22 July 2014

Phil Boland

Phil Boland - The B2 Group

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Lean vs Fat - has channel banking connectivity come of age?

05 June 2014  |  1960 views  |  0

It seems that developing countries who are lean through necessity, Africa is a good example, with less legacy technology and changing economies, including a burgeoning trade flow that requires more efficient and automated cash management offer us inspiration to do things differently, and do them well.

Traditional Western markets are inherently fat from heavy, high maintenance infrastructure supporting economies that are relatively flat in terms of change.

Providing a secure, reliable, scalable host-to-host conduit for automated cash management processing for corporate clients has always been an expensive business. The long lead time, skilled people, and sheer cost of the technical infrastructure required combine to make even the biggest banks think twice about which corporate clients to automate, and often preclude smaller banks from playing at all.

However, the seeds of change have been planted, with low-cost connectivity solutions that satisfy even the most stringent due diligence now available to any bank prepared to think even slightly out-of-the box. Bank connectivity innovation is not coming not from Silicon Valley but from new markets like Africa and it should be taken seriously.

Adopting a lean model does require banks to re-think on several fronts, including:

  • Changes in connectivity technology
  • Offering complete flexibility for host-to-host integration
  • An on-boarding approach that assists the Corporate at all stages and is open to SME’s as well as VIP sized companies.

Bearing all this in mind, when considering adopting leaner connectivity, banks must inevitably ask some fundamental questions, the most fundamental of which is... 

What is ‘Leaner Connectivity Technology’?

In this context, the adjective ‘Leaner’ effectively means, “easier and cheaper” to :

  • deploy (can be installed and monitored remotely without the need for site visits, requires no specific licensing by the Corporate, has a minimal IT footprint obviating the need for investment in new infrastructure or expensive skilled human resources)
  • run (uses readily available public Internet infrastructure, obviating the need for dedicated networks).

We need flexibility in our integration technology and processes, so that banks can adapt to the way the Corporate works, and technology that can operate robustly in what may be an inherently insecure and unstable environment.

Why hasn’t leaner connectivity always been available?

The simple answer is that essential technical components weren’t available, until recently. There was no single game-changing event that enabled lean connectivity, so that its arrival was somewhat insidious in terms of market visibility. Rather, a combination of factors has made lean connectivity mature to a level acceptable by banks.

Key to this acceptance has been the evolution of a secure public Internet, with Hypertext Transfer Protocol Secure (‘HTTPS’ which is strictly speaking not a protocol at all but a secure solution achieved by adding a security layer to the standard HTTP protocol) offering the necessary security. The Open Source community has been especially pivotal in making cost effective HTTPS software available, with software vendors able to employ industry-tested and well supported components in their lean connectivity solutions.

Continued advances in the stability and speed of Internet connections have also helped enormously, so that the kind of connectivity previously only available through use of expensive proprietary software and proprietary VAN’s (Value Added Networks) is now open to all.

The lean connectivity technology is all very well, but how does a bank overcome the traditional hurdles of on-boarding a new Corporate client?

The most efficient lean connectivity solutions are useless if host-to-host system integration cannot be enabled quickly and cost-effectively. Numerous ‘middleware’ solutions on the market purport to make integrating a Corporate’s ERP system and a bank’s core platform easy, and whilst a useful system integration tool set is certainly important, middleware is really just a commodity. The key to rapid integration lies in other areas, including:

  • Standards (message standards such as ‘pain001’ ISO20022 for payments are rapidly being adopted across most markets, with many ERP systems now able to process such messages)
  • An end-to-end on-boarding process (the bank must work with its Corporate client from start to finish whilst on-boarding, providing easy to use documentation and testing tools, plus expert advice)
  • Flexibility (the bank must offer a choice of connectivity methods such as SWIFT, SFTP, FTPS etc, plus also allow Corporates to use non-standard message formats if needs be).

Is leaner connectivity secure enough?

In a word, yes. Security at every stage within a host-to-host channel is of paramount importance and today’s lean connectivity solutions can achieve this, taking data all the way from the ERP system to the core banking system, encrypting via key exchange and providing a full audit trail. Indeed, some of the traditional security mechanisms, such as card readers (where a transaction can be left on an open server whilst waiting to be signed and encrypted), are inherently less secure than the automated processes available with leaner connectivity.

Other risks, such as malware taking control of machines remotely, are unrelated to whether lean or traditional connectivity is used. Security, rather than increased transaction volumes, is a key driver for banks to encourage Corporate clients to use host-to-host channels, a client of mine at a major UK international transaction bank told me recently that in his view, security with leaner connectivity solutions is just as good as with traditional technology, and sometimes better, as it is easier to integrate with other new technologies. He went on to say that such integration also enables a multi-layered approach to cover so called ‘attack vectors’ by providing front-line protection such as antivirus  software and security devices at the Corporate, backed up by processes and software such as profiling of account behaviour and investigation queues to monitor suspicious activities.   

Lean connectivity solutions for electronic channel banking have definitely arrived, in part spearheaded by needs of the lean economies in territories like Africa. And while traditional connectivity solutions will likely remain prevalent in mainstream banking for the foreseeable future, there is surely a place for lean connectivity as well, benefitting both the bank and its corporate customers.

When it comes to putting customers first, we have to open ourselves up to innovation arriving from unlikely sources and ensure we investigate every option that will help drive down costs and provide secure, robust bank connectivity.  Everyone will benefit in the long term.

TagsPaymentsTransaction banking

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Phil Boland

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The B2 Group

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