Why technology is the key to improving agility for retail

WHY TECHNOLOGY IS THE KEY TO IMPROVING AGILITY FOR RETAIL BANKS

Mark White, Senior Manager of Financial Markets and Fintech at Telehouse Europe, explains why banks need to take steps to improve their agility now or risk losing their competitive edge.

Innovation in banking has always been driven by customer expectations. And while digitalisation is far from new, escalating levels of demand, driven heavily by Generation Z, have triggered a notable shift in gear for retail banks. Born between 1996 and 2010, Generation Z is the first to have no experience of life before the internet and mobile phones. Digitally native yet rooted in the physical world, in 2019 they accounted for 32% of the global population. That’s 2.47 billion people, making them the largest demographic on the planet.

With stratospheric confidence in digital’s ability to deliver, Generation Z expects instant responses, advice and processing of products and services. And there’s no doubt they will be the first to completely drop cash and cards in favour of mobile and e-wallet payment services. However, it’s not just this generation banks need to worry about. According to EY, COVID-19 prompted a 34% increase in contactless payments by all demographics, along with a 57% fall in cash usage. So, banks simply cannot afford to stand still.

This change in user behaviour and preferences is forcing banks to once again rethink systems and technology to future-proof their business. They need the agility to flex systems and services and that means finding a practical approach to overcoming the technology barriers posed by legacy IT and reshaping infrastructure once and for all.

The switch to digital

The biggest challenge many retail banks are facing is the need to urgently adapt to the fast-changing requirements and behaviours of their customer base. With more physical branches shutting (Lloyds is the latest to announce it would close another 44 high street outlets), the focus for many is on bolstering their online offerings and capabilities and this requires changes to both operating models and IT infrastructure.

The problem is that many banks have typically been slow to respond to change, held back by the need to ensure compliance with an ever-expanding array of regulations. Despite having the appetite to change, banks have often struggled to make meaningful progress. Their legacy systems have held them back from taking effective action quickly.

However, with newer, digitally-native players threatening to cement their competitive advantage, banks know they cannot afford to wait any longer. They need the agility to flex systems and services and that means finding a practical approach to overcome any technology barriers and reshape IT infrastructure.

Making better use of data

Accepting the status quo is no longer an option for these banks. As customers’ digital knowledge and skills increase, the race is on for the industry to embed the necessary agility to adapt. This has, in turn, triggered some deep thinking about what the market will look like in a further ten years, where the demand will come from and, crucially, how can banks gain a competitive edge.

Making better use of data will be a key element of this. Data is the new gold and harnessing its value will remain central to the future of banking. To become agile, banks are reviewing what data they hold, where it is stored and how they can apply analytics to mine it for insights and to deliver new services.

There is a raft of potential use cases. Banks could use data to increase agility, inform their strategy, launch new services quickly and inform decision making for digital transformation. They could leverage artificial intelligence, and more especially machine learning, to deliver operational enhancements such as credit granting and fraud control capabilities. Ultimately making good use of data is key to enabling banks to do everything from meeting customer demand for more connected, relevant and personalised experiences right through to simplifying their business and operating model to increase efficiency.

The key for success for banks is to embark on a detailed planning and thought process around data and how they want to use it before evolving their infrastructure. Ultimately, it will be these choices that will determine how effectively data should be managed, processed and stored. And with cost a key consideration, it’s important banks don’t invest in areas of innovation that then fail to deliver the competitive edge required due to insufficient infrastructure.

Rethinking IT Infrastructure

With growing pressure to deliver the connected, personalised experiences today’s consumers need, banks need to look for ways to increase bandwidth, simplify operating models, reduce cost and unlock and analyse data to improve efficiency. And the starting point is their IT infrastructure.

Newer entrants will have built digital banks from the ground up, with cloud-native strategies - a route that has proved successful in mature fintech markets such as Asia. However, incumbents are likely to be more dependent on legacy systems; tried and tested infrastructure models that are embedded within the organisation and its culture, with many resistant to change. But legacy architecture poses many limitations including high cost and lack of scalability and flexibility.

To future-proof their business, retail banks need an IT infrastructure that facilitates fast and seamless connectivity between the cloud and internet service providers, enabling them to ingest and process data at speed and maintain competitive advantage. A hybrid approach is likely to prove the dominant choice, consisting of a mix of colocation and cloud.

Using colocation as an enabler

By hosting their IT infrastructure in a colocation data centre, retail banks can benefit from enhanced agility and flexibility, while also leveraging fast and secure interconnections to cloud services, enabling them to control the migration process, keep on top of regulatory demands and keep a lid on costs.

More importantly, by deploying a combination of cloud and colocation strategies, banks can create a resilient and secure foundation for growth. This will enable them to flex and scale operations when building new services and innovations to meet future demand, while also ensuring they provide their customers with a responsive and high-performing service. And by choosing a colocation facility in close proximity to the organisation, banks can benefit from reduced latency and faster data processing to enable real-time big data analysis.

Ultimately, by embracing a hybrid approach to cloud and colocation, banks can benefit from the enhanced capability they need to drive agility, while minimising costs. But it is also the case that having the right infrastructure partner, one that can provide the security, resilience, and low-latency connectivity required to enable transformation will be critical to their ongoing success.

Mark White, Senior Manager of Financial Markets and Fintech at Telehouse Europe

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https://www.ey.com/en_gl/banking-capital-markets/fourways-covid-19-is-reshaping-consumer-banking-behavior https://news.sky.com/story/lloyds-shuts-44-more-brancheswith-customers-moving-online-12339992