Next generation IT for banking - Challenges and way forward
The bank of the future will be very different to the bank of today, thanks to a variety of factors - technology changes, client needs, regulatory pressures and new competition - which will transform the way banks operate and respond to business imperatives.
Even today, banking is largely aligned with organizational business structure. While this worked in the past, emerging trends suggest a need for deeper thinking in organizing the business applications that drive competitive advantage, in building the banking shared services utility model.
Exclusivity of services and confidentiality of information have always been valued by the industry, and associated expenses treated as an inevitable cost of doing business, which banks charged back to the end customer, who didn't mind paying because the banking returns were adequate. This meant banks had little reason to optimize their cost structures, which took a back seat to service availability and support in driving IT decisions.
The Changing Paradigm
We believe the bank of the future should focus on the following dynamic areas:
1.Products - constantly evolve to cater to demographic/regulatory/technology changes
2.Channels - accelerate digitization and integration to provide single view to clients
3.Operational - rejig internal systems, processes and governance model for agility and adaptability to changing market dynamics
4.Technology - watch out for new challengers and also opportunities to serve clients with differentiated offerings
Bank of the Future
Heightened competition and the pressure to optimize service costs for larger clients drove banking organizations towards outsourcing and offshoring. Leading analysts, such as Gartner and Tower Group, have estimated that 30 to 50 per cent of IT functions is outsourced . Over the past ten years, banks have made significant cutbacks in fixed costs, while increasing the variable component to become more business-agile. Also, they have mostly moved away from individual-based programming and supporting applications to service level agreement-based development and support.
However, the past two years have really changed the landscape of the IT organization within the financial services industry. In the interconnected world, information exclusivity does not last long enough to be advantageous. Banks need to increasingly redefine their IT systems to support business initiatives to respond to emerging competition from non-banking businesses, such as telecom and retail.
There's a new thinking in the IT organization. Changing market dynamics and the predictability of IT applications for various business needs, is leading to the creation of shared service utilities across functions. Still early-stage, these concepts can enable IT organizations to become more efficient while rendering superior support to business. We believe banks must explore the opportunity to reshape the IT organization to lead such industry changes by examining:
•The practicability of building a shared service organization across business units: Shared services within certain functions of single Lines of Business (LOB) bring some benefits, but also pose issues in cross-border trade on account of varying regulation. Building cross-LOB supporting services is yet to be understood in detail. Typically, organizations are wary of disturbing a working process, preferring to wait for first movers to succeed before making radical changes to the IT organization.
•Significant challenge in aligning mindset among diverse teams across LOBs: Consolidating services based on utility requires broad consensus among a diverse set of business stakeholders, and a leaner organization. While this may force unpopular decisions, consensus is necessary to mitigate the risk of disruption.
•Difficulty in analyzing cost benefit: Rebuilding legacy platforms supporting various business processes, consolidating databases, migrating applications and reorganizing message flows, and changing downstream application interfaces is difficult to conceptualize and analyze from a cost-benefit perspective. This is further complicated by the choices available today. Given the scale of change, decision makers are finding it hard to justify a future case based on current realities. Since some decisions are forward looking, quantifying their outcome is difficult, and they may need a leap of faith to happen.
Banks building a business-aligned, real-time responsive technology landscape to support next-generation banking should take the following dimensions into consideration:
•Lower cost of transactions and higher operational efficiencies - through services standardization and harmonization of the lifecycle managed across processes .
•Leveraged data management through proper lifecycle management - enabled through enhanced dashboards, minimum error, and complete visibility into banking relationships with customers and suppliers.
•Enhanced risk management services - through proper alignment of risk servicing infrastructure enabling a consolidated view of various risks across entities, accounts and geographies.
•Adaptation of "Single Customer View" - with a complete and accurate customer warehouse. Provisioning an organization-wide standard of customer data for representation, access, control and governance improves cost and operational efficiencies.
Along with simplifying application architecture and supporting infrastructure, banks must address the key issue of mapping raw data from source systems into an appropriate canonical representation that downstream applications will consume as they are provisioned. Thanks to Service Oriented Architecture and Batch Integration mechanisms, today's technology is up to these challenges.