How to successfully manage market challenges
How will cloud computing shake up the banking industry? The pre-crisis, high-leverage banking approach is no longer fit for purpose in the post-crisis world. For example, to successfully manage current market challenges (e.g., with liquidity, volatility and regulation), retail banks can no longer rely extensively on expensive branch-focused distribution to achieve sustainable growth. Rather, they must look to “smart size” their distribution network. In this new market context, banks will need to successfully overcome specific distribution and marketing challenges.
A powerful nexus of changing customer behavior through the use of the Web, mobile and social connectivity and emerging new technology (e.g., digital, analytics and cloud) is motivating “smart banks” to re-examine and re-engineer their business models. And, there are at least three unique business models emerging among smart banks.
The first model is the “analytical multi-channel” bank. It engages customers frequently through various channels while offering personal preferences and is underscored by advanced multi-channel integration focused on digital channels and integrated architecture; pervasive analytics based on effective customer data collection and micro segmentation defining new products and pricing; real-time interaction management; and a product offering based on micro segments and optimized by channels.
Second, is the “socially engaging” bank. This model interacts with customers who spend their time leveraging information provided via social media. It is dependent on customer feedback and preferences monitoring through social media to mitigate risks and reactions to issues; social digital marketing to engage customers with proper content; and a product offering defined by social CRM and enriched customer data through social media tools.
The last one is the “digital ecosystem” bank. It offers extended services by leveraging a dynamic network of partners. It is distinguished by an enriched proposition through mobile commerce, focused on financial and non-financial offerings, geo-localization and hot deals; the active use of mobile payments, based on near-field communication (NFC) or mobile wallets; and alliances and partnerships with nonbanking operators.
The shape of banking clouds to come
As banks adapt to these changes in their competitive and technological environments, cloud computing will play a major role. Cloud’s combination of low cost and high scalability, effectively unlimited processing power and storage, unprecedented agility and speed to market, and variable pay-per-use cost structures all support the qualities that banks will need to compete and win in the future.
Already, some newer banking entrants ― unburdened by complex and costly legacy systems ― are using cloud computing to support core banking applications. However, we don’t expect to see a wholesale mass-migration to public cloud services across the entire banking industry. Instead, the adoption by banks of cloud will be highly selective and targeted, focusing on matching the characteristics of each specific process with the different variants of cloud computing. There will be three key trends in banks’ use of cloud computing.
Cloud-based offerings will leverage social and mobile media to transform the banking experience and relationships for customers. By offering disaggregated banking services, and moving information, advice and money in a faster, more responsive and more personalized way, a new generation of cloud-based online personal financial management applications ― mint.com, Geezeo and BankSimple to name a few , aim to become the “front office” for customers’ banking needs, leveraging the social and mobile experiences that consumers find so compelling.
At the same time, cloud-based applications such as peer-to-peer lending and crowd sourcing of loans (often micro-loans) are gaining momentum, especially in emerging markets. And banks’ role in payments, including in the emerging area of m-commerce and mobile wallets, is being challenged by online heavyweights PayPal, Google and Facebook.
Cloud computing offers the tools and capabilities to resist disintermediation by leveraging social and mobile networking and differentiated bundling capabilities for the changing consumer profile.
Many banks are doing this already by investing in social media tools and creating a social enterprise strategy, including linking to customers’ Facebook profiles and involving them in communities ranging from basketball to wealth management. Once a customer opts-in and clicks “like,” the bank gains access to that individual’s personal social profile ― which it can then blend with its own customer/transaction information and other public, location and web behavioral data to build a 360-degree view of the customer. The customer is, therefore, willing to share their social data and activities in exchange for increased personalization.
This, in turn, enables banks to generate and deliver relevant offers on a timely, even real-time, basis via the customer’s preferred channels. To do this, banks will integrate business processes with advanced analytical capabilities, including using “closed loop” analytics which, by nature of its capability, aids in driving continuous refinements to processes, services and products in real-time. Mobile and location-based data add an additional dimension ― such as a customer checking the availability of mortgage loans in a particular neighborhood.
Private clouds come to dominate core banking. As cloud-based offerings come to dominate the financial services marketplace, the ability for banks to integrate multiple cloud enabled service and product providers will become the industry’s “new normal.” This capability will be necessary for offering compelling services and products in the way that customers want to consume them, and banks must prepare for the new environment or risk being left behind.
This new normal will challenge banks’ traditional ways of translating their business requirements into IT solutions. It will also dramatically reshape the role of the IT function, requiring a new governance model, new skills, new behaviors, and new ways of sourcing IT infrastructure and services.
At the same time, changing customer demands mean banks will have to focus on their key differentiators and transform their operations by adopting a lower-cost, more flexible and more scalable operating models, and by moving to a service-oriented mindset. Cloud computing will help by enabling banks to break down existing silos, decouple physical from virtual IT, and separate production from distribution, all boosting their agility and customer responsiveness.
Banks appreciate the relevance of cloud solutions for executing these changes. Some, especially newer, banks have proved willing to take a fresh look and incorporate multitenant cloud solutions into their core banking activities. For example, banks including Metro Bank in the UK and Sofol Tepeyac in Mexico are using Temenos’ T24, the first production-grade core banking system that runs in the cloud. Some leading US banks are using the Varolii cloud-based voice dialer. By using Varolii to deliver routine requests for borrower information, SunTrust has reduced the number of inbound calls to its call center, shaved more than a day off its overall loss mitigation timeline, saved between $8 and $25 per call, and cut first payment defaults by more than 60 percent.
Alongside this early usage of external, multi-tenant cloud offerings, private cloud models, through virtualization, are playing an increasingly pivotal role in core banking by enabling banks to realize the cost, scalability and flexibility benefits of cloud computing while preventing external exposure of customer data. This focus on private cloud systems is underlined by industry research among global financial services companies showing that they expect spending on private clouds to increase as a proportion of overall cloud spend as seen in Figure 1.
Figure 1: Estimated spending on private cloud by financial services companies Worldwide
Public clouds will dominate non-core and non-differentiated banking activities. Cloud computing will increasingly provide banks with new lower-cost operating models thanks to virtualization, greater automation, and the ability to push more activities offshore. As these benefits are realized, banks will face decisions regarding the business case for moving legacy systems “into the cloud” or building new cloud-enabled assets that they will then integrate into the legacy environment. Not all banking activities will move onto the cloud in the next five years. Adoption of cloud models generally has greatest impact in areas of the value chain with the most variability. Banks that manage higher transaction volumes with little variation might find the best financial option is to balance offshore labor arbitrage with the use of cloud computing.
While security concerns mean many banks are reluctant to use public cloud services in core banking, public clouds have a big role to play in banks’ horizontal and back-office processes not directly involving sensitive customer data. Today, these processes include email, office/workforce productivity, internal collaboration and knowledge sharing.
In the future, public cloud use could also potentially extend to activities such as credit card processing, check clearing, and analytics on aggregated data. For banks, those enterprise processes that are best suited to public cloud include procurement, HR and customer relationship management (CRM). Salesforce’s CRM cloud has gained strong popularity among banks in the past couple of years, and Spanish banking group BBVA recently announced that it would migrate its whole workforce to the cloud-based Google Apps suite. Public clouds for non-core banking areas may impact the economics of internal shared services. Consider it an alternative to outsourcing with different economics and less lock-in.
The benefits of cloud-enabled agility
By its nature, the cloud model is available to everyone. So while the early adaptors will enjoy a period of competitive advantage, others will catch up over time, as happened with the initial waves of offshoring. However, all banks stand to gain significant benefits from cloud computing adoption, including new levels of strategic options. Specifically, cloud enablement makes new and bundled products and services easier to develop and provide, whether on a stand-alone basis or through partnering with cloud-enabled specialist providers. When services are ramped up, the infrastructure can be scaled; if not, they can be abandoned.
This article was contributed by Accenture.