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A rolling core gathers no moss 2017 ROUND-UP
Core banking as the ‘sick man’ of fintech is a narrative that is slowly being eaten away by new players and new technology. How exactly has the sector got with the times in 2017?
Senior Reporter Alex Hamilton
H
as core banking ever been cool? Probably not, but that doesn’t make the sector any less crucial to the banking industry. Still, a number of players have appeared in
recent years challenging the established status quo – that banks need only switch between two or three prominent vendors every few years. The cloud, APIs, fintechs and collaboration have all had their effect on the market, and now core banking is driving the change, as opposed to trying to catch up. In this respect, the year 2016 was a notable one for the payments technology industry, with many key developments recorded during the year. Most developments centred around three major areas – mobile payments, real-time payment infrastructure and digital currency initiatives.
“As 2017 draws to a close, digitising the banking operating model remains as critical as ever,” says Kanika Hope, business development director at Temenos. “Recent McKinsey research states that the ROE of banks could fall to an unsustainable 5.2% by 2025 if customers switch their banking to digital companies.” From Temenos’ discussion with incumbent banks, she adds, it’s “clear” that they understand that they can no longer rely on legacy platforms.
Competition with challenger banks and technology giants is growing ever tougher to keep ahead of. “Constrained by their legacy infrastructures, many banks are facing high operational costs, high risk of outages, and a lack of agility that hampers their ability to bring innovative, personalized products to market quickly, and to extract valuable data from their systems.”
How have the banks reacted during 2017? Many have begun modernisation programmes, which often involve a rip-and- replace of their legacy systems, or the parallel construction of infrastructure to handle a digital future. “Banks are working towards a future-proof end-state architecture that is open, real-time, straight-through and scalable,” says Hope. “Others are launching greenfield digital-only banks built on entirely new
front-to-back banking technology platforms, a trend likely to continue well into 2018.” The narrative at lots of events in 2017 has switched somewhat.
Banks, it seems, no longer see fintech and startups as a challenge to their superiority. Now the focus is on learning from – and collaborating with – fintechs to utilise their leaner, more streamlined ways of doing business. “Rather than buying fintechs outright (such as such as BBVA with Simple, Ally with TradeKing or BPCE with Fidor), most banks appear to be either investing partially in them through their venture capital arms or partnering with them,” comments Hope. “This is because it is hard for a bank to come across a fintech that fits into the bank’s existing business model, that meets their exacting compliance standards, and that promises enough certainty of returns.”
One model by which banks are embracing fintechs is to buy the technology from fintechs via digital marketplaces – such as Temenos’ own marketplace – or via pay-as-you-go API platforms, which are being set up I greater abundance across Europe. Some banks are attempting to build their own innovation labs and ring- fence them from within.
But what else can we expect from 2018? From the Temenos perspective, it’ll all be about banks deploying “the full digital toolkit” - data-driven marketing, marketplaces, collaboration and micro-segmentation of products. It’s all very compartmentalised and data-heavy, and it’s for this reason that we may see banks turning towards AI and machine learning to shoulder the burden.
“The technology required to support this [change] will be predicated on the adoption of AI and machine learning over vast amounts of proprietary and third-party data, the scalability, flexibility and security offered by cloud-based infrastructures and the use of open APIs and apps deployed from modular yet end- to-end integrated architectures,” concludes Hope. The future’s bright for rickety core banking systems, then.
www.ibsintelligence.com | © IBS Intelligence 2017
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