In the accompanying article “Banking Operations Strategies and Technologies – 15 Years on” we reviewed how our last guess at how these subjects evolved versus the predictions at the time. We got enough things right to provoke us into having another go. We have broken it down into the following sections;
- What will the Banking Operations Context be over the next five years (and beyond – as we learnt, these things move slower than anticipated)?
- What are the key Business Design ideas for Banking Operations and Technology?
- What are the technology ideas to invest in (and not)?
The Anticipated Context For Banking over the Next five Years
Banking Biodiversity will Increase
Unlike the planet, banking biodiversity hit its low point in 2010 and has been on the rise in the UK since;
- We still have the (now 5) big banking groups.
- We still have the traditional challengers (Co-op, Clydesdale, Yorkshire Bank, Nationwide) as well as some new “traditional” challengers such as Metro and TSB.
- We have a plethora of Fintech start-ups, predominantly mobile only, such as Monzo, Starling, Revolut, N26, Transferwise, OakNorth etc.
- We have some tech giants lurking on the horizon (Amazon, Facebook, Google, Apple, AliBaba etc).
Another important context is that we are rapidly moving to a low cash society. This alone presents a challenge to Banks’ Operations in terms of cash center capacity management, but also ratchets up the pressure on banks to close branches, as many only really exist as a place for small businesses to deposit cash and cheques.
“Us and Them” becomes less clear
It’s a noticeable feature that the traditional banking model is undergoing a substantial change.
- The experience from China shows that Banking Services like payments and lending can be “inserted into business processes” in much more easy to use ways for customers; e.g. the extension of credit to a merchant and/or a consumer can be made at the point of purchase by a platform and not a completely separate process outside the online store.
- The UK Fintech scene shows that lots of “Best of Breed” suppliers can combine in various ways to provide good/ efficient services to consumers. (E.g. the interconnectedness in various different ways between Starling Bank, Transferwise, ClearBank, Form3, N26 etc).
We think Banking Operations will expect to work in a situation like that illustrated below.
This means that some products and services delivered through the Bank’s channels will be from third parties, and they may or may not be branded. Conversely some competitors will be accessing a Bank’s products and services through their channels. This could be in partnerships such as through a marketplace or it could be (increasingly) via open APIs (such as those promoted by the Open Banking Group or PSD2).
Banking Facilities for the “Digital Laggards”
There is no shortage of options for people who only need/ want digital banking. The options for people who want/need aspects of the old fashioned bank will be much more limited;
- People wanting to pay or be paid cash and cheques.
- People wanting to withdraw money from branches at counters.
- People wanting to talk face to face with Bank staff.
- Small businesses with cash and cheques to pay in.
These groups of people will include a lot of vulnerable people; for example people who;
- Are visually impaired who cannot use mobile phones.
- Cannot read/write.
- With learning difficulties/degenerative mental diseases.
- With complex arrangements with lawyers and/or powers of attorney.
- Are in prison.
These groups are not being catered for by the start-up/digital banks and are increasingly being left behind. Many of the new accounts only work with a Smartphone. Increasing numbers of shops and cafes do not take cash and banks are under pressure to close branches to cut costs. It is highly likely that politicians and regulators will force banks to provide services to the “digital laggards”.
What are the Main Banking Operations and Technology Business Design Ideas for the next Five Years and beyond?
We think the following ideas (evaluated in the following sections) will be key.
Banking Operations Business Design Ideas;
- Banks will collaborate to provide some forms of multi bank presence in smaller towns and villages.
- Banking Operations will become management of Banking Technology.
- Banking Operations staff will be few in number and highly skilled.
- Banks will outsource IT infrastructure management and Invest in Application Development.
- Banks will use Artificial Intelligence (AI) to improve customer service and reduce costs.
Banks will Collaborate for Multi Bank Physical Presence
Customers use branches for two main groups of reasons;
- To deposit/withdraw/exchange cash and/or cheques.
- To get answers to questions.
The volumes of both these activities is reducing rapidly as electronic payments overtake cash and payments and call centres and the internet help bank customers resolve problems. The volumes are decreasing so rapidly that the vast majority of branches are just not economic (this issue is common to all forms of Retail).
Unfortunately, there is a long tail of customers that are unwilling or unable to give up on branch based services, many of whom are what most banks would consider vulnerable in one way or another. Society needs these people to be able to function and they need bank branch services. As a result, either by inducing self regulation or by enforcement. Banks are going to have to find a solution and the obvious answer is some level of industry sharing. (Currently a branch with all its overheads and costs is identified with one and only one bank brand).
For cash and cheque deposit/withdrawal, the sharing has already started; it is being outsourced to the Post Office by all banks. There is no current answer to dealing with customer queries, which given they often involve vulnerable customers can be complex and require empathy and judgement on the part of the branch staff.
HBW does not know how shared branch space and staff can be made compatible with bank security requirements, but they will have to be overcome. Below is an example of one possible type of solution.
Banking Operations will become Management of and Support for Banking Technology
Twenty years ago, Banking and Branch Operations could easily be the management of 20k-30k staff whilst maybe 1k-2k staff were employed in IT. In ten years time, there will be 1k-2k staff in Operations and 4k-5k staff in IT. The combination of contactless payments and customers solving their banking issues themselves on mobile phones or via the internet, means that operations staff will be vastly reduced in number. On the other hand the amount of functionality and the number of interfaces to develop, test and maintain will increase enormously (because the bank’s product systems will be part of complex ecosystems with third party platforms and marketplaces and the bank’s channel systems will need to access third parties).
This means Operations Management is not about managing teams executing repetitive process but about managing an estate of IT capabilities and projects.
Banking Operations Staff will be Rare and Highly Skilled
Thirty years ago, all banking processes were executed in branches and branch staff moved from role to role and ended up knowing them all over time. They also saw all human life with all the rich complexities of customer situations that entailed.
For the last 20 years, because of the centralisation and specialisation of bank work into distinct centres, the broad range of knowledge and skills are not being developed in bank employees.
In the near future, most simple queries and operational work will be automated and so the need for branch/operations staff will be very limited. When they are needed, the questions will not be simple; they will be questions like;
- “My business partner has been knocked off his bike and killed – what do we do?”
- “I am in Monaco and I have had my mobile phone stolen – help!”
Thus there will not be many staff needed, as these situations are rare, but they will need high empathy and good communication skills as well as broad ranging banking operations knowledge. Successful banks will have to find ways of developing and retaining such people.
Banks will Outsource IT Infrastructure and Insource Application Development
For the last forty years, banks ran the largest data centres and felt they had little to learn from other companies, nor were there any economies of scale to be gained by outsorcing.
This is no longer true; Amazon, Microsoft, IBM and many others are all running much bigger data centre operations and have robust, proven commercial models for providing infrastructure services.
When it come to Applications Development, the pendulum is swinging in the opposite direction. IT development and maintenance had been outsourced, primarily to India. Now banks are realising that their core business is developing and deploying banking technology based on IT and to outsource is to abdicate responsibility and cede competence. There is no longer a difference between IT development people and product/channel management people, they are all on the same grey scale. This also coincides with the shift to agile development that works (even for banks) in the mobile and internet world.
Banks will use AI to Improve Customer Service and Reduce Costs
Many people prefer to “Google” questions and get answers on their phones. When it comes to similar questions on Banking issues, users have to navigate complex FAQ lists or tricky web pages. The information they want is probably there but it is hard to find and they end up making a phone call to the bank or giving up.
AI technologies can make this better resulting in fewer dissatisfied customers and fewer calls to customer help desks.
Technologies to Invest In
In the opinion of HBW, technologies to be invested in are;
- Robotic Process Automation to avoid legacy system developments.
- Video conferencing to provide access to experts for customers.
- Chat Bots and AI to solve the simple customer queries.
- New digital only banks built from the ground up for digital natives and with migration off legacy platforms at the customers pace using normal account opening processes.
- Open Banking and API’s – this competence will be a competitive advantage.
They are discussed in more detail in the next few sections.
Robotic Process Automation (RPA)
Michael Hammer talked about re-engineering the business. In the past Banks tried this, with limited success, because they ran into the immovable object that is their legacy systems estate. These were very difficult to change and so banks tried to get over the problem by putting digital and workflow layers on front of these legacy systems.
This worked up to a point but created a lot of break points where manual intervention is required. This is illustrated in the diagram below.
For example, a customer may complete an online form for a product change but behind the scenes, bank staff have to re-key the information into one or more systems. What RPA offers is the ability to automate this step by using a computer robot instead of a human being. This has always been theoretically possible via workflow technology and “screen scraping”. The advantage of RPA is that it can be combined with machine learning to become much quicker to learn (and hence automate) the myriads of combinations of customer type, product types and features, circumstances etc that made this automation so hard in the past.
Video Conferencing with Customers
Since there will be fewer human beings in the bank and they will be more expert, more regulated and more specialised, it follows that they are very likely to be geographically remote from most of the customers they need to deal with. To compensate for this, banks will invest in a range of video conferencing capabilities. Some of the capabilities will be at the experts’ end in their offices and/or home offices. Some will be in (the reducing numbers of) branches. Some may be in “shared branch facilities”. Security and risk appetite will determine to what extent this will take place over customers own phones and computers. In situations where the bank is confident, the video conferencing will be combined with screen sharing to help customers with their completion of online forms or resolving their online problems.
Chat Bots and AI to Reduce the Work from Simple Queries
Most organisations offer “chat” as an efficient way of dealing with customer queries. Some are already experimenting with using bots to help automate some of these situations. We believe this has a lot further to go and is illustrated in the diagram below.
One of the characteristics of current customer self help (FAQ’s, help pages) is that the content is limited to what can be put on the website without making the navigation too difficult. What Bots can do is make large amounts of user help material available in a user friendly way. Some customers may want a natural language interface and so want a chat bot. Others will want intelligent search. Help screens will stop being long lists of classes of information and will look more like a Google help screen accessing large volumes of different types if information, including videos. To make this work, the Bots need to be connected to a machine learning environment which continually trains the robots on the best answers. It should also feed into the development of new content where there is not a good answer.
Digital Only Banks
Big and traditional Challenger Banks are even more stuck on legacy banking platforms than they used to be. Previous attempts at replacing legacy platforms have foundered on the rocks listed below;
- The need to connect legacy channels to a new core banking platform or new channels to the legacy platform has always been technically very challenging. This is required to allow a phased migration.
- “Big Bang” migrations of large number of accounts by automated means have become too risky (TSB incident).
- Splitting sort codes across banking platforms was (and still is) impossible from an accounting and payment systems point of view and so units of migrations were either whole sort codes or customers accounts had to be re-numbered into new sort codes. The former meant phased migrations by product type or customer type were not possible. The latter meant that customers ran the risk of payment instructions not working.
A number of factors have recently come together to enable an opportunity to migrate off their legacy platforms;
- It is now possible to comply with KYC and other requirements without branches; for many banks the technology associated with branches are a key legacy constraint.
- It is possible to have meaningful bank accounts that do not offer cheque books or allow the pay in of cash (see Monzo, Revolut etc).
- Account opening can be a relatively low cost event for banks (see Monzo, N26, Revolut etc.).
- Industry account switching (CASS) means change of account number is not such a big deal.
- Cloud based, banking as a service solutions, now allow low cost entry points for creating a new digital bank.
The new idea is illustrated in the diagram below.
The key ideas are;
- The bank does not try and replicate the full functionality of the legacy platform; in particular it does not try and support channels other than the mobile channel, nor cash and cheque payments other than ATM withdrawals.
- The bank does not replicate channels complexity; it only offers a mobile banking proposition.
- The customers are incentivised to “self migrate” from the legacy platform by opening the accounts on the new platform themselves via the Mobile App.
- The bank lives with a diminishing number of digital laggards on the “stabilised” legacy platform.
- There is no systems interconnection between the new platform and the legacy platform.
- The new bank will be designed from the ground up to be built by connecting components via API’s.
This will have the effect of getting the majority of customers onto a new low cost; flexible modern platform. It does leave the ongoing costs of the legacy platform which will have to be run down over time but stops it being the inhibitor it is today for the bulk of the customers.
Open Banking and API’s Competence
As mentioned in the section on digital bank above, the new digital bank will be built and maintained using API’s. This alone should be a reason to develop a competence in API’s. However the world outside the bank is moving to much more of a granular marketplace for banking services (see the context part of this article).
Alipay and Tencent have shown that banking “micro payments” and “micro finance” can be inserted into lots of different places in a customer’s digital lives. Banks will need to be able to offer such services and they will be exposed and exploited by API’s.