By Joseph Prunty, Area Vice President, Modern Finance Solutions, Oracle
Remember the old idiom “bankers’ hours”?
Short workdays and numerous holidays gave rise to the phrase, back when banks operated at a slower pace and in a more predictable business landscape.
That world is unrecognizable today, as technology, regulations, and changing customer expectations roil the banking world, forcing changes throughout the value chain. Disruptive technology continues to serve as both cause and solution in banking, powering new competitors—the fintechs—and helping established banks meet new challenges.
Fintechs, unencumbered by legacy systems and practices, have quickly leveraged technology to capture market share from traditional banks. Meanwhile, leaders at long-established banks face the daunting task of replacing outdated IT and business models.
As Oracle CEO Mark Hurd said at Oracle OpenWorld 2017, “Technology innovation and customer adoption is increasing faster than [banking] IT capabilities can keep up.” The stakes are high.
In 2009, credit-card processor Square came out of nowhere and ultimately swiped 25 percent of market share from traditional card payment processors by offering a simple product that could connect to any mobile device. Leveraging the latest technology, Square built a system to process transactions at a lower cost than existing companies could, changing the rules of the business.
As fintechs drive down prices, margins shrank at established competitors. Some estimates indicate that banks lose money on the majority of their customers. With traditional full-service banking, financial institutions can expect 20 percent of their customers to drive 150 percent of their net income before taxes. This means that, with the other 80 percent of their customers, banks either break even or lose money on every transaction.
Additionally, banks must contend with the cost of meeting increased government regulations, while fintechs tend to fly under the regulatory radar—at least initially.
To survive, banks need to focus on cutting costs and improving services to make that 20 percent more profitable, and lose less money on their unprofitable customers.
Banks are beginning to recognize the need to update old IT systems and organizational structures. More importantly, they’re beginning to understand how the two are interrelated and can be leveraged to drive competitive advantage.
Traditional banks tend to think and operate from an internal perspective, usually by lines of business. As a result, bank operations are not driven by customers. This is a problem in a world where people have been trained by mobility and apps to expect fast, personalized service. In the past, “banker’s hours” persisted because people didn’t have a choice. Today, they do. They have a banking need and want to satisfy it in the most cost-effective way possible—at a time (24/7) and via the channels that they prefer.
Most important, the same customer might need multiple products and services—say a mortgage, business loan, checking and savings accounts, and college savings account. When the bank is organized by lines of business, it limits the visibility required to meet that customer’s needs. And as bankers worry about where to assign revenue and responsibility, they lose sight of delivering the service customers expect.
Just as lines of business tend to be siloed, so too are the IT systems they rely on. This cripples the bank’s ability to exploit their most valuable competitive advantage over the fintechs: data about their large customer bases across all lines of business.
The result is that banking customers don’t get the full-service experience that might keep them from defecting to a competitor.
A complete, connected suite of cloud systems offers the accessible, un-siloed technology that enables banks to transform. With all customer data in one comprehensive data set, banks can take advantage of algorithms and machine learning to identify and serve broad-based customer needs, even as line-of-business leaders retain access to the data to serve their specific needs.
At the same time, a connected cloud helps banks meet competitive challenges by reducing IT costs and simplifying the deployment of digital services. Cloud solutions eliminate on-premises application license fees, along with implementation and upgrade costs. Upgrades are completed automatically, reducing disruption, along with the need for teams of expensive IT specialists and time-consuming, multi-million dollar upgrade projects. And since cloud systems are updated on a regular cadence by the service provider, the bank always has access to the latest, most innovative technologies.
The cloud help banks address both back-office and customer-facing challenges. Internally, the cloud streamlines reporting, which reduces cost, speeds decision-making, and frees time for bankers to strategize on growing the business. For customer-facing needs, cloud simplifies the adoption of the latest technologies—including chatbots and digital-only products and services—that fintechs have used to woo today’s technologically capable customer base.
The once-staid financial services industry is undergoing a dramatic change that requires it to be as nimble as the fastest-growing technology company. By operating on a complete, connected cloud, banks will be able to transform from a siloed business to a customer-centric organization—reducing costs even as they meet ever-changing government regulations and deliver ever-improving products and services.