The financial services industry is in a period of fundamental change forced by the rise of fintechs, changing regulatory demands, and the inability to offer modern functionality due to the burden of legacy systems.
The damaging impact of this could result in up to 35% of banking industry profitability being disrupted by fintechs alone, according to IBM research.
Companies such as Workfront have forced the likes of Charles Schwab, an U.S investment firm, to drive down prices, however, it’s not all bad news because if banks fully embrace digital transformation programs then they could drive more than a 45% increase in profitability, at least 30% of which would come from improved productivity, efficiency, and cost.
Firstly there is the idea of being able to serve the customer better, something which many of the large retail banks have made some move towards.
Ideally banks would be able to provide a single view of the customer across all of the services and products that are being used, but that isn’t being achieved.
Likhit Wagle, Global Industry Leader, Banking and Financial Markets, IBM Global Business Services, told CBR: “It’s very expensive to do because of the way banks are set up in terms of legacy where you have lots of siloed organisations, lots of banks coming up through acquisitions, they’ve got zillions of data warehouses – they’ve never consolidated any of this.
“So if you’re a very large bank and starting from scratch it’s not something that is entirely straight forward and the view has always been do I really need to do it. There’s hasn’t been much of a burning platform until recently.”
That has changed, there is a burning platform and the sharks are circling underneath.
Banks have to change and if they want to see things like a 45% increase in profitability then they will need to look at technology.
This is where the idea of the cognitive bank comes in. IBM is one of the companies pushing this notion of a bank’s systems and processes being more intelligent, mainly with the help of Watson.
IBM Watson, the cognitive system that the company has been trying out in a number of different areas such as healthcare, finance, and even jeopardy, has a potentially important function in the area of compliance.
The problem is essentially regulations, they are constantly changing and most of it comes in an unstructured form that financial organisations have to go through manually in order to find out what their obligations are, before then translating those into the implications for all of their products, services, and advisory obligations.
To put some context to the problem, a bank like HSBC employs around 40,000 people and 10% of its global workforce is exclusively involved in this activity. This means that a lot of expense and man time is tied up doing a job which provides no competitive differentiation.
IBM’s solution has been to run proof of concepts with banks in the U.S to take the Watson technology and pass the information through it.
Although human intervention is still needed at the end of the analysis to determine what is really important and what is not, it is a fraction of the effort that is manually required right now.
“It’s much more value added intervention that is really taking advantage of human experience and human skill as opposed to a lot of very mundane going through reams and reams of paper. A lot of things that graduate lawyers are doing the grunt work, all of that is no longer necessary,” said Wagle.
The outcome is that a job which would take humans three or four days to do is reduced to three or four minutes.
Although Wagle can’t envisage a situation where technology is relied upon completely he says that what they are trying to do is take the low value added, time intensive job and convert it into something that can be done through cognitive capabilities.
While this sounds like a great deployment of technology it isn’t as simple as it sounds.
In January 2014 the Development Bank of Singapore (DBS) started using IBM’s Watson to deliver a next generation customer experience. It applied the technology to its wealth management business to improve the advice and experience delivered to affluent customers.
Wagle said that it took around 12 months to get Watson firing on all cylinders. This is because Watson gets better the more practice and data that it gets.
Initially the accuracy of responses would be quite low at around 30-40% but it improves quickly due to the nature of the cognitive software.
“Come up with an offer that truly meets the requirement, rather than just saying I’ve got a credit card to flog so I’m going to flog you a credit card.”
While optimising the time consuming jobs that yield little to no competitive advantage is one way the banks can improve, another is in monetising data.
This is the one thing that fintechs don’t have, the information on customers and what they are doing.
“If banks were starting to use that information more effectively, and by more effectively I mean by providing a better quality of customer experience, then you will start to see a sustainable competitive advantage and fintechs will find it very difficult to replicate that because they just don’t have the information,” said Wagle.
Should banks be fearful of a burning platform type of scenario when it comes to legacy, they should definitely be concerned about losing this competitive advantage.
Due to changes in regulation, the Competition and Markets Authority called for banks to provide Open APIs and data sharing, there is essentially an hourglass running down on how long banks have exclusivity over their data.
Wagle said: “If anything it creates more of an incentive for the banks to accelerate them truly taking advantage of that information because that data is now going to become available to everybody. I think it’s going to take a little while for that to become sufficiently effective for the playing field to be truly levelled.
“But it’s a small window and I think if the banks do not take advantage of this to put themselves in a position where they find even that piece disappearing.”
What this means is that they need to act quickly and one of the ways they are taking action is by collaborating with fintechs.
The evidence of this has been made apparent in research by the likes of Accenture, and Wagle said that Chase Bank in America is providing a good example.
The bank decided to start thinking about mortgages as not just selling a loan but as a way to help customers to buy a house. With this in mind the bank brought together an ecosystem of people from estate agents to insurance companies and people who can advise on neighbourhoods.
So when a customer goes on to the site and makes an inquiry about mortgages they will see help from a number of different areas that play an important role in where to buy a house.
Wagle said: “What Chase found is that people are not just taking the mortgage rate and comparing it elsewhere to see the best rate for the mortgage, you’re probably still going to have a look at it and you’re not going to pay Chase a premium but you’re happy to stay within that environment.”
Essentially this is connecting in to a larger ecosystem of experts in their fields in order to make the Chase service better.
This comes down to a matter of offering something of value to customers, as Wagle said: “Come up with an offer that truly meets the requirement, rather than just saying I’ve got a credit card to flog so I’m going to flog you a credit card.”