Fixing the hidden wiring is key to the success of tomorrow’s bank

Technology has revolutionised retail banks over the past decade. Customers now predominantly manage their money via apps with personalised features, virtual assistants, and financial suggestions tailored to their individual needs.

Users can open accounts quickly via digital systems. They can share key financial information at the click of a button with Open Banking, with no need to send payslips anymore. Their money is kept safe with convenient, secure biometric authentication.

All these developments are the result of new customer-facing technologies which have been implemented in banking over the last five years.

Why has this happened? Largely because digital natives have come to expect a slick, reliable digital experience. In banking, challenger banks have provided just that. So the mainstream has had to follow, trying to match this experience and lower operating costs. 

But what about the hidden wiring?

However, when we look beyond the customer-facing technology, at mainstream banks’ back-end systems – what we might call the hidden wiring – the picture is different. 

According to Deloitte just 11% of banks have modernised their core systems to the point that they can easily integrate emerging technologies. Most still run on legacy systems and old data models. 

So how can banks modernise their back-end systems, and what would be the benefits?

The data issue in banking

Data modernisation is key to transforming back-office systems. Most back-office activities in banks – credit and affordability assessment; process management; document management; compliance; audits – rely on data. But legacy back-office systems and old, siloed data models create problems. 

Firstly, legacy systems tend to force banks to see a series of disconnected accounts and transactions rather than a single customer. They cannot always get an accurate and timely view across their loan portfolios, and they could have much more insight into the value each customer and product truly represents.

Secondly, it can be difficult for banks to compile the data needed to meet audit requirements. Regulatory reporting can take longer than it should because of the need to use multiple systems. As a result huge amounts of time is wasted every month closing the books and reconciling data.

Thirdly, although banks hold more information about customers than ever, it is often siloed. Most can’t consider data holistically. If it was joined up, this data could deliver important insights. But that is often not possible and those insights never materialise. 

From silos to strategic insights: Finding insight in back-office data

What would it look like if this data was coherent, in one place and available for interrogation? 

Data on customers, products and markets could be mined for insights to guide decision-making.

Operational data could be considered together with finance data, in real time. This could deliver a real-time view of the value of each customer on the bottom line. It could also give insight into new products to offer and potential markets to enter.

The value of this instant insight has never been greater. We've gone beyond the 'new normal' to a world some have defined as 'never normal'. The old certainties no longer prevail. In this changing market, insight and agility are business imperatives.

Banks need to understand their position in real time. They also need to be able to model and forecast multiple scenarios continuously. 

Institutions which rely on episodic planning and legacy systems will have limited insight. They will waste valuable time and be exposed to more risk. They won’t adapt as quickly to the changing world around them.

Take product profitability as an example. Historically, it has taken considerable time and effort to see clearly whether a product is profitable. It has required huge amounts of data manipulation in the background. 

But modern data techniques will allow banks to see precisely how profitable each product is at any given time and to forecast profitability with more confidence.

And instead of seeing each customer as a series of disconnected accounts and transactions, and making decisions based on their use of a single product, they’ll also be able to see the customer as an individual. They’ll see their behaviour and their risk or value in its entirety, and understand more and more clearly each customer’s needs.

This will allow banks to tailor their offers in a compelling way without increasing risk.

Turning AI and machine learning into value

Most of these potential gains will involve using Artificial Intelligence and Machine Learning to find insights from huge data sets. 

Workday's research shows that nearly three-quarters (73%) of business leaders already feel pressure to implement AI in their organisation.

In finance, research from The Bank of England and Financial Conduct Authority suggests that 72% of UK financial services firms are developing or deploying ML, a branch of AI that allows machines to learn from data. 

The same report predicts that the number of ML applications used by organisations in the sector will grow 3.5 times in the next three years. 

But AI and ML need coherent, complete data sets. For banks to get full value from these technologies they need to address their back-office data and modernise the hidden wiring. 

Leaner operations through back-office modernisation

Banks face significant competitive pressure from digital-first rivals. And data-savvy tech firms can cherry-pick some of the most profitable bits of their business. Where, historically, banks required ownership of the current account to gain the greatest customer insight, firms can now gain at least the same customer understanding through open banking and by bringing together other alternative data sources, allowing them to focus on the more lucrative financial products.

Operational efficiency is therefore key. Having data that is AI-and-ML-ready allows the use of technologies like robotic process automation to streamline burdensome processes. Modernising back-office systems means leaner operations, with staff freed up to focus on work that adds value, rather than routine administration.  

Time to bridge the gap

Gains made from improved customer-facing technology show that banks can innovate and drive progress that has significant benefits. Now is the time to extend progress through the mid and back office, gaining new and improved insights from joined-up systems that provide the most complete picture of customers, portfolios and business performance at any given time.

The organisations that do that quickly and well will be best placed to adopt new technologies such as AI and ML, make better customer and business decisions, and embrace new ways of working to drive their organisations forward.