This article first appeared in City A.M. on Monday 26th February 2018.
There is something for everyone to celebrate in what has been a solid earnings season for the Big Four UK banks.
RBS saw its first profit in a decade, HSBC’s pivot to Asia gained momentum, Lloyds’ focus on simple and safe business model continued to bear fruit, and Barclays planned to return more excess capital to shareholders.
The UK banking sector may have turned a corner with the worst of the regulatory burden and litigation costs now behind banks. A synchronised upturn in the global economy is on the cards. The Bank of England is signalling faster interest rate rises than previously expected, offering retail banks a greater interest margin.
At the same time, the return of market volatility gives investment banks some optimism when it comes to trading activities.
So where next? Pivoting for growth is a clear theme among leading banks’ strategic plans as they announced their 2017 full-year results last week. And accelerating and sustaining digital transformation is the centrepiece. Lloyds Banking Group made this clear with a £3bn strategic investment into enhancing the development of digital banking products and upskilling its staff for the digital age.
Legacy IT estates are widely acknowledged as the Achilles’ heel of the financial industry’s digital transformation. Such estates are expensive to maintain, not agile enough to underpin new technologies or compete in terms of costs, and cannot be transformed into digital platforms easily.
The net outcome is trapped and duplicated customer data and computing power – the oil and horsepower of digital finance – across the siloes of spreadsheets, functions, and business divisions.
Balkanising data and computing power in digital finance is as unproductive as balkanising capital in traditional banking. Incumbents are aware of this and have sought to overcome the “data silos” by looking into the public cloud – data storage and processing infrastructures hosted by third-party technology providers, such as Amazon or Microsoft. The business rationale is clear: on-demand scalability without the need for upfront investment.
Such initiatives have, to date, focused on individual processes in the back-office. But increasingly, banks will need to move beyond dipping their toes in the cloud and consider migrating core functions to address the opportunities and challenges brought about by PSD2 and Open Banking.
Both regulatory initiatives force open access to customer data and customer relationships currently held by incumbent banks to third-party players, be that fintech, challenger banks, or incumbent giants from retail and telecom.
Banks will face intensified competition, not least in the race to develop better digital banking products. Industry analysts expect Open Banking to accelerate the sector’s migration to the cloud from “trickle to tsunami”.
Without a single view of the customer, banks will struggle to provide the truly personalised experience expected by those customers. And without the technology architecture to support seamless programmatic integration with partners in the financial ecosystem, banks cannot fulfil the real mandate of Open Banking aimed at enhancing consumer choice and welfare.
The banking sector’s migration to the cloud has started. OakNorth has become the first British bank to be born in the cloud. Established incumbents have also responded with similar initiatives. For example, UBS is moving its risk management, one of the most critical parts of the bank, to the cloud. JP Morgan is doing the same with its wholesale trading applications.
To enable and sustain the step-change in performance envisaged in strategic plans, banks need to be open to the business and cyber advantages of the cloud and embark on the migration in a synchronised and thorough manner, particularly as the industry gears towards greater openness.
Banks will need to be considered in the choice of infrastructure providers to minimise financial stability and data security concerns from concentration. Harmonisation of technology standards and a greater coordination between the financial industry, its regulators, and the technology sector will also be required to ensure that every cloud has its silver lining.
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