New frontiers for Transaction Banking IT

I have come to the conclusion that readers want to get straight to the point when they read blog articles. Therefore I will outline my opinions in a series of short sentences that should facilitate reading and highlight the relevant points for discussion. If—instead—I am wrong with this assumption just let me know and I’ll turn to a more “orthodox” writing.

The objective of this article is to anticipate the most likely configuration of information technology (IT) solutions for transaction banking in 5 to 10 years from today.

Banks use technology in two ways: 1.To support their “internal” objectives to reduce costs – in which case technology is mainly used to remove, automate and accelerate manual operations. And 2. To improve their “external” client relationships.

Historically the two areas have had separate IT investments. The current dynamics in the market are radically changing the way banks will deploy technology. My prediction is that the two worlds (i.e., “internal” and “external”) will coexist on a single cloud-based infrastructure with applications deployed in a SaaS fashion à-la iPhone Apps.

Let’s see how we get to validate this assumption.

“Internal” business operations (e.g., procurement, logistics, and back-office administration) are not so different from those deployed in other “non-bank” industry sectors (e.g., automotive, retail, food& beverage, consumer goods). Moreover, these other non-bank sectors have much greater experience and discipline in the adoption and execution of business practices focused at improving internal and back-office operations. As an example, procurement practices are particularly streamlined and efficient in the automotive or retail industry sectors. And the processes managed are not that dissimilar from that of a bank’s procurement office: E.g., select suppliers, process purchase order (PO) requirements, manage the workflow of internal PO approval, PO issuance, and supplier performance evaluation.
The same level of maturity and sophistication applies to the related supporting IT solutions.

Question is then why banks don’t just take advantage of these experiences and adopt IT applications already developed and successfully tested in other industries? After all the ease of adaptation should be quite high considering that many banks’ procurement and logistics executives had previous experience in the “non-bank” industry.

Regarding the “external” operations (i.e., Point 2. To improve client relationships) that is where banks should exploit their expertise and deploy the practices and solutions delivered in the course of time to their corporate clients. Cash management, trade finance, payments, foreign exchange (FX), money market funds, securities, are all but a few of the services and products that are the bread-and-butter of a bank’s relationship with its corporate clients. All these solution areas fall under the wide umbrella of Transaction Banking.

The remainder of the article will focus on services and products that banks deliver as part of their transaction banking strategy.

Opposite to the “internal” processes, banks must develop and deploy the “external” solutions and services at the best of their knowledge and expertise to achieve the target results of revenue generation and customer satisfaction. There are no third-party sources that can inspire the best solutions to use other than the bank’s own strategy aligned with its history, experience, and plans for improvement.

From an IT perspective—which is what this article wants to develop—technology applications for transaction banking must reflect the peculiarities of how each bank services its clients and the way each bank decides to deploy (and price) the offered services. For example, for a simple payment transaction a bank might want to add a reporting service, while another might want to give the option to attach the original invoice document. Another bank might want to enrich the payment with a financing option, while another might provide a cash flow projection for cash and liquidity management purposes. Eventually one or more banks will want to offer everything altogether. Each bank, in conclusion, will want to deliver a transaction-based solution in a way that improves the bank’s revenue, enhances the service level to its customer, and provides an additional reason for the client to remain loyal. That is why, until now, almost every bank has developed its internal proprietary IT “ecosystem”. After all, no IT solution is closer and more suited to run business processes than a custom-made.

To summarize, my point is that “internal” bank operations are best supported by IT solutions inherited from other industry sectors that have proven better proficiency and adoption. “External” (i.e., client-facing) bank operations must run on IT applications that reflect each bank’s service strategy and for which the bank itself must provide its (proprietary) technical specifications.

How does all this reflect in a bank’s IT development strategy?

First of all, banks are too distracted by technology. To avoid that, technology must be separated from business. That is, technology supports the execution of business decisions, but business decisions must not be constrained by the (limited) IT solutions available at the bank. So a bank must decide once for all whether it wants to develop IT applications to support its own business activities—in which case the IT must then be maintained and continuously updated—or just focus on its business priorities and adopt the technology available from any source that makes that technology available.

The reference model I am thinking of for both “internal” and “external” applications is the iPhone Apps. Given that the applications are developed on bank specifications, they could be branded “bApps” (bankApps).

I will describe extensively the paradigm for the “external” (i.e., client-relationship-based) bApps, as the one for the “internal” follows suit.

For “external” IT applications, banks will focus on developing—or providing the specifications to develop—the  bApps. These bApps will run on a dedicated cloud-based platform. For example, we know that letters of credit (LC) will not disappear anytime soon. Each bank will offer its own LC bApp on the IT platform from which the corporate user (generally the treasurer) will be able to select the preferred one. That is, corporate treasurers will be able to log onto the platform and select across a portfolio of LC bApps provided by banks.

Deutsche Bank’s Autobahn App Market is exactly anticipating this trend.

Banks must not spend their IT budget to keep running their transaction banking platforms. They should let specialized providers do that especially because these know better the business processes of corporate clients. To run transaction banking you must better know the underlying business processes of the company.

I expect banks to release to technology providers the task to build cloud-based platforms that support bApps. Banks will concentrate on what bApps they should build on the platform and will use the tools provided by the platform to do so. The platform can be white-labeled if that’s in line with the bank’s strategy.

The platform must be easy to use. Platform providers must ensure technical interoperability with major software ERP (e.g., SAP. Oracle, Sage) standards and protocols, but also interoperability with major banks’ bApps. For example: How does the platform integrate with JP Morgan’s bApps? And with Citi’s? What about Deutsche Bank’s? And with any other bank’s bApps?

The future will see banks and technology providers establish solid partnerships with the IT provider building cloud-based platforms and the bank constructing its portfolio of bApps using the platform’s tools. It is unlikely that these platforms will be completely “open” (i.e., multi-bank). Technology will still constitute a competitive differentiator and a powerful tool to strengthen the bank-customer relationship.

As per their “internal” operations, banks will use Apps built and provided by third-party vendors and will run them using the same platform.