How is emerging technology transforming the banking sector?

Banking has changed considerably in the last decade and our expectations of what a bank is, and where we should find it, are drastically different. It’s indisputable that technology has been the driving force behind this change. With that in mind, we asked four senior industry executives to give us their view on the technology that is most influencing banking.

Hybrid cloud

By Prakash Pattni, MD Financial Services Digital Transformation at IBM

The fintech industry has experienced rapid global expansion as banks seek to modernise in the midst of evolving laws and regulations. As we look to 2023, many banks will partner with agile fintechs and turn to the cloud to develop new products and services to keep up with today’s digitally savvy customers.

To unleash the full potential of these collaborations there will be challenges to overcome. For established banks it will be essential that fintech partners do not introduce systemic risk to their supply chains – especially as regulatory oversight grows. To help navigate the changing landscape, adopting a hybrid cloud approach, including the use of industry-specific clouds with built-in security and compliance controls, can support the secure modernisation the banking industry craves. In the year ahead, fintech should partner with established technology providers to explore the adoption of industry cloud platforms that help remove barriers within partnerships which restrict agile innovation.

One area of growing interest to financial regulators is ESG reporting. Next year, I see fintech incorporating ESG reporting into their business models to help banking clients evaluate and reduce their environmental impact. A hybrid cloud architecture has an important role to play by enabling companies to tap into other capabilities, such as software powered by AI, to draw on multiple data sources and provide real-time tracking for things like energy usage and carbon emissions.

Composable banking

By Prema Varadhan, Chief Product and Technology Officer at Temenos

To survive and thrive banks need a platform for agility, scale and innovation. So what sort of platform should banks be using? The answer is a composable one – cloud-native, driven by data but in a way that is explainable and extensible.

Banking’s new business models are about spinning up new products and bringing them to market rapidly. Composability, where services are broken down into specific capabilities, enables this. It maximises freedom, speed and flexibility while connecting with an ecosystem of third-party offerings that further increases choice and boosts innovation.

Banks should look at some of the most successful B2B technology companies to understand the value of composability. These companies have taken a function and created an entire suite of software capabilities, accessed through a single platform – think Salesforce for CRM, or ServiceNow for workflow management.

Once a business is plugged into these platforms, they have everything they need, whether they choose to enable all the modules at once or gradually over time. And all without the burden of integrating, updating, localising and innovating, which falls to the platform provider to do.

For large banks, adoption of composable banking is likely to be incremental. They cannot simply give up on their incumbent technology, but must progressively renovate in order to run down their legacy investments. Challenger banks, fintechs and non-banks will want to scale fast, and adopt specific capabilities that have been pre-composed for specific use-cases such as SME lending or digital mortgages.

AI, data and privacy

By Adam Lieberman, Head of AI and Machine Learning at Finastra

From the adoption of chatbots to ML-powered risk and decisioning models, the banking industry continues to progress at an exponential rate. As financial institutions grow their business and adopt new technology, their stockpile of data is growing at the same rate. However, with great data comes great responsibility, and financial data often comprising sensitive and personally identifiable information falls under the most stringent governance. This dampens the spirit of innovation as banks need to collaborate and share data with one another to solve the world’s toughest financial problems such as AML or fairness in credit decisioning.

Thanks to evolving technology in the field of private AI, banks now have a suite of privacy enhancing tools (PETs) to collaborate at scale and solve these pressing financial problems together, without the requirement of physical dataset share, moving data, or manual partner agreements. PETs allow them to answer questions and develop models collaboratively with data they cannot see in a completely decentralised fashion for fully remote data science and analysis. This allows banks to own their own data, which never leaves their servers, and allows external model developers and software engineers to work with data in a private manner and build models and apps without needing physical access to datasets. Private AI and the suite of PETs are driving the future of collaboration and innovation in financial services, giving data its invisibility cloak.

Coreless architecture

By Abhishek Bhattacharya, Group Vice-President at Publicis Sapient

Modern, cloud-based core banking systems (CBS) are facilitating a move towards coreless architectures, which in turn will drive innovation and transform customer experience in the banking world.

In the 2022 Publicis Sapient Global Banking Benchmark Study, which surveyed 1,000 senior banking leaders, the top priority to achieve operational transformation (cited by 37%) was to transition to a modern, cloud-based CBS. Among leaders of the largest institutions (with assets of more than US$1tn), 48% of respondents made this their number one goal.

Modern, cloud-based CBS systems are widely regarded as the way forward with lots of banks prioritising how to transition to a coreless architecture as their top objective for 2023. This is because the old system of banks running legacy CBSs have run their course. These systems are difficult to change and it’s extremely hard to build new capabilities or innovate on these systems. Banking architectures are undergoing a profound transformation leading to an entirely different, "minimalist" approach to the CBS.

But what is coreless architecture? In short, in a "coreless" architecture, the key functions such as accounts, transactions and product definitions sit in the "core" but everything else sits outside of it, connecting to the core via APIs. This bears virtually no resemblance to legacy systems, which ran a huge range of arguably unwieldy functions.