In its April Global Financial Stability Report, the International Monetary Fund said that banks across nine advanced economies will struggle to generate profits through 2025, noting the challenging financial conditions that began early in 2020. In this Q&A, Tom Hetterscheidt, DXC Technology’s chief technologist, Banking and Capital Markets, discusses issues that will affect banks’ ability to be resilient — automation, optimisation and modernisation.
Q: Banks are under significant pressure. What will be critical to their evolution and adaptability?
A: Top of mind in the industry is optimising operations, being more efficient with resources and lowering costs. Applying automation to key areas in the middle and back office is critical for operations teams. Similarly, IT developer teams are automating software development life cycles as part of a DevOps methodology.
Q: How do operations teams take advantage of automation? What are the challenges?
A: You’d be hard-pressed to find any bank that hasn’t implemented robotic process automation (RPA) and layered artificial intelligence (AI) on top of that to do intelligent automation.
Low-code, no-code tools are cost-efficient and appropriate for operations teams who want to quickly build a small internal system and easily deploy it without having to go to IT. But they need resources with experience in effectively using RPA. Even low-code, no-code tools need to be properly governed.
Q: What about DevOps?
A: As part of a DevOps approach — a practice of bringing development and operations teams together — you can automate the development pipeline, speeding up the development life cycle and improving code quality. As part of the automation, it’s also a good idea to apply automated code security scanning to make sure that you haven’t introduced any security holes in the code.
Having skilled developers to set up automated pipelines, and also automating IT operations effectively, are both necessary.
Q: In the last few years, banks focused on digitally transforming core banking systems. How’s that progressing?
A: Smaller banks typically outsource their core banking systems to some of the major providers and are pushing those providers to upgrade them so they can run in the cloud, which provides greater agility. For larger banks, modernising legacy core banking systems is a very complex undertaking. Some banks have adopted a strategy of setting up a digital-only bank. With such an approach, banks contract with fintech providers that have cloud-based core banking systems to set up a new brand within the bank and run the core banking system on this fintech core banking system. Some larger banks are trying to identify specific functionality to take out of the core and move to a more modern architecture, leaving the sections that handle accounting and other core functions where they are. BIAN is an industry consortium developing the Coreless Bank initiative to promote a more efficient and effective approach to modernising banking software.
Q: Are banks holding back on efforts to modernise core banking systems because of the economic situation?
A: The pace may slow down a bit under today’s economic pressure and constraints, but I think things will continue because banks realise how critical it is to modernise architecture and become much more agile. There are going to be more and more systems they’ll want to move to the cloud and large, monolithic, legacy applications are an impediment to doing that. Banks will accelerate their journey towards becoming a much more agile, responsive organisation as they peel more pieces of functionality off the core, modernise them and run them in the cloud.
Q: Optimisation, automation and modernisation — that’s a lot to do. What technologies can help?
A: In addition to banks starting to sign on with fintechs for new cloud-native core banking systems, banks can look to adopt a platform business model, partnering with a technology provider that has strong client-facing capability and brand.
Google just recently announced that it will offer checking account services from several new banking partners, building on what it started with Citi. Apple introduced a co-branded credit card last year with Goldman Sachs. This is all part of being a platform player.
Blockchain-based systems also may come into play for digital identities. KYC (Know your Customer) is one of the big pain points for banks. They have to go through a lot of due diligence to prove customers are who they say they are. Digital identities issued in an easily verifiable way will help simplify and automate that process.