Banking technology changes in 2016

2015 was a key year of change for the banking industry, with disruption and innovation taking center stage. The pace of change is set to accelerate further in 2016, driven by the continued proliferation of technology, the emergence of non-traditional players across the banking value chain, overall pressure on banks’ bottom lines and evolving customer expectations.

As a result, the banking industry is expected to significantly increase the focus on innovation across front, middle, and back offices, with continued cost rationalization. Hybrid cloud strategies and the adoption of blockchain technology will help banks cut costs. While increased regulatory compliance and security directives will initially involve significant budget commitments, they are expected to improve operational efficiency and risk management in the longer term.

Apart from operational initiatives, banking executives will continue to strive to provide a superior customer experience through personalized offerings and enhanced payments security by leveraging analytics. Here, in more detail, are five trends that top executives can expect to unfold this year:

Blockchain technology will revolutionize payments. This technology can assume the role of a financial middleman by significantly reducing the execution timeframe of a transaction and making it more transparent and secure. Transparency, a decentralized structure and multi-signature capacity are the features that have led to the increased willingness by banks to explore potential use cases of blockchain technology across the banking value chain, including retail banking, cash management, and payments. This technology can accelerate the velocity of money and provide a path for legacy banking systems to interoperate, according to the World Payments Report 2015.

2016 will be the year of big partnerships between blockchain-based technology firms and major financial institutions. For example, thirty leading banks across the globe formed a consortium known as R3 to explore potential use cases of the blockchain technology in finance. Fidor Bank in Germany recently announced a collaboration with technology firm Ripple to use the latter’s distributed ledger system to further its international trade finance and subsidiary payments.

We expect higher involvement from all the stakeholders (including regulators) in evolving common standards to facilitate interoperability. As more and more real world applications are developed, common standards will lead to enhanced financial integrity and consumer protection. This will also pave the way for increased adoption of blockchain technology within the industry.

Banks will accelerate hybrid cloud strategies. As banks continue their focus on cost rationalization and face stiffer competition, they will intensify their search for solutions that will provide them with much needed agility, reduce their operating costs and enable them to better engage with customers.

Cloud solutions provide banks with the right ingredients to compete and flourish, as they offer agility and flexibility to institutions burdened with legacy systems. They can help banks meet ever-changing customer expectations and also compete with more nimble players operating with lower cost structures. Additionally, the scalability offered by cloud platforms enables banks to free up internal resources (both staff and funds) for more productive activities such as business development.

With these advantages, we expect 2016 will see an accelerated adoption of hybrid cloud strategies. Larger banks burdened with legacy systems will witness a gradual shift toward the cloud, with a focus on non-core or less sensitive activities, while banks with more agility will look to leverage hybrid solutions more as they will migrate data onto cloud platforms.

Big data and analytics become essential to deliver enhanced customer relationships. With the proliferation of technology, we have witnessed the larger role played by digital channels, such as the Internet, mobile, social media and video, in delivering financial services, driven by both customer adoption and banks’ push to lower transactional costs through the use of less expensive digital channels.

As interactions shift to digital channels, banks have slowly lost out on valuable customer insights, which were traditionally garnered through face-to-face interactions. However, with technological advancements and the shift in the role of the branch from being transaction-oriented to advice-oriented, we will see more and more banks taking initiatives to improve their knowledge of the customer by leveraging analytics to build/enhance customer relationships.

Utilizing these advanced analytics, banks will better analyze personal financial patterns from a broad set of unstructured internal and external data to generate a 360-degree view of the customer.  This will enable financial institutions to acquire new customers, effectively cross-sell to existing customers and proactively identify risky portfolios/accounts to prevent bank fraud.

Banks make bigger strides toward regulatory compliance. Following the recent financial crisis, there has been a tremendous increase in regulatory activity, covering a wide array of functional areas, across geographies, aimed at improving the stability of the industry along with safeguarding customers’ interests. Given the varied nature and scope of the regulations, coupled with aggressive compliance timelines, banks are expected to face significant pressure on their already strained reporting systems and resources. With 2016 being the start date for quite a few critical regulations, such as Basel Committee on Banking Supervision (BCBS) 239, regulatory compliance is expected to draw increased attention from bank executives and directors.

In 2016, we expect banks to take a more strategic long-term approach towards regulatory compliance, with a focus on data governance to establish accountability, ownership and traceability around change management and how bankers manage their data. Also, banks will move away from the “quick fix” approach for compliance. As the compliance requirements increase, we expect banks to focus more on automating the processes, leading to significant savings in terms of costs and reduction in time and errors.

Enhanced payments security becomes an imperative for banks. With the increasing adoption of online and mobile channels, the industry is witnessing a shift in the nature of fraudulent activities and data breaches. This trend has been aided by the migration of card payments from magnetic strip to EMV chip and PIN.  

In order to mitigate losses from data fraud and breaches, banks have already started adopting multiple solutions, such as increasing compliance with industry standards (PCI-DSS and 3D secure), EMV Implementation (to check fraud incidence), and end-to-end encryption and tokenization (to enhance data security during transmission of sensitive transaction data).

Given the financial and reputational ramifications fraud and data breaches can have on financial institutions, we expect banks to focus on embracing advanced technologies to fight fraud. More banks, payment processors and merchants are expected to use solutions such as geolocation tracking and mobile secure location, biometrics and real-time analytics over the next year – with at least one of them becoming mainstream.

Faced with significant challenges, the ride through 2016 is not going to be an easy one for banks as they face challenges related to competition, compliance, and customers. It will be paramount for banks to harness their strengths and develop appropriate business and IT strategies to turn the tide in their favor.

Mr. Ramakrishnan is a senior vice president in Chicago with Paris-based Capgemini Financial Services. He can be reached at [email protected].