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Transaction Banking transformation: do bankers dream of electric sheep ?


The future of banking has, as with the iPad, been dreamed out already decades ago. Science fiction writers such as Peter F Hamilton or Iain M Banks showed us a future of banking which ranges from now trivial things such as video calling with your banker, to more developed imaginations such as neural interfaces, artificial intelligences defending secure crypto-locked networks and remote will execution via time-coded cryptographically secure instruction envelopes.

Also, such future is closer than you think: scientists are already experimenting with neural interfaces for lost human limbs with some degree of success [1][2], people are writing about artificial intelligences not needing to develop beyond a certain level [3] and blockchain [4] and recent internet communication events [5] are launching a new golden era of cryptography.

But this is still in the ‘potentially happening’ realm space; the here and now (and how did we get here) is a little bit more tricky and challenging.

From a business PoV, long gone are the times when a commercial offer development roadmap could be filled in just by looking at what the competition was doing at the time or by expanding organically to other countries. Since 2008 [6], banks have been looking to windward: from regulatory issues to negative interest rates, increased AML or international sanctions risks, the outlook is dire.  When some institutions consider stashing piles of cash as a cheaper alternative to central bank deposits [7], you think you’ve heard it all. All this results in an increased cost of running the transaction banking business, to the point that banks have been actively pulling out of correspondent banking relationships [8] or direct membership to non-core currency market infrastructures [9].

In addition, there is more recently the trend of business disruption from “new entrants” coming from the Fintech sector. In 2015, 19.1 bn USD have been poured into financing Fintech companies [10] (up from 1.2 in 2008 [11]) of which 13.8 bn USD in VC-backed companies. Fintechs are working on products ranging from interconnected wallets, alternative lending platforms and cross-border remittances to robo-trading and DIY FX trading. Often nimble and specialised (versus financial institutions with –tens of– thousands of employees), these new entrants are slowly but surely eroding the banks’ traditional revenue pools, beginning with the retail sector but creeping up the ladder.

From an IT PoV, Banking technology in its automated form originated with the mainframe, those formidable machines capable of doing the heavy-lifting required to process (as they developed) a high number of transactions per second. These machines, while crucial for the banking infrastructure, have over time been relegated from the spotlight of the COO due to the ever growing ecosystem of processing appliances such as payment engines, FX engines, filtering engines, messaging and routing middleware and, on the most visible side, by the development of electronic and mobile banking in the recent years.

Finally, from a process PoV, banking’s history began as an altogether manual business, with ledger entries being done on actual paper-based books. Over time, the availability of information technology automated or assisted some of those processes but for some transaction banks a certain percentage of manual processes is ever-remaining. Further automation and optimization, while ultimately a source of cost savings and customer satisfaction, has always had to fight with business-sponsored initiatives aimed at obtaining additional revenues. In addition, we’ve all heard of this project where, to finally enable an important feature for which there is no additional budget, a bit of “process tape” is applied to fix the issue and make things work. Such ‘process tape’ adds up to the legacy of operating model processes and often ends up staying there forever, lodged at the first part of the bank’s cost-income ratio.

Bridging the gulf is not an easy task. Here be dragons.

Hindering banks evolution is the sheer number and complexity of back office systems ensuring their daily operations. Any incremental change needs to go through a laborious gated approach where, through a high number of controls and tests, banks make sure that clients operations are not broken when the change is applied. As a result, for large global banks, designing and replacing their core back office application throughout all their locations can easily take a decade [12] [13].

The Fintech sector has been churning out new solutions at an incredibly fast rate the last years. More often than not, they implement a closed loop system where they can apply a clean slate approach. However, for transaction banks having to ensure a transition of their live customer operations, such things only seem possible when mandated by regulators (e.g. SEPA, real time payments) or thanks to a perfect storm (e.g. Sweden’s Swish [14]). In all other cases, two major issues risk materializing: the need for critical mass and the risk of rediscovering why things work as they do (e.g. increased KYC costs pushing bank network rationalisation).

Finally, and above all, banks have only started innovation labs in recent years to experiment with these new solutions. Through the lessons learned but also from the renewed interest in updated business models, in the next few years we will see a more profound discussion on the future of transaction banking, including truly exciting discussions such as e-identity and fully digitized customer interactions, as well as modern banking platforms (VaultOS [15]), applying new and recent cryptographical formulas as a design principle.

One thing is sure: at cross-roads between disruption and regulation, customization and security, banking is again to become one of the most cutting-edge and versatile professional environments.

(c) Pedro Mullor, 2017




DISCLAIMER: the views expressed here are my personal opinions. Content published here is not read or approved by my employer before it is posted and does not represent the official positions, strategies or opinions of my employer.

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