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24-Oct-2019 13:46:23

Big banks have long struggled to keep legacy systems competitive with the newer tech used by challenger banks and fintechs. The upstarts’ use of cloud platforms is perhaps their biggest advantage.

Banking has always been at the forefront of technology-driven change. From the ATM roll-outs of the 1970s to contactless payment in the 20-teens, the data- and transaction-rich banking world has lent itself readily to digital change.

But digital adoption has turned into digital disruption over the past ten years. Two notable contributors to the new landscape have been the partial breakup of large, bailed-out incumbent banks to create new competitors; and a new breed of technology-led operators entering the sector as part of a fintech revolution.

The result has been a sharp increase in competition, along with an explosion of innovation to bring better banking and financial services to retail and business customers.

Creating Positive Experiences

These new challenger banks are making branch-free banking and customer service easier and more personalised, adding ancillary services and creating experiences that attract and retain customers. Although incumbent banks have worked hard to keep pace – with their own investments in fintech, app-based banking and acquisitions – their dependence on legacy technology gives them a major headache.

The resultant distinction between challenger and traditional bank capabilities is already showing up in customer satisfaction surveys. Fintech-enabled providers can roll out new and enhanced money management, savings, investment and lending products – and generally at much lower costs than their traditional rivals.

Coming generations of customers will need all the financial advice they can get from banks, whether it’s to help them invest, pay off university loans, mortgages or plan around starting a new family. So becoming the trusted provider of personalised money-management support represents an extraordinary opportunity for any bank that can deliver on these services.

For challengers, digital chatbots that can walk customers through a wide range of product choices, for example, are a natural extension of their low-cost, high-touch technological roots. For incumbents, they’re a costly add-on to ageing core databases and transactional systems.

And challenger banks, often starting from scratch, have been able to base their services on the far more powerful, predictive and secure ecosystems that cloud-based technologies offer.

Failure to Launch

Traditional banks were, in fact, early adopters of cloud technology. But most of these banks were only tapping a fraction of the cloud’s potential, restricting its use to managing their non-critical systems, such as email, customer relations management, and application development. In the UK, the FCA only issued guidance on the use of third-party cloud platforms in 2016 – in part prompted by the number of new banking licences going to these cloud-by-instinct new arrivals.

Even now, relatively few incumbent banks have been deploying cloud technology in their critical transactional applications, such as deposits and loans. (Note, however, that in an Accenture survey of banks just 3% of respondents didn’t have a cloud strategy and had not started to think about it.)

Some still cite security concerns about their customer data and IT infrastructure. This has left old-line banks at a significant competitive disadvantage because much of their owned and operated data centres and legacy hardware is costly to staff and maintain – and, ironically, more vulnerable to cyber-attack or system failure.

By contrast, challenger banks utilise the scalability and flexibility of the cloud by way of outside partners – such as Rackspace – to meet the needs of on-demand consumers. Because they do not own or maintain critical IT infrastructure, these challengers are able to deliver new services far more cheaply – and are able to rely on cloud providers’ far more extensive investments in the security of their networks.

Flexible compute: the next frontier

Those operational advantages from cloud are about to get more telling. Being hosted in the cloud means challenger banks have flexible access to vast additional power (or ‘compute’) as an when they need it. That means they can make use of processor-hungry AI and machine learning applications to analyse the huge amounts of data that they collect from online communications with customers.

These tools are allowing them to better understand the savings and spending habits of their customers – and driving predictive modelling of customer needs. Challenger banks are then able to suggest additional services that customers may not be aware they could benefit from, or for that matter, that they even exist.

Challenger banks are continually pressing their technological advantages to develop these customer-centric services. Along the way, they are earning their customers’ trust, a hard-to-achieve commodity in the global financial services industry.

Becoming a trusted adviser has a value beyond bread-and-butter transactional banking activities. As the cloud enables more and more service capabilities, challenger banks will be well-positioned to advise on more of the important decisions that help new generations of customers lead successful financial lives.

From helping them choose the best mortgage to finding the most appropriate retirement plans, the trust earned through the services banks deliver now will pay dividends down the line.

What do data rooms and challenger banks have in common?

Much like the challenger banks, data rooms use the cloud to maintain robust levels of security, to scale and innovate quickly, and to provide consistently high-quality customer service.

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