Teaching old banks new tech

Managing change - such as increased regulation, economic upheaval and technological disruption - is driving banks to adopt more speed and agility in their project delivery, writes Kevin Reed.

In a world where business has few certainties to cling to, the banking and financial services (FS) sectors could make a strong case that they face the greatest, most fundamental challenges ahead.

Some might argue that the financial markets and lenders, who through a combination of lack of oversight and arrogance helped drive the financial crisis, deserve what they get. But that was 10 years ago – and the ramifications are still being dealt with, making it difficult for them to move on. And a healthy banking sector is vital for its corporate and consumer customers.

Stronger oversight is being implemented, slowly. And the next 12 months will see huge, fundamental regulation come into effect.

Basel III seeks to introduce stronger capital and liquidity requirements upon financial institutions – alongside more robust risk management within an enhanced governance framework. IFRS 9 is a new international accounting standard that will see problem debts shown earlier in accounts.

If these were the only concerns of the banks in 2017, then things would be relatively painful. But they are also contending, as all businesses are, with an increasingly internet- and tech-driven market. The growing use of digital in people’s day-to-day lives has created expectations that FS is struggling to keep up with: better mobile offerings and broader services, all in real time.

Real-time customer focus

New market entrants, including those facing the customer and specialist service providers in the burgeoning fintech industry, are setting the bar high for institutions that have forever been used to doing things at a sedentary pace.

“There is pressure on banks to keep up with the pace of delivery, plus new entrants on the scene looking to grab market share who are impacting the way banks think about what they do,” says Tom Merry, managing director in Accenture’s UK banking strategy division. “I have sympathy for them. There’s a huge amount going on: regulation, which is complicated and increasing; the macroeconomic backdrop; interest rates cramping margins; and customers or clients being more empowered and expectant.”

So, despite the headwind – more because of it – banks must change. They must become better at managing risk, be more financially robust, and yet be able to invest and flex depending on both the rapidly evolving economic climate and customer needs.

Change programmes, and the projects supporting them, are about business transformation and new digital products – which all affect legacy finance/IT teams and systems. Oh, and holding more capital gives you less capacity to invest. So, what’s to be done?

Small is beautiful

Institutions built on huge, legacy, siloed databases cannot just reconstitute them for the 21st century. Instead, banks are running numerous smaller projects that are aimed at providing discrete customer solutions, according to Nick Sherrard, managing director at customer proposition consultancy Market Gravity.

Sherrard, whose firm has recently worked with Standard Life and Clydesdale, says that agility comes from the formation of cross-functional teams – from different disciplines and with different backgrounds – looking to solve a problem or find a solution based on a commercial driver.

Short- to medium-term projects need a mix of task orientation, with flexibility to allow individuals
 responsibility. Flexibility in the aim of the project is important too, Sherrard says: “What are you willing to bend on? If something has to be live in six months or you lose out to the competition, what parts of the project can we flex on?”

“Gone are the days when banks undertook a project because it seemed like a good idea at the time,” says Howard Berg, managing director at data security outfit Gemalto UK, who has seen a ‘160-day rule’ implemented in FS organisations: if a project is likely to take longer, that incarnation is shelved.

“There is more immediacy, but with proper objectives and milestones, based on customer expectations,” he adds.

Embedding compliance and customers

Many regulatory requirements are about process change or documentation, and not necessarily technical, Berg believes. To mitigate the financial and resource cost of meeting regulation, such projects should be built into those focused on the customer.

Culturally and organisationally, departmental projects are disappearing, Berg says, concurring with Sherrard. Security projects often have to flex as new frauds occur.

“The nearer that FS gets to retail [in terms of customer interaction], the more agile it has to be. People expect the immediacy. Agile is the keyword in the market, but with a process-driven methodology,” Berg concludes.

Agility doesn’t mean that the back office leviathans of finance and IT are left out of the equation – which would be near impossible for any type of business, let alone the financial data-driven exploits of banking. So where do they fit?

Back office at the forefront of change

The heads of both finance and IT have seen their roles expand and become more forward facing, with the respective functions providing more strategic support to their organisations because of it. Berg sees their involvement at the very start of the plan – rather than parachuted in at delivery phase – as crucial: “Although accountants must play the gatekeeper and audit roles, they now act more like consultants.”

The ability to analyse customer data and act on it means that IT will play a crucial role in legacy banks keeping up with the pace of change in the market.

Rather than rebuild their databases, banks are adding an interfacing layer, or an ‘adaptor’, that enables new technology to work with legacy systems, according to John Lyons, PwC’s leader of retail and commercial banking, and EMEA FS technology.

“They are building flexibility for the future,” he says. “Real-time analytics are needed to manage customer expectations. More agility, more insight – what would have been a two-year journey can be achieved in weeks or months. They can test and learn far quicker.”

Another important part of the ‘agility’ piece is involvement from executives, without whom projects inevitably slow down, according to Merry. They are displaying more accountability and involvement on a day-to-day basis, he believes.

“C-suite people are going into project meetings and walking the floors of the office, because the model for change allows them to get access. In the old days, projects were a 100-page document that no one wanted to read, which was then broken up and handed down,” Merry explains.

It’s not all sweetness and light, however. Banks are “still struggling” to be nimble, says Lyons. They could be smarter about how they approach their portfolio of work, he explains – with Brexit an example of an issue that will inevitably translate into ‘another project’ for banks to handle.

Echoing Berg’s thoughts, Lyons says a more strategic approach could see them roll projects into each other, rather than running multiple iterations – but the tech platforms need to be in place to enable this change: “For some, it’s easier to do it the same way. It’s difficult to step back and say ‘Let’s do things differently.’”

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Kevin Reed is a business journalist and former editor of Accountancy Age and Financial Director.