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Retail banking network infrastructure: The four forces of change

What you will learn from this eBook

The retail banking sector is not what it used to be – and continues to experience seismic change. New market entrants are fuelling competition, customers are demanding 24/7 digital services, regulators are tougher, and back office IT is gobbling up more bandwidth than ever before. In combination, these factors place unprecedented strain on a bank’s underlying network infrastructure.

This eBook will explain how the four forces of change will help shape future networks, and have a major influence on the evolution of Retail banking infrastructures.

Those four forces are:

1. Evolving competition in the retail banking marketplace

2. Customer-driven transformation of retail banking services

3. Virtualisation of IT infrastructure

4. The continuous yet ever-changing challenge of regulatory compliance

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eBook series: Retail banking network infrastructure: The four forces of change 2eBook 1


Force 1: Evolving competition in the retail banking marketplace

The need to introduce more competition into the retail banking market has exercised politicians and regulators for some years. But while their actions – which make it easier for new entrants to launch banking services and for consumers to switch accounts between banks – seem to have had little impact, the industry may be entering a period of significant change.

New entrants include completely new banks, digital only ones, high street only ones, and some foreign banks seeking a new market. It also now seems likely that peer-to-peer (P2P) financial services will start to have an impact in this market over the next few years.

Digital only banks, such as Atom, founded by Anthony Thomson, co-founder and former chairman of Metro Bank, will have the advantage of being able to create a new technology infrastructure from scratch, using the most efficient technology options available. They will have no legacy systems to hamper systems development and no branch network to manage.

New entrants using branch networks seek to marry digital technologies to the face-to-face services many customers feel they no longer get from the incumbent banks. Virgin Money, established in 2000, purchased a readymade branch network when it acquired Northern Rock in 2012, and now has 70 branches across the country and around £21 billion of customer deposits.

Another prime example is the Swedish bank Handelsbanken, which now has over 180 UK branches, having only had three in 2000. The branches do not actually handle cash, as the bank has agency arrangements with other high street banks instead: a sensible move now that so many interactions between consumers and, to some extent, business customers are not cash- and counter-based.

1 in 4 Consumers would now consider using a purely digital bank

Metro Bank

£0 deposits

400,000 accounts£2.3 billion deposits

Plans to have £25 billion

2014-

2020-

2010-

Opened at convenienttimes and locations

https://www.ssetelecoms.com/for-enterprise/banking/





Force 1: Evolving competition in the retail banking marketplace (cont.)

With further political and regulatory action designed to increase future competition, new entrants and incumbents alike will face major competitive pressures. But all players in this sector will ultimately depend on the strengths of the technologies that deliver their services, from core banking systems, branch networks and ATMs to online, mobile and social media channels.

Industry observers see a clear connection between system upgrade failures and ageing technology infrastructures. As Paul Thomalla, a managing director at software house ACI Worldwide, told the Financial Times when the RBS fine was levied: “The antiquated IT infrastructure of many of our biggest financial institutions is a ticking time bomb which requires surgery and not just a sticking plaster.”

It is clear that any bank aspiring to compete effectively in a changing retail banking market must use technology that will allow them to operate in new, more flexible, ways. Older banks will need to find ways to replace, or mitigate the negative impact of, as many of these ageing systems as possible. New entrants will need to take full advantage of their ability to build networks from scratch and launch services that will win customers from slower-moving competitors.

£56 million Is the amount RBS was fined when its failure to upgrade to a batch processing system meant millions of customers couldn’t access their account information.

3.7 million Is the amount of customers that the award winning M&S bank had gained in 2014, since opening two years prior in 2012.






Force 2: Customer driven transformation – the rise of the digital bank

Around 25 years ago, consumers were becoming accustomed to using ATMs, but branch opening hours still controlled what they, and many businesses, could do with their money. Banks continuing to follow a similar model today stand no chance of retaining their customers, who now expect to be able to interact via telephone, online or using social media.

So this is the second trend that is exacerbating the challenges faced by retail banks trying to revitalise IT and communications infrastructures: a huge change in the way consumers and business customers access banking services. Although online banking has become commonplace in recent years, it is arguably the recent explosion of mobile technologies, including tablet apps, that has enabled the long-awaited ‘anytime, anywhere’ service to become a reality.

In 2014, Barclays also announced that it is planning to launch a full 24/7 mobile banking service for mortgage, business and wealth management customers by the end of 2015. These developments are also complemented by a growth in the use of mobile payments: The Centre for Economics and Business research (CEBR) predicts that by 2020, 20 million people will be using mobile phones to pay for goods and services.

Banking via PCs and laptops is also still popular. A growing number of consumers also use online services to research and complete more complex transactions, such as mortgage completions – something that was considered unthinkable when online banking services first appeared. According to Santander, 28% of its mortgage customers will complete the full application process online.

167,000 RBS and NatWest customers do mobile banking on their morning commute, between 7am-8am.

Weekly banking App usage.

9.1 million

18.3 million2013-

2012-






Force 2: Customer driven transformation – the rise of the digital bank (cont.)

Banks also need a credible, well-resourced social media strategy. Nationwide is among the financial services provider leading the way in this area. “Social media is rapidly becoming the channel of choice for people to contact us – and Twitter is particularly popular,” chief operating officer Tony Prestedge told the BBA for The Way We Bank Now in early 2014. “At Nationwide we’ve embraced Twitter, along with other social media channels... it complements more traditional services, as we often start conversations with the customer on Twitter before migrating them to...phone, email or otherwise.”

Social media can also act as a useful source of information for lending or strategic decisions, if banks can record and process this and other unstructured data such as transaction details. This could help to cross-sell services and to offer additional value to the customer, by pointing them towards better value energy prices, or special offers at relevant retailers, for example. Some technology providers are developing solutions that enable this, but most banks still lag behind some other industries, such as retail, in this area.

Any bank that aspires to offer such service enhancements will need systems and networks capable of handling the fluctuating capacity and the speed and data requirements associated with managing multiple service channels. Reliability and security will also be crucial; all banks continue to research stronger, yet still user friendly, security technologies to protect customers using multichannel services, possibly including use of biometrics.

Many banks now find customers like interacting through social media for immediate responses to simple queries






Force 2: Customer driven transformation – the rise of the digital bank (cont.)

So there are threats and opportunities here for digital-only, and for branch/digital banks, whether long established or new entrants. Banks running services that fail to meet consumer expectations are likely to lose market share.

Accenture’s 2014 UK Financial Services Customer Survey outlined five steps banks should take to create genuinely engaging experiences that would suit customer preferences:

1. Focus on the customer experience across all

service channels

2. Extend the digital experience across all service channels, including social media

3. Use new formats and technologies to improve the in-branch experience

4. Use continuous feedback to review and refine customer propositions

5. Use big data and analytics to more effectively retain customers as they move through different phases of their lives

What is clear is that each of these steps depends on the network technologies that service interactions will rely on. It all comes back to the strength of the network.






Customers now also expect more from interactions in bank branches. Findings from Accenture’s 2014 UK Financial Services Customer Survey reveal a continued desire among a majority of customers to discuss more complex requirements in a physical branch. Even though BBA figures show branch-based transactions as a whole have fallen by around 30% since 2010, Accenture found an increase in the number of customers visiting a branch at least once a month, up to 52% from 45% in 2012. The biggest increase was, surprisingly, among the 18 to 24 year old age group, 54% of whom visit a branch every month, up from 39% in 2012.

Although 2014 saw an increase in the rate of branch closures (300 closed compared to 195 in 2013), banks such as TSB and Santander and some new entrants opened new branches, while other banks and building societies announced branch refurbishment initiatives. Nationwide is investing £300 million on refurbishment while Lloyds refurbished 585 branches between 2012 and 2014. RBS has spent £130 million refurbishing 680 branches since 2011, and will spend a further £1 billion on improving its branch network before 2017. Almost all banks now offer enhanced self-service technologies in branches, and many have staff with tablets as an additional customer service tool.

Nationwide has launched ‘Nationwide Now’, a videoconferencing-based service that allows customers to use a private room at a local branch and speak to product specialists elsewhere. It reports uplifts in mortgage completions and the uptake of financial planning products in branches where the system has been installed. Lloyds is trialling similar technology.

The evolving role of the branch in response to customer preferences will have implications for the networks that link branches to other parts of banks’ IT and communications infrastructure, in terms of the speed, reliability and security of the connectivity required. Running a branch network effectively will also now require a greater degree of planning and flexibility in terms of relationships and contracts with technology and network service providers.

Rebirth of the bank branch






Force 3: Virtualisation of IT infrastructure

Since 2008, any aspirations a bank may have to improve its multichannel services, and use big data to develop the right products for the right people, can easily be derailed by a lack of money. So the search is on for more cost-efficient technologies. Even before the crash, many CTOs in this sector were attracted to efficiency gains that virtualisation technologies can offer.

Virtualisation and ultra-flexible cloud technologies are now used in the front and middle offices of many banks – although virtualisation is still much more common in data centres than in remote sites or bank branches; and cloud technologies are still not usually used for mission critical processes.

The next step in the journey towards ever-greater operational efficiency and flexibility is adoption of more advanced orchestration technologies. Orchestration provides the ability to allocate processing requirements between virtual servers housed across multiple data centres, thus optimising compute power. But use of orchestration technology can create more problems.

Orchestration demands greater levels of capacity, performance, and flexibility than can be delivered by many current networks. It is simply incompatible with some legacy systems and can introduce some operational complexity and security vulnerabilities that may undermine a company’s attempts to attain and maintain regulatory compliance, as well as their reputation.

In KPMG’s 2014 ‘Reinvention of UK Banking’ report, it highlighted three changes banks can make to reinvent themselves:

Re-evaluate customers and markets.

Use insight to inform product innovation.

Introduce ‘game-changing’ technology.






These challenges become even more complex if an organisation is also using, or wishes to use, other emerging virtualisation/abstraction networking technologies, such as Software Defined Networking (SDN), or Network Functions Virtualisation (NFV). These technologies may offer significant performance benefits, but they also add a further element of unpredictability to network operations. All of these performance challenges are complicated further still when companies merge and have to integrate IT networks and other assets. In some cases, decades of corporate activity may have left scores of payment systems within a single bank’s infrastructure.

Clearly, successful deployment of virtualisation and orchestration will depend largely on the capabilities of the network underpinning the IT environment. Integration will need to be flawless, with network scale and performance able to keep pace with changing business needs and extract maximum benefit from these technologies. The infrastructure must also be able to manage unpredictable and fluctuating demand, without permitting profit-shredding downtime.

Virtualisation and orchestration may help banks to make at least some of those changes, without increasing either cost or complexity to a problematic extent. But if banks are to get the full benefit of these technologies, then their network and data centre infrastructures – many of which have been constructed gradually over many years – will need to be adapted to incorporate fast and reliable optical or Ethernet services.

Virtualisation and orchestration

Virtualisation, implemented within private or public cloud, increases operational efficiency and can reduce costs significantly through server consolidation and clustering. Orchestration tools distribute data storage services across multiple virtual machines automatically, matching provisioning requirements to capacity and appropriate facilities across the network.

Both virtualisation and orchestration can help make IT infrastructures more resilient, as well as improving efficiency, performance and flexibility. That flexibility extends to network designs, which can be shaped to suit business need, and the nature of existing IT assets. But both these technologies depend above all on exceptionally swift, utterly reliable optical or Ethernet services between data centres, and on to other remote sites such as bank branches.

Force 3: Virtualisation of IT infrastructure (cont.)






UK retail banks face a range of often complex regulatory pressures, some of which may be supplemented or altered to a significant degree over time. This makes strategic and technical planning of network structure, capabilities and capacity a much more complex task.

The processes companies must use to attain regulatory compliance also adds to the burden placed on networks and IT infrastructures, because efficient management of those processes relies on streams of reliable and timely information reaching senior managers to give them a clear picture of the company’s compliance profile, at the same time as the company fulfils external reporting requirements.

Compliance demands also exacerbate the issues created by the impact of the other three forces impacting retail banks. New product development and the ongoing refinement of multichannel services are driving more data onto networks and into storage facilities; and much of this data must be stored, managed and/or reported upon for compliance purposes.

For retail banks operating as subsidiaries of financial companies based abroad, or themselves offering services within other countries, there will also be an international dimension to compliance issues. Networks, data centre operations and data management processes must comply with all relevant regulation and legislation in each jurisdiction.

In the final analysis, compliance depends as much upon the technical capabilities of banks’ systems as it does upon any other factor. The technology the banks use needs to manage compliance processes, and also protect the organisation against security issues or business interruptions that could lead to compliance breaches. Effective, efficient, well-integrated and managed infrastructures will do much to safeguard banks against fines from regulators and reputational damage.

Force 4: The continuous yet ever-changing challenge of regulatory compliance

50% Of Sungard Financial Services’ survey respondents said handling regulatory change had distracted their organisation from core business activity

2/3 had increased staffing in compliance during the previous two years






SSE Enterprise Telecoms specialise in the provision of high bandwidth, high availability network connectivity services within and between the buildings of the most demanding organisations across the UK.

All organisations offering retail banking services will be affected by the changing market place to some extent – and in many cases in transformative ways – by the changes driven by the four forces of change. In each case the capabilities of their networks will determine their success or failure in the years ahead.

We believe these capabilities fall into seven key areas, and it is vital that every retail bank closely scrutinises each of these when planning their future connectivity strategies:

These four forces combined have a huge financial and reputational impact on retail banks when they go wrong - fundamentally they can all be achieved with the right connectivity strategy. Below we help make defining the right connectivity strategy a little easier.

Accessiblility

Banks need to facilitate high volumes of concurrent, mission-critical customer requests. With customers demanding constant, multi-device access to banking services, network accessibility has never been so important Dependability

Network access must offer unmatched reliability, with additional layers of resilience that are valuable from a compliance perspective, reducing regulatory requirements for capital adequacy as well as safeguarding the bank’s reputation.

Affordability

Naturally, banks will be seeking to invest in technology in

a financially efficient way – these investments need to be affordable and sustainable.

Availability

Banking systems and services must be readily available and rapidly deployable. Profits can be impacted if digital services aren’t available because the network cannot go live when required.

Scalability

Network services must offer scalability without incurring unreasonable over-provisioning costs. In the banking sector, it is equally important that capacity can be turned up to meet rising and sometimes unpredictable customer demand, as well as coping with the additional networking demands.

Security

Security is, of course, of paramount importance for social responsibility, legal, reputational and regulatory reasons, as well as practical and operational ones. This entails both physical and cyber security.

Responsiveness

Our connectivity platforms must deliver responsive services that can underpin a consistently high level of user experience. Without this quality, other technical capabilities may well be academic. The quality of the service shapes the quality of the banking service experienced by customers. In short, it must be excellent.

Deciding on the right connectivity strategy:

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3

6

4

7

5

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Companies providing retail banking services need to work with service providers that demonstrate a strong understanding of the trends impacting the sector, as well as deep experience of delivering mission-critical networking solutions. This will enable them to plot technology strategies and build metro and long-haul network infrastructures resilient and flexible enough to deliver any-to-any connectivity with the required speed, accuracy, reliability and security to meet these new requirements. And in turn, this will allow companies to cope with the changes created by the four forces reshaping the sector.

How we can help? At SSE Enterprise Telecoms, we have a strong heritage of both designing and building world-class optical networks for some of the UK’s most demanding organisations, including many operating within the banking sector.

Our hallmark is engineering excellence; a vital quality for banks which need 100% assurances that their underlying network infrastructures are equipped to withstand the forces of change impacting the sector. Indeed, our networks go one step further. They provide our banking customers with the competitive edge in an increasingly challenging marketplace.

We hope you have found our eBook interesting, find out more about how we can help you: Call us on 0345 070 1997 to discuss how we can help. Or, email us at [email protected]

And if you want us to contact you, please fill in a form and we’ll get back to you.

Conclusion About the authors

David Adams is a freelance business and IT journalist. A former editor of Financial Sector Technology magazine (now FSTech), he has been writing about IT and the financial services industry since 1998, for a range of business and IT magazines. He trained as a journalist after a brief and utterly undistinguished spell as an insurance salesman.

Simon Poole leads the enterprise market development team at SSE Enterprise Telecoms and has more than 20 years of proven experience helping financial services firms get the best from their telecoms networks. Having worked with some of the world’s top investment banks, Simon understands the challenges facing the financial services industry and was a big contributor to this eBook.




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