Banks have been investing in bolt-on, front-end services for a number of years to give the impression of a modern, digital operation. But without a strategy to realign the back end, customers will soon notice shortcomings, writes Dharmesh Mistry
Banks have been paying lip-service to modernisation for a number of years now. Bolting on online and mobile banking, promising endof- day cheque clearing, instant loan approvals, contactless payment services – even anti-fraud transaction blocking – all delivered via apps, APIs and proprietary solutions. The result: a veneer of a modern, customer-oriented service. But look a little deeper and most are as stuck in the 20th century as ever. The big problem? Their legacy back ends. It's time to realign the back end with the investment they have made in the front.
Today's banks require three things of their core platform if they are to deliver a truly modern 21st-century service. It must be scalable – to accommodate the explosion in transactions and data analytics heading their way. It must be robust and secure – to provide seamless service and engender customer trust. And it must be adaptable – to enable the speedy launch of new products and services so they remain competitive.
Scale is a huge problem for banks. It's not just about getting more customers – it's about keeping up with customer behaviour. Contactless payments are growing at more than 250 per cent a year. When, a few years ago, a customer took out £100 a week to cover incidental expenses like a drink in the pub, a sandwich, a tube ticket or bus ride, today they pass their bank card across a reader. One banking transaction at the ATM has turned into maybe 20 at the point of sale. The rate of growth of these micro payments is only going to accelerate. The Internet of Things will link more consumables to our banks, offering instant ordering. Wearables will allow us to deduct payment for services as we walk in and out of museums, restaurants and transport systems. Cars will automatically pay for petrol when we fill up. We'll buy TV programmes on demand. The use of cash will virtually disappear and banks' core systems will need to be able to cope with the scale of transaction flow.
From these transactions will come valuable data, but its value can only be unlocked by computerpowered analytics. And the sheer volume of data to be analysed will put further pressure on the core.
Banks will need this analysis to offer competitive services to customers – services that bring the kind of intimacy that will engender loyalty. Knowing your customer isn't just about anti-money-laundering compliance; it's about delivering a service that the customer wants and values, be it reminders for birthdays, offers of a gold credit card or loans in times of need, or tailored monthly spending projections. Nor is it just customer behaviour. Sensors too will deliver data – be it geographic, for monitoring stress or simply to check the weather. All this can be used to better sell and increase revenues and profits.
Data analytics is a huge field and demands serious processing power. Without it customer data will gather dust rather than create value. What's needed is a unified command centre – what I call a single brain – with a direct connection between the back and front end with data going back and forth to ensure appropriate and timely service.
Security is the second major issue. The big banks have huge security teams that perform many compliance and risk-management functions manually on Excel spreadsheets. Where alerts are raised by the system, too many are false positives, demanding expensive human investigation. The processes and procedures are also fallible, leading to fines and penalties when things go wrong. And, perhaps most importantly, few are able to react in real time to threats – meaning banks can only shut the door after the horse has bolted. All this undermines the banks' reputations and increases costs.
Instead, banks should look to the Cloud, where security specialists offer cost-effective solutions with significantly better track records. But this demands a sensible back end for Cloud services to talk to. They cannot be plugged into legacy systems and expected to deliver the kind of service that is needed.
Finally, it's about competition. Customer expectations and fintech innovation are regularly outstripping banks' ability to deliver new products and services. The process of defining, originating, delivering and operating such a product takes months on a legacy system – if you're lucky. My favourite is still the Virgin One bank account – an offset account that allowed customers to use their positive current-account balance and savings accounts to bring down their mortgage balance. It took more than 18 months for rivals to launch competitive products, giving Virgin plenty of time to clean up. Nothing's changed since then. You snooze, you lose.
With a modern core banking system, new products can be launched within weeks. It's much more plug and play.
Today's market is more competitive than ever. Low interest rates have squeezed margins, costs are rising with compliance demands, and challenger banks and financial service providers are still picking off the low-hanging fruit. Banks need loyal customers to survive, but these customers will increasingly demand exceptional service.
While they are still mostly blissfully unaware of their bank's shortcomings because the bolt-on services are just about delivering what they want, within just a few years core legacy systems will no longer be able to cope. When this happens, the wheels will fall off and the whole machine come to a stop. Before that happens, banks should realign their IT and get the back end in shape to meet the investments they have already made in the front.