service offering or easily connect wider services such as robo-advisory or personal finance management, and the entanglement of multiple, complicated solutions makes it harder to deliver the hyper-personalised experiences that their digital challengers are known for.

Ultimately, many attempts to digitise produced a digital recreation of a traditional highstreet bank and therein lies the problem; a digitised bank is not a digital bank. Automating the front-office does little for customer experience if the back-office isn’t in order, when today’ send-user demands the same omni-channel consistency and 24-hour accessibility that they have come to expect as standard.

Getting ahead on the cloud

Challenger banks have recognised the fundamental role of cloud in building seamless web and mobile applications around the customer experience. By delivering account aggregation services, payments solutions and connected products, they are effectively providing choice and convenience, ultimately creating connected lifestyle experiences for consumers rather than simply products.

The new kids on the block are cloud-native, which translates to faster, agile and scalable ways of building, creating, testing, and presenting digital offers to end-users. But it’s not just the creation of digital products and services that the cloud supports; challengers like Starling, built on the public cloud with an open platform, not only accelerate the creation of bespoke or collaborative services using open APIs, but capitalise on the wave of non-financial market entrants by offering banking-as-a-service.

This freedom from legacy technology supports the agility that the Open Banking and open API movement has brought about. In February 2020, the UK alone saw 348 million API calls made to banks from third party providers – a record number –and this continues to rise. Cloud-based technology also aids the race for new customers and profitability. Accenture says digital banks are on track to treble their customer base this year as consumer expectations increase, and this, combined with their lower cost-base, which Accenture estimates at £20-£50 per account (compared to £170 for established banks) and near-zero marginal costs, significantly undercuts established players.

This combination puts challenger banks in a strong position, and the strategic response by established banks must be to adopt a flexible and agile platform. Rather than looking at it as a defensive move, however, a cloud and open platform model should be viewed as an enabler of transformation and growth. End-to-end digital banking capabilities can be scaled at pace, while product development and testing times are simplified, sped up, and de-risked as banks can publish beta versions, use soft launches, or reverse these moves. Furthermore, costs can be better controlled by using an on-demand approach to scalability; modern microservices architecture allow for automatic scaling during times of peak traffic using containerisation and orchestration.

Established banks playing catch up – cloud is for everyone
Yet cloud doesn’t only benefit the smaller players. Financial institutions of all sizes can harness it to adapt, enhance creativity and productivity, and start to use big data analytics to better analyse the wealth of structured and unstructured data they hold. The cloud makes data integration from multiple sources easier to handle, can scale to support increased datasets and exploit advances in machine learning to apply data science techniques, counter fraud, predict churn, and create hyper-personalised experiences for customers.

What’s critical right now though is the value of co-development and co-innovation. The pace of change, across not just financial services but all services at large, means that it is impossible to keep innovation in-house. Attempting to ring-fence innovation is to miss out on all of the third-party expertise as they build the capabilities of tomorrow. Acloud-enabled, platform-based approach is the launchpad on which banks and fintechs can collaborate and co-innovate more easily –creating new value and driving new market opportunities in an Open Banking world.

BBVA’s acquisition of Atom Bank shows the appetite that legacy banks have for obtaining the customer service prowess of challenger banks. This includes flexible technology solutions that come without technology debt, modern digital services, brand recognition and low cost-to-income ratio; crucial at a time when banks are trying to reduce IT overheads.

Established banks will note that disruptors are focusing more on partnering with the challengers rather than buying them out. According to Finextra’s Future of Payments 2019 Report: 81% of banking executives would collaborate with partners to execute digital transformation most effectively. And with 54% of banks saying they have a cloud adoption strategy that will be enacted within the next 12-24 months, it’s evident that the time for migration to the cloud is now.

If established banks are to survive, they must learn from the digital disruptors, enhance the customer journey, invest in understanding the customer’s behaviour and innovate to offer a bespoke customer experience. In this regard, more effective targeting of customers will be a primary strategy as the role of the customer becomes inextricably linked to product development and long-term sustainability. In a partnership ecosystem it’s imperative to implement a cloud-based environment to safely test and explore partnerships; and to help regulators encourage innovation whilst ensuring consumer protection.

2020: A turbulent start has prioritised digital

The dramatic start to this decade has accelerated the need to prioritise digital over physical; a direction likely to continue even after lockdown restrictions are lessened or lifted. This new environment could drive a greater adoption of digital technologies across the whole banking sector – digital onboarding as standard, increased financial inclusion as payments and support are issued to the underbanked and unbanked populations, and a shift to digital payments as a desire to touch and handle cash dwindles, opening up the opportunity for digital solutions – mCommerce, eWallets and P2P payments.

As banks of all sizes regain stability, being able to compete on a digital playing field will be high on the agenda, as will the ability to adapt and scale on demand. Some may be considering the workplace of the future and contemplating the shift to cloud and remote systems and infrastructure management. Others may be examining the potential of fintech partnerships to accelerate digital capabilities beyond retail banking into areas such as lending and payments. Technology and cloud will be a significant support in this.

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