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Digital Banking

November 11, 2018

 

While consumer-facing tech like real-time payments and mobile banking hold great promise for banks, updates to behind-the-scenes infrastructure could be the key to cost savings and competitive advantage. With improved regulatory clarity and the prospect of normalized interest rates, technology will be the future battleground of differentiation for both consumers and investors. As an example, most bank consumers in developed markets are expected to have access to real-time payments by the end of 2018 allowing banking transactions to be completed with a swipe of the smartphone. But customer-facing applications aren’t the only differentiators that investors should be watching. As mobile banking increases customer traffic, having efficient scalable back-end systems becomes critical. Behind the scenes, digitization in banking has the potential to boost back-office efficiencies, reduce operational risk and improve profitability.

 

Over the long term, tech advances such as artificial intelligence (AI) and blockchain will clearly play a role in the evolution of banking. However, modernizing the infrastructure backbone that is, the core banking systems which handle the backbone of a bank’s activities, such as deposits and credits is the most important step banks will need to take. In order to remain competitive, banks will need to update technology on the back end in order to deliver a seamless experience on the front end since customers will have little tolerance for glitchy apps no matter how sleek the user interface. Investments in cloud computing and robotic process automation (RPA) should also take priority. Both of these investments offer an immediate opportunity for cost savings in the back office, while at the same time putting banks in a better position to compete with FinTech’s.

 

To better gauge infrastructure spending, analysts recently analyzed IT expenses over the last five years and earnings call transcripts over the last two years to better understand how banks are spending their IT budgets, gauge their progress against their competitors, and identify banks with the highest potential for improvement:

 

Core banking systems: With many banks still operating off a patchwork of legacy systems, most banks will need to make some improvements to their backbone. Migrating to a state-of-the art core banking system could reduce cost/income by 9%.

 

Cloud computing: Most of the banks are moving to the cloud, which offers the potential to shrink relevant infrastructure costs by 30% or more. Leaders have already moved 10% to 40% of their servers and operating systems to the cloud, and many are targeting up to 80% by 2020.

 

Robotic process automation: Among all of the technologies on the table, RPA may have the greatest potential in the near term. Put simply, these applications (robots) transfer information from one system to another, automating processes previously handled by humans; this can include everything from customer onboarding and payment reconciliations, to fraud prevention and compliance reporting.

 

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