The banking industry is considered fertile ground for the consultancy industry.
This is because it is faced with challenges that range from continuing crisis fallout, ageing infrastructure and challenger banks emerging in every geographic and business domain.
Michael Steinharter, is VP and GM for Banking and Capital Markets at services firm CSC. The company issued a report as part of its fintech engagement strategy. The report is called: Redress the Balance, How can IT leaders stop spending too much on ‘Running the Bank’ and start spending on ‘Changing the Bank’?
Mr Steinharter and Mr V. Balasubramanian, CTO Banking & Capital Markets at CSC were in London recently and we discussed the current and future state of banking.
What are the top technology issues in banking? The top issues in banking are governance, risk and compliance. Add to that the competitive battleground in customer experience because power has changed hands to the consumer from the bank.
Mr Steinharter says: "You [the bank] need to be where your customer is. Payments disruption is in early stages of maturity but it is remarkable watching what Google Apple and Paypal are doing."
This all points to the need for greater efficiency. Efficiency is not a strategy but is a result of the pressures being put on the industry.
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"The banks have never had to strive for the kinds of efficiency that they must try to achieve today. Banks with cost income ratios that are in the 60s and are in a panic to get to the 40s. In some parts of the world banks are in the 40s. Australian banks and some of the Nordic banks are in good shape as are some of the Spanish banks. But even here they are in a panic to get a cost income ration into the 30s because they are thinking: "One day I’ll have to compete with Google," he says.
This is important in IT terms because by some calculations all the compute power of the biggest banks in the world would fit in the corner of one of google’s mega data centres.
Steinharter says: "It could be managed by 10% of the people who currently manage the IT at particular banks."
"The overriding challenge is the ratio of how much they are spending on running the bank versus how much they are spending on changing the bank."
Customer Experience
The pressure that banks are facing are around customer experience and the need to find customers and start serving them well.
This quickly becomes an IT conversation because it requires investment in the system. Its creaky old core systems may not be capable of providing multi-channel access and social media based services. For many banks, the systems have been set up in silos over many years.
This question being posed is: "How do you do serve the customers in required way if you are spending 60-70% on running the bank?"
The answer, says Steinharter is by reducing cost to income you can use that to fund the necessary changes.
"A simple but effective strategy but one that can be hard to execute given the existing infrastructure," he says.
How can banks become more efficient with infrastructure? The problem is complex because it isn’t just moving money from one pocket to another. "You have to do it while reducing the total spend," says Steinharter.
He gives the following example. Today’s spend is 100 quid split two thirds and one third. That 100 is getting reduced to 60 or 70. And if you follow that traditional split of two thirds and one third you have very little with which to change the bank with the necessary innovation to keep up with the upstarts.
"So bank IT leaders are getting squeezed from both ends and that’s a conundrum for a lot of people," he says.
See next page for more on why banks risk failing if they don’t control capital costs
Traditional outsourcing
Why not just opt for a traditional outsourcing solution to deliver capital cost reduction.
Steinharter says look at the customer and vendor perspective. Mess for less is yesterday’s news.
"The vendor, and I know this because I cut many of those deals myself, will always sacrifice profitability upfront to deliver savings for the client. So that’s how you win. The clients will get the savings promised. Promises will be made about delivering innovation from research labs and a variety of sources and the vendor will say ‘I’ll make my profit in the out years.’ But most of those deals don’t actually make it to term. They get renegotiated part way through."
"On the customer side you get your benefits and you know well that the vendor will make profit on the out years. So what gets sacrificed is innovation. The best case on a classic ITO deal is it delivers savings. It rarely delivers innovation."
So where do banks find capital efficiency?
Banks are interested in very significant cost savings and reallocation of capital and taking assets off their balance sheet by building utilities approaches to IT. This is an area which is starting to pick up a lot of steam.
"Great big global banks are saying we have to save this amount of money on an annual basis over the next five years. And if we don’t take this amount of capital cost out we may not survive. It becomes that dire," Steinharter says.
And rather than having that lead to a classic outsourcing discussion it has led to a consortium of vendors.
CSC operates by orchestrating a variety of vendors such as storage, server, apps and outsourcing firms into this environment. It manages them into the pillars of activity to bring the savings in particular areas. It breaks it up into unit price parts that are executable.
"It delivers the capital reallocation that the bank is looking for an it also leads o a discussion about carving out targeted business processes and create a utility out of it. It would serve proper market SLAs and which could become a commodity for others to tap into.
Heart Transplant or exercise
In relation to core banking – many are quite old and very few banks are interested in performing ‘heart transplants.’ These are very expensive and take a long time.
"Taking out your Hogan banking system is a big deal and will take multiple years. So build stronger muscles around the core. Don’t touch the core but modernise in components. Maybe modernise deposits, modernise cards, modernise lending and build a multi channel access through software next to the core."
The reality is that you can’t get to next generation infrastructure unless you modernise your apps.
What are the approaches the banks are taking?
Mr V. Balasubramanian, CTO at Banking & Capital Markets CSC says that as banks undertake the value map of their operations they tend to see functions that differentiate them. The goal is to identify functions that are potentially commodity and that lend themselves to the utility approach.
"That’s really where this discussion is going," he says.
Is a bank a technology company?
The new chairman of Santander, Ana Botin has said she is competing with the big four. The big four she referred to are Amazon, Google, Apple and Paypal. Those, not other banks, are her big four competitors.
Steinharter says: "People trusted their banks for hundreds of years. The paradox is that the burden of regulators – being the thing many banks complain about every day – is also the thing that protects them from other players. At least for the time being."
