Ever since cash dispensers became automated teller machines (ATMs) pundits have regularly said that the large retail banks are going to have to change their core systems or they will lose their customers.
It started with the ATMs because they broke many banks' assumption that their customers transacted all their bank business in their own branch. This only got worse when electronic point of sale (ePOS) got added into the ATM architecture. Then, when mini-computers and PCs took over from mainframes in the early '90s, the pundits said now the banks would have to abandon their out-dated core systems for cheaper alternatives. Next up was the internet, which made it even more obvious that bank customers didn't want to go to the branch but rather wanted the bank to come to them. This was surely going to kill off the mainframe core banking systems. Finally, along came mobile. One large bank told me that it took ten years for the internet bank to overtake the branch – the mobile bank did it in a year. This was confidently predicted to kill off the mainframes about five years ago.
So I am not going to predict the death ('certain death' as the CEO of BBVA puts it) of the mainframe core banking systems. Rather I am going to describe what a bank would look like if I were to design it now. The table below summarises the bank of the future (or 20XX) and compares it with the characteristics of the large retail banks today.
First up, my new bank would focus on providing high levels of customer care. It would be at least as good as Amazon. Every interaction with the bank would be remembered and used to add value to the customer's financial transactions. All services would be available on all appropriate channels 24 hours a day, 7 days a week. By contrast, today's big banks are accounting focused; in fact their systems are called branch accounting systems. This is why there is so little differentiation among the large banks and why in the UK, for instance, there is enormous consolidation of banking.
Next, my bank would assume extremely low margins, so all services would be have their full costs allocated and charged to the customer at a small profit. No pretence of free banking.
Thirdly, my bank would assume that it will get thousands more enquiries than actual financial transactions. Today's banks a built for a 'look to book' ratio of 5 to 1, mine would assume 5000 to 1, as is the case for online travel and capital markets.
Today's large core banking systems stop for the night. They close up after 6pm and wait for the overnight batch accounting run to complete before starting the next morning at 8am. My bank would do everything in real time. You should be able to take £100 out of the ATM at midnight and see the transaction on your mobile as you walk away.
The bank I would build would assume that the customer wants the bank to come to them for all transactions. This would be for paying in shops, paying online, paying friends and family, international payments, getting cash, getting foreign exchange and depositing funds. There would be no need ever to come to a branch to do business, but I would have some high street presence for those customers that want to talk to someone face to face.
Not only is my bank real time, but there are no batches. All processes are same day and straight through. When I opened a mortgage in the US with a large bank in 2000, it took six months for the bank to get the mortgage onto its own online banking system as all the different month end batches completed. This is too expensive, too error prone and too slow for the customer.
I wouldn't build a data centre for my bank. Rather I would rent the hardware and software online using infrastructure as a service for my front office and software as a service for my core banking.