Commentaries and insightful analyses on the world of finance, technology and IT.

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March 27, 2015

How to comply with new regulations such as fast pay-out? - A banker's dilemma

The new guidelines on fast pay-out issued by the financial regulators of FSA, are changing the perspective of banks and other deposit-accepting financial institutions on achieving consolidated and comprehensive views on their customers and their activities irrespective of their touch points. These guidelines and the consultative framework, which FSA is building, will significantly speed up processing of claims of the depositors. The consultation prescribes a mandatory period of seven days to process the claims and settle them. An important element of the proposals is the introduction of a clause requiring the banks to be able to furnish a Single Customer View (SCV) to ensure that they are in a position to provide the aggregate balance held by each eligible depositor (FSA UK).

In its attempt to solve the depositors' difficulties to gain their money back from the banks as well as to assure that bank will not have a run on them, FSA is asking a few fundamental questions to banks. These questions can be summarised as:

a. How do banks store and retrieve all their customer information?
b. Are systems and applications that the banks have built over a period capable of extracting vast amounts of data attributes to create meaningful information?
c. Can the banking and other financial organisations realistically establish a relationship between depositors A and B when they are the same or are interconnected with transactions?
d. How do banks manage their customer information particularly in the context of mergers and acquisitions?
e. Can the two systems - acquired and acquirer bank be integrated in a way that enables single view of their customers and their activities?

Traditionally, banks have organized themselves in silos created on the basis of products/services or geographical processes. Further innovation in products has made it difficult to share customer information between different SBUs seamlessly. In addition to this, disparate systems exist between different divisions of the banks, making it all the more difficult to extract the information in real-time basis to understand depositors' exposure to the banks.  Though in the last few years banks have spent significant effort and money to implement robust CRM systems and other applications such as KYC to meet internal and external compliance matters, a comprehensive view providing a greater depth of knowledge about their customers is far from reality. The key stumbling blocks to achieving single views on customer data between different products and service lines include the lack of an information bridge between business architecture and technology architecture and the difficulties in building common symbology across source systems.

Historically, organisations have approached the solutions from the perspective of building large data-warehouses. This approach of building large-scale databases to load customer information, analyse them through data marts and data processing applications were built as additional layers to create meaningful reports and views about customers and their activities. However, issues such as duplications, re-creation of customer data in addition to effort, the requirement to maintain structured and unstructured data along with real-time update of changes, have limited the benefits of these built data-warehouses.

To be in a position to meet the FSA's deadline, banks now need to relook at their entire IT landscape. Sooner or later, IT management of these banks have to take a deeper look on the multiple databases they have built over a period of time to maintain and manage their customers across the globe. They need to be in a position to seamlessly distribute and redistribute information as, when, and where needed. To comply with FSA, banks need to initiate a few first but important steps.

Step 1: Build an enterprise wide roadmap for master data quality: It is a known fact in the industry that in large organizations, there are multiple formats and versions of master data. Having a defined view on how customer-related information will be captured and maintained is the first foundation stone. De-duplication of customer information and building a standardised format through which, customer information acquisition can happen is important and critical for the intended strategy of building a SCV.

Step 2: Build an Information Architecture: Within banking organisations, different business and technology architectures exist. The missing link has been the lack of a clear vision on building a unified information architecture. Defining the process for building a common symbology to serve as a single-source for cross-reference is critical. This will not only help in seamless update of all downstream systems but will also play a significant role in how information is received from upstream systems without any manual, intervention-based data cleansing effort. Limiting manual intervention can significantly reduce errors that typically occur during the creation of customer information.

Step 3: Define the view on solution choice: data warehouses and SOA both provide ways to achieve the single view on customers. Depending on the number of source-systems, data volume, and integration complexities, an organisation needs to have a clear perspective on the solution, which not only caters to the current needs but also addresses the needs of the business and customer growth in the foreseeable future. If the choice is to build a large data warehouse, it is important to understand how a single update of the other databases that store customer information can also happen.

In a nutshell, there is no silver bullet to addressing these requirements.  In order to optimise the tools and technologies to ensure that organisations have a single view on customers, they need to consider cost-effectiveness, flexibility, and analytical requirements. Building a single view on customers will help organisations benefit beyond regulatory compliance requirements. Finally, it is the deep understanding of the customer, which differentiates and propels competitive advantage for organisations.


March 19, 2015

Are The Clouds Over Core Moving?

Are FSIs still slow and hesitant in looking for core banking solutions on the cloud?

Operational risk is a major issue that inhibits companies from moving to a cloud business model for core banking. It was once believed that FSIs would never move their core systems and applications to a public cloud infrastructure or purchase core services under a public cloud, software-as-a-service (SaaS) model. IT adoption is following a familiar pattern of embracing new technologies, leapfrogging developed economies, and their legacy systems.

Here are some success stories:
Microsoft and Temenos launched a cloud-based, pay-per-use core banking platform under a cloud-based delivery model and pricing approach that had 12 Mexican banks as their first customers. PNC bank is on its path of modernizing the legacy of its core banking systems. They want to rationalize and simplify their legacy core applications, reduce the time to market (TTM) innovative products and services vis-à-vis their peers, and prepare for hosted and cloud computing solutions.
It would be impossible for banking industry to adapt to cloud based solutions without some common standards. These standards will help integration of different services t from and to the cloud interoperable. The cloud solutions are going to throw open and allow multiple options. Then the big, enterprise wide solutions are slowly going to become a thing of the past. (When we say cloud here, we mean private, internally hosted cloud services and these are not public cloud offerings like those offered by Google, Amazon and Rackspace.)

The banking industry architecture network (BIAN) is not going to help banks to make or manage their private clouds or their SaaS applications. Yet, BIAN could be the best catalyst to help the entire banking industry gear up to become cloud-ready.
There are still many hurdles for financial services industry specific SaaS deployments and services. Issues such as privacy and safeguarding business secrets coupled with the larger problem of non-availability of specific appropriate financial services and some particular SaaS offerings are preventing banks from taking the cloud adoption route. BIAN has multiple a components to help them create a value in the SaaS space. BIAN's idea of cloud-enabling the banking industry will become a reality once these hurdles are removed.

In general while looking for cloud as a solution, Banks and financial institutions are placing transparency, robust auditing controls and better data encryption mechanisms on top of the list when it comes to expectations from their cloud service providers. When we try to understand why Banks are going to the cloud, flexible infrastructure capacity and reduced time for provisioning were listed as top objectives. Customer relationship management and application development are the top services being adopted by banks for moving to the cloud.

So, Clouds over core banking are clearing slowly and banks need to gear up and get ready.

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March 13, 2015

Overcoming the cloudy concerns: Recommendations for banks

-Anjani Kumar

In my previous blog, I had posited that banks should not let their concerns deter them from leveraging and reaping cloud computing's immense benefits. That said, banks need to adopt a structured approach towards their cloud implementation. In my view, there are four essential ingredients of a well thought-out cloud adoption approach:

1.Choose the cloud model judiciously: No single cloud model (public, private) can meet all of a bank's requirements. Hence, while choosing the cloud models, banks should consider the regulatory, security, cost efficiency, operational agility, and scalability aspects of the model. In the initial implementation stages, banks can plan to have a federated ecosystem comprising a combination of cloud-based and on-premise application portfolio mix. Such a federated ecosystem will allow banks to have myriad cloud models (private, public and hybrid) implementation and flexible capacity for incremental adoption.

Depending upon their business needs, banks can opt for large-scale hybrid cloud model which comprises a combination of public and private cloud features. In this, the computing resources and capabilities are owned by both the bank and the cloud service provider. It allows banks to reap the benefits of optimization offered by cloud, and also ensures high-level of data confidentiality and security. Public cloud capabilities of the hybrid model could be used for general computing, while sensitive data and functions could be enabled in the private cloud. Similarly, for core banking aspects, and also for cases where regulations prohibit processing and storing customer data outside the country, private cloud could be leveraged. An example of private cloud adoption of Westpac New Zealand which recently opted for IBM's private cloud technology to become the country's leading digital bank. The bank will migrate some of its business-critical applications to IBM's Auckland based datacentre.

2.Avoid the big-bang approach: Banks should develop a business case for their cloud adoption and take an evolutionary adoption approach. A mid to long-term roadmap for cloud migration is crucial. Starting with small and less mission-critical legacy applications that have already been architected for meeting external integration and security challenges is the way to go. Also, the relative data importance vis-a-vis the regulatory requirements of data privacy and residency should govern the adoption prioritization. Cloud migration strategy should take into consideration the systems' integration (batch, real-time, etc.) and performance requirements. Business domain wise, lower risk projects such as ECM, CRM, collaboration and workspace are good candidates to begin with. Payments and corporate banking functions such as credit risk simulations, payment settlement, corporate actions, etc. are also well suited for the cloud. In collaboration and workspace, cloud (public or hybrid) can be leveraged for back-office and horizontal processes such as email, internal collaboration, knowledge sharing, etc. UBS has leveraged Oracle's cloud-based Fusion HCM to support its HR function. Similarly, BBVA's entire workforce is enabled through the cloud email and collaboration suite (Google Apps). In content management, Barclays' private cloud-based service named "Cloud It" provides a cloud-based document management system for customers to store their personal documents.

3.Focus on security: Banks should clearly understand and comply with cloud related data confidentiality and regulatory requirements. For instance, regulators such as FINRA may want to audit the bank's cloud architecture. Depending upon the local regulatory needs, many banks may have to keep sensitive data (e.g., customer details) within firewalls and in private cloud. Amazon Web Services has launched AWS GovCloud to allow the U.S. government agencies and contractors to move their sensitive workloads into the cloud by taking care of their specific compliance and regulatory requirements. IT teams should thoroughly test all systems to be enabled on cloud for strong data and application security, performance, regulatory, business continuity, disaster recovery and risk management aspects. Cloud security should integrate well with the bank's existing security processes and platforms. A secure, sophisticated and easy-to-use remote access management solution for cloud which can support all operating systems is desirable.

4.Engage in partnership: Banks should engage a leading cloud solution provider to gain expertise and ensure compliance. Cloud service providers can also be engaged to educate regulators on cloud capabilities concerning data security, residency and privacy. Chosen cloud services providers should have clearly defined strategy, demonstrable ROI and proven capabilities. Banks should get all key information from the providers upfront; including the costs and other implications of migrating the existing infrastructure and applications to the cloud. Banks should also examine the service providers' external security and audits certifications before engaging them. Service providers' performance vis-à-vis transaction volumes, reliability, availability and quality of the services should be scrutinized closely. Stringent SLAs with guarantees and remedies / penalties should be enforced. Banks should have the service provider work with their risk, security, and legal teams and aid in developing cloud migration plan. Where multiple providers are engaged, ensuring that the applications and data can be moved throughout the cloud environments, as appropriate is important. A good example of a third-party cloud solution is the Infosys' Cloud Ecosystem Hub. It is a first-of-its-kind solution helping enterprises build and manage unified hybrid cloud environment. The solution helps to rapidly create, adopt, and govern the cloud services across the clients' ecosystem.

In your view, what are the other key aspects banks should consider during their cloud deployment? I am interested in knowing your views.

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March 12, 2015

Core Banking Modernization

Core banking modernization - A myth or a reality? 

Modernization of core banking platforms has been discussed for a few decades, but is it a myth or a reality? Do banks need to undergo this change, and if so, how can they approach this  change to come out successfully?

Why do banks need to modernize their core systems?

Whether it is a small, medium or a large bank, traditional or non-traditional, local, regional or global, all types of banks face competition. Their survival and success depends on conflicting priorities such as reducing costs, increasing revenues, and increasing capital. In addition to this is the complexity of regulatory changes, compliance, and competition from banks and non-banking entities. It ultimately comes down to how banks will achieve growth in deposits, control customer attrition, and roll out innovative customer-facing strategies.

  • Banks need flexible core banking systems to address these strategies whether it is increasing their customer base, increasing deposits or servicing them better, origination and servicing of loans, offering products and services quickly, or assessing credit risk.
  • Ageing legacy systems are becoming costlier to maintain, difficult to support from technology, vendor support and resourcing perspectives.
  • A lot of time and effort is needed to make these legacy systems adapt to new functionalities, open up to new channels, support new products and services quickly.



* Non Exhaustive

Before banks take on this challenge of core transformation, they need to find answers to the following questions.

1. Will the core transformation reduce operational costs and in what period?
2. Will the core platform change support the bank's future growth and vision, and if so how?
3. How will this change benefit in creating a better customer experience?

4. Will the change help banks get a better handle on managing risks and changing regulatory environment?
5. What is the plan to make employees at the bank skilled to embrace and adapt to this change?

Banks need to make a business case that details the value they will derive from modernizing their core systems. This change is not solely a technology-driven mandate but needs to be a strategic business decision. The detailed plans require an analysis of people, process, and technology costs while looking at business value, business process improvements, customer experience and value in parallel.

How can banks make this core transformation a smooth journey and come out successful?

  • Committed transformation with responsibility and accountability from the highest levels of the bank
  • Communication, governance, and stakeholder management
  • Transformation roadmap should be created by the business and technology teams together aligning with the bank's business vision and technology path
  • Professional program and project management,  robust delivery capabilities backed by a scalable engagement model
  • Requirements and scope management through the change
  • Evaluation of current business process to decide on re-engineering to align with the new product
  • Understand the implementation methodology, impact to the bank and customers, and how they will be handled
  • Infrastructural support that leverages the latest architecture and modernized applications
  • Organizational change management with involvement of the top management across impacted lines of business 

What have banks who have already taken this bold decision said?

Zions Bancorporation (assets > US$50 billion) made this decision due to factors such as risk concerns and systems with limited support. They also wanted to achieve common standards, , more centralization, and straight-through (STP) processing across the enterprise through this change.

Deutsche Bank (assets > US$2250 billion) made this decision to standardize processes, improve flexibility in IT infrastructure, and build modular functions through a service-oriented architecture approach. It was aimed at boosting efficiency, profitability, accelerate time to market new products and services.

Commonwealth Bank of Australia's (assets US$725 billion) vision through this change was to build a customer-centric organization, driving growth through simplicity. Their objectives were real-time banking, customer-centric processing, increased customer offerings, industrialization and multi-entity enablement. Customers experienced benefits right away - ability to see transactions quickly, accounts were opened instantly, account switching was done on the spot, transactions descriptions were simpler, and increased sales interaction.

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