Howard Bush

Caution over Blockchain

Bitcoin may have entered the public consciousness, but not much has changed for the banks over the last twelve months. Bartlett says, “distributed ledger technology is something of great interest – the question is how do we turn something of great interest into something of great value?”

Certainly there’s a perception in banks that while distributed ledger could be valuable, there are problems to be worked through first, and even the most technologically-savvy are moving cautiously. There are still big problems for banks, specifically around anonymity and the problem in anti-money laundering that it creates.

“All the banks are investing R&D in [distributed ledger],” says Bartlett. “They want to be seen as active players.” But even banks with a reputation for being forward-thinking when it comes to adopting new technology are moving cautiously with distributed ledger. The initial rush of interest over cryptocurrencies has been replaced by a more measured view of what distributed ledger can offer.

So where are the benefits of distributed ledger? When applied to the banking system distributed ledger offers a more efficient alternative to the current payment processes; but moving these legacy systems onto an entirely new technology stack is a large, expensive and risky undertaking. Performance improvements and cost reductions promised by distributed ledger could be realised using alternative technologies such as Artificial Intelligence (AI) and Robotic Process Automation (RPA).

“The benefits to a bank tend to be on the transaction side,” says Bartlett. “Look at the payment world, which is relatively inefficient. These technologies could take a huge amount of inefficiency out of the international payment environment.”

Ultimately, then it’s still early days, and other solutions may yet present themselves. “distributed ledger is one pressure on the system, but there are other pressures creating uncertainty,” Bartlett says. “When you look at a technology like distributed ledger, it is a pressure point on an environment or ecosystem, and the ecosystem can respond in multiple ways. Banks typically, because of their conservative nature, tend to look for efficiencies in their current environment, rather than adopting new technologies. We’ll see how it plays out.” Microsoft is investing heavily in Blockchain with Project Bletchley and Coco Framework.

APIs – a platform of value

Banking is a highly-regulated industry, and the banks are prepared for mandated changes such as the second Payment Services Directive (PSD2) and Open Banking. That’s not where the uncertainty lies. The banks don’t want to be like Blockbuster.

The API trend is yet to mature, but Bartlett believes it will only take one or two sharp organisations to build a platform of value rather than just substitute value. “Where API will come into plays is when you start to see smaller players able to offer platforms of value by coming together under the umbrella of a third-party platform. So, a building society might combine with an insurer, plus a mortgage provider, plus a Monzo-like debit card – and presents itself as one platform.”

Still, the churn is low. Current account switching in the UK is only in the 3-4% per annum range, and the change in market share is also low even with initiatives such as Open Banking.

Trends in cloud computing

Regulatory-mandated changes are a chief driver when it comes to the adoption of cloud technology. Initiatives such as the Fundamental Review of the Trade Book (FRTB), part of the Basel Accords, are changing the way in which traded assets are valued throughout the course of a day, and the risks associated with that.

Bartlett says it’s a process that demands a large amount of compute. “Banks’ first foray into the cloud has been with analytics workloads, things like grid compute. For FRTB all the banks are looking at cloud.” Speed is of interest here. “We can spin up an analytics environment in hours, not months, so we’re seeing banks go down that path.”

Another driver towards the cloud is dealing with legacy technologies. The cloud offers the advantage of avoiding the huge expense of on-premise technological solutions. “The cost of those services in-house is ridiculously expensive, particularly when you look at the switch on/switch off costs.” In-house assets, such as grid or HPC computing infrastructure, can have multi-million-pound initial outlay costs that rapidly depreciate in value. “Whereas an Azure Service like Batch you can switch it on, get the value out of it, and switch it off.”

To compete with the challenger banks and the FinTech startups, the established banks need to provide a better customer experience at a lower cost. “Banks all struggle with trying to get the cost/income ratios down,” Bartlett says, “and a large part of that is driven by legacy technology environment that are inflexible, too costly and too slow moving to adapt to these new requirements.” This in turn creates blocks to knowing more about customers. “That’s when you start to see technologies like Azure Data Lake being used to create a better source of information.” Machine Learning and advanced analytics workloads and are gaining traction too. “Banks are trying to see how they can take the information assets they already own, move them into modern data platforms. Then they can learn more from every customer interaction. This allows them to provide better customer experiences, with greater customer intimacy, to gain greater efficiency and challenge the challenger banks”.

If you would like to know more about how Azure can be used by the Banking industry, visit the Azure banking website.

In the next article, we’ll be looking at how Smartr, a UK based startup, is disrupting the traditional mortgage market.

Find out more by downloading The Future Banking Ecosystem white paper

The post The latest trends in the Banking Landscape appeared first on Microsoft Industry Blogs - United Kingdom.

Howard Bush is a Principal, Banking & Capital Markets Lead in the Azure Cloud Industry Experiences team at Microsoft. As a practitioner of the “art of the possible,” Howard is a 25+ year banker wrapped in IT clothing impacting the Banking & Capital Markets Industry by building bridges to cloud adoption. Below, Howard provides insights on Open Banking and the global API Ecosystem.

The Road to Transformation

There has never been a better time to embrace digital transformation and innovation in Banking. Unfortunately, many global banks are being caught off guard by disruptive fintech innovation and swift moving regulatory requirements. On the road to that transformation, banks will have to quickly define the new value chains that will drive market share and growth in revenue.

As an accelerant to this banking innovation, there are two regulatory requirements coming out of the European Union (EU) where banks have to expose account information and service payments to/from Third Parties: The Second Payment Services Directive (PSD2) and The United Kingdom (UK) Competition and Markets Authority (CMA) Open Banking initiative.

In a nutshell, the regulatory directives are requiring banks to open up their backend systems (aka Open Banking or Banking as a Platform) via Application Programming Interfaces (APIs) to FinTechs and other banks. PSD2 and Open Banking are kick-starting the financial services revolution that will connect consumers, third party applications and banks in new ways using new business models.

Progressive Banks Have a Leg Up

Many banks are only beginning to take action on these regulations despite its massive repercussions it will have on their business. However, progressive organisations that embrace regulation and transform will be the winners. While banks in Europe must open up because of regulation, leading banks around the world are following closely and not waiting for the regulators.  They are starting to provide API-based access to services to others.  And some banks are pursuing a “marketplace banking” strategy, seeking to position themselves as a banking platform in the middle, on top of which third parties can build a myriad of discrete services.

According to ProgrammableWeb.com’s global API directory, banks and fintech firms published more than 275 new payment and banking APIs in the past 2 ½ years. 

Banking APIs or Banking as a Platform offers a gateway to an interesting ecosystem of trusted partners that will improve the customer experience, increase collaboration, speed up time to innovation, measure business impact, predict needs, devise new business models, new value chains and innovative products that customers need.

With greater accessibility to banking products and services, new market entrants will make it critical for banks to consider new approaches to empower employees, engage customers, optimize operations and transform products to stay competitive.

The Inflection Point and Microsoft’s Point of View

The key question banks need to think about is How will banks’ participate in a broader API economy?

Banks will likely not own the end-to-end value change as they will bring Third Party Providers (TPPs) into their ecosystem. Banking business models will transform to an open ecosystem of partnerships and new un-imagined capabilities. The new era for banking will lead for new opportunities and challenges not seen before. And the role of Banking will be redefined:

• Incumbents may be relegated to the role of pure component/product supplier and be subject to fierce price competition and limited grip on the customer experience, while being saddled with existing risk and capital requirements
• Incumbents will need to make some stark choices on how they wish to position themselves to capture future value
• Incumbents can develop their own aggregation and platform capabilities: for example, ING has launched the bank-agnostic Yolt personal financial management app in the UK
• Others may decide to retreat from the edge altogether and instead focus on becoming hyper efficient, user-friendly product suppliers – aiming to integrate into as many alternative digital sales outlets as possible

We feel marketplaces and the sharing economy are inevitable and those newly formed partnerships can pair the experience of banks with the agility of FinTechs to a win-win scenario by creating agility and collaboration needed as a key to success. Banks can turn regulation into Digital Transformation opportunity to leapfrog competition based on open and collaborative new business models to bring new value to their customers – new value chains will be formed.

To continue the dialogue on this fascinating topic and how Microsoft is driving the API economy through its Azure cloud platform, feel free to reach out to me on:

Twitter @HowardBush2 or Linkedin.

Howard Bush, Principal, Banking and Capital Markets Lead for Azure Engineering at Microsoft.

Find out more by downloading The Future Banking Ecosystem white paper

The post Transforming banking and capital markets appeared first on Microsoft Industry Blogs - United Kingdom.