top global banking technology trendswith virtusa, is to examine and analyse how banks are responding...

A RESEARCH PAPER FROM FINEXTRA IN ASSOCIATION WITH VIRTUSAJULY 2019

TOP GLOBAL BANKING TECHNOLOGY TRENDS

01 Introduction .......................................................... 3

02 API enabled services .............................................. 5 03 Mobile channels .................................................... 7

04 Micro services ....................................................... 9

05 Branch strategy ....................................................10

06 Fintech partnerships .............................................12

07 Blockchain ...........................................................14

08 Artificial Intelligence ............................................16

09 Cloud ..................................................................18

10 IT Priorities ..........................................................19

11 About ..................................................................217 What should financial institutions be doing about blockchain right now? 25

| TOP GLOBAL BANKING TECHNOLOGY TRENDS

03

01INTRODUCTION

Against the backdrop of an increasingly digital world, banks are facing growing competition, in many cases from non-traditional players which puts greater emphasis on the need to innovate whilst, simultaneously, transforming their businesses, all the while keeping an eye on the bottom line. The effect of these imperatives on banks’ IT systems, infrastructure as well as go-to-market strategy is further complicated by regulatory compliance – particularly around opening-up market access to enable greater competition, eg. KYC, AML, PSD2.

The purpose of this research paper produced by Finextra, in association with Virtusa, is to examine and analyse how banks are responding to these significant changes in their market by identifying the top 10 banking technology trends for 2019.

The information on which the paper is based was obtained from around 100 responses to an online, survey completed by senior managers in banks, corporates and fintechs from around the world. The validity of the results obtained is demonstrated by a breakdown of those who completed the survey:

67% 60% 30%

2510%

Senior managersor above

Global banks Regional banks

CountriesFintechs


04

• 67% were senior managers or above• 60% were from global and 30% from regional banks• 10% were from fintechs• responders were located in c.25 countries.

The trends identified demonstrate that quite a fundamental shift in banks’ approach to their IT platforms has occurred over the last 18 months. For example, banks are now:

• embracing open banking / APIs and the move to a digitally-connected, ‘instant’ world for payments and information transfer

• actively partnering with (often) relatively small suppliers• making use of the Cloud to host their applications and data• seeking to use regulatory changes to drive new income streams• using new technologies – things like microservices, artificial intelligence and

blockchain – to provide enhanced internal controls, security and support new customer propositions.

This paper provides the detailed responses received to each of the survey’s nine questions. The top ten banking trends are presented in the final section.

“ The use of APIs is not a new initiative – regulations and compliance have driven their wider adoption. Banks are embracing their use to meet the expectation of their customers and match the competitive offering of new entrants.”


05

02API ENABLED SERVICES

WHICH OF THE FOLLOWING BEST DESCRIBES YOUR API-ENABLED SERVICES FOR CONSUMER BANKING?

CHART 2

Have launched a programme

Mature programme established

Will evaluate a programme in 2019

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

Have no plans to launch a program





27%

35%

25%

13%

27%

35%

25%

13%

The use of Application Programming Interfaces (APIs) is the accepted means by which financial institutions compete and offer products and services to each other, and increasingly share data. The use of APIs is not a new initiative but regulatory and compliance have driven their wider adoption. Banks are embracing their use to meet the expectation of their customers and match the competitive offering of new entrants. Chart 2 evidences this by the 87% of responders who said that their institution is evaluating or has already launched API services.


06

Banks are embracing the use of APIs to drive new sources of revenue by offering innovative services and products to their customer base. In an age of open banking, digital transformation, greater competition and customer expectation, banks will need to work with a growing number of partners to transform the services the offer.

All major banks are ‘reimagining’ the customer journey and expectation. In an increasingly digital, real-time environment, many banks have advanced projects to reengineer their business models, infrastructure and networks backwards to meet the demands of customers.

The technical challenge of linking a bank’s existing legacy infrastructure with innovative propositions provided by third-parties can only be addressed by the use of APIs. Sixty per cent of survey respondents confirmed the launch of or an evaluation of a program to support their API network strategy.

APIs support and help banks in their digital transformation. Many manage them as a product and look to monetise their use to drive revenue by connecting business processes, channel partners, vendors, fintechs in a secure and cost effective way.

“ Banks are divided in their development approach to their m-channel strategy, with responders to the survey confirming that 50% of their institutions are building out from their existing internet channel whereas 50% are utilising a new, dedicated infrastructure.”


07The mobile phone / tablet-based delivery channel is now of prime importance to banks in both the personal and, increasingly, in the SME / corporate markets. However, banks are divided in their development approach to their m-channel strategy, with responders to the survey confirming that 50% of their institutions are building out from their existing internet channel whereas 50% are utilising a new, dedicated infrastructure. This is illustrated by Chart 3.

03MOBILE CHANNELS

IS YOUR MOBILE CHANNEL SOLUTION AN EXTENSION FROM YOUR EXISTING WEB / ONLINE CHANNEL?

CHART 3

No, it is a separate development

Yes

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

No, it is a separate development

Yes

50.5%

49.5%

50.5%49.5%

Up until, say, two years ago the approach of most banks would have been to base their m-channel on their established online platform due to concerns around experience, stability and security. However, of late, there is greater acceptance of the advantages of making use of a dedicated new infrastructure for mobile. This can provide banks with greater flexibility, easier design and build of new functionality (eg using biometrics) and lower support costs through the use of the latest technologies.


08

In addition, some banks are using the support of their m-channel as an initial phase in the rollout of their new ‘end-state’ IT environment with a view to migrating all existing customers to the new infrastructure once it has been proven.

Furthermore, banks are adding an additional focus to their m-channel and associated digital services by marketing it under a different brand – eg JPMC (US) ‘finn’ and NatWest (UK) ‘Mettle’ – to that of their parent bank. This is illustrated in Chart 4.

As shown in the chart, although only 37% of institutions use this separately branded m-channel approach at present, it is a growing market trend among incumbent banks enabling them to take advantage of open banking without the dependency on further developing their legacy platforms. It also helps enable them to compete with the new digital-only challenger banks such as Fidor in Germany, Atom and Starling in the UK and Simple in the US. This new brand approach also allows banks to target specific markets (eg consumers or SMEs) with specially branded m-channels.

IS YOUR MOBILE CHANNEL PROPOSITION MARKETED UNDER A DIFFERENT BRAND TO OTHER SERVICES?

CHART 4

No

Yes

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

No

Yes

37%

63%

37%63%


09In order to maximise the opportunity offered by open APIs, banks are increasingly seeking to move to an IT architecture based on microservices (ie an architecture in which large applications are broken down into smaller, modular services).

The use of microservices can provide enhanced security (critical when dealing with new external partners such as fintechs), simpler integration of a bank’s new API layer with its existing, legacy systems and, hence, the speedier development and launch of new products. The extent to which banks are adopting microservices is shown in Chart 5.

The strategic importance of the use of microservices within banks is demonstrated by the results to the survey, whereby 56% of responders confirmed that their banks are already working on their implementation with a further 31% in the process of establishing a programme to this end. Only 13% of responders said that their institution had no plans to initiate a microservices programme.

04MICRO SERVICES

WHAT IS YOUR LEVEL OF MICROSERVICES ADOPTION?CHART 5




10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%






19%

37%

31%

13%

19%

37%

31%

13%


10 The question is, are bank branches still relevant into today’s increasingly digital age marked, particularly, by the pervasiveness of smart phones? Banks constantly review their branch strategy and with a greater focus on services delivered digitally through mobile devices (as well as mobile-only banking) it is no surprise to note that 36% of respondents state a decrease in the number of branches. Significantly, the same number is maintaining their branch numbers, albeit they are transforming them. Twenty-two per cent are not changing their approach at the present time. This is shown in Chart 6.

05BRANCH STRATEGY

WITH ADVANCING DIGITAL AND MOBILE CAPABILITIES, WHAT IS YOUR STRATEGY FOR YOUR TRADITIONAL BRANCH NETWORK?

CHART 6

We are decreasing the number of branches

We are increasing the number of branches

We are not changing the number of branches

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

We are maintaining the number of branchesand transforming them





6%

36%

22%

36%

6%

36%

22%

36%


11

The rationale behind the high number of branch reductions is due simply to customers carrying a bank in their pocket. Banks report a significant drop in customers visiting their branches. Globally, banks and financial institutions process far higher numbers of transactions digitally than in branches. This, coupled with instant, 24/7 access and the convenience of services provided digitally has changed customer behaviour and traditional branch services are increasingly redundant.

However, this balance between services delivered digitally and physically is an intriguing one and we see the emergence of the ‘smart branch’. Many banks have invested heavily in their branch real-estate, often located in prime locations, and see them as an essential part of their channel strategy. The smart branch replicates the way customers do business through other channels (online, call centres, apps) to create a seamless way to conduct business– one that mirrors the way they choose to do business through any contact with their bank.

The increasing adoption of digital technology in a branch environment (next-generation service machines, video connection, intuitive information) enables this, and the reduction of over-the-counter transactions creates resource and floor capacity. Therefore, as evidenced by the survey, bank branches remain relevant in a digital age with a stronger focus on person-to-person experiences and relationship-led provision of services and guidance.

“ It is no surprise to note that 36% of respondents state a decrease in the number of branches. Significantly, the same number is maintaining their branch numbers, albeit they are transforming them. Twenty-two per cent are not changing their approach at the present time.”


12

06FINTECH PARTNERSHIPS

OF THE STRATEGIC FINTECH PARTNERSHIPS YOU ENTERED INTO IN 2018, HOW MANY SERVICES OR SOLUTIONS HAVE BEEN PUT INTO PRODUCTION?

CHART 7

1 - 3

None

More than 4

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

More than 4

1 - 3

None

30%

53%

17%

30%

53%

17%

The threat of disruption is no longer viewed as a competitive battle between incumbent banks and emerging fintechs. Rather it is a question of how the two co-exist culturally and technically, and collaborate to collectively innovate and distinguish themselves from others. Bank and fintech partnerships are emerging and although there are challenges in working together the survey results record 70% of respondents have 1-4+ solutions in production. This is shown in Chart 7.


13Historically, there have been challenges between traditional banks and fintechs and it has taken time for the industry to get to grips to determine how best to partner. The fintechs nurture and drive a culture of agility, creative thinking and innovative use of emerging technologies. For their part banks can be monolithic in their structure and unresponsive to change but they are transforming and remodelling their businesses to compete in a digital age.

Banks benefit from working with fintechs in many ways, not least of all in improving their customer experience, managing data digitally and launching services more timely and frequently. The issue they quote as a challenge is moving from a sandbox environment where fintech solutions are tested in a controlled manner to putting them into production and scaling them. This in part explains why the volume of solutions in production is still low (eg only 17% of responders said their institution had more than four fintech-based solutions live), but they are growing.

“ Bank and fintech partnerships are emerging and although there are challenges in working together the survey results record 70% of respondents have at least one solution (1-4+) in production.”


14

07BLOCKCHAIN

1 2 3 4 5

International payments

Domestic payments

Trade finance

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

Securities

Asset management

26% 18% 10% 10% 36%

25% 29% 16% 22.5% 7.5%

12% 18% 18% 17% 35%

37% 10% 8% 15%30%

9% 23% 22% 8%38%

WITH ONE BEING THE HIGHEST AND 5 BEING THE LOWEST, PLEASE RANK IN ORDER YOUR TOP 5 BLOCKCHAIN-BASED SOLUTIONS:

CHART 9

Blockchain or Distributed Ledger Technology (DLT) is a powerful and secure technology that has been of considerable interest to banks for at least the last 3 years. Its ability to record and validate every transaction it processes and present a single view of the truth to multiple users in a highly secure environment has created significant interest for banks globally. The priority business areas for blockchain-based solutions are shown in Chart 9.


15

With payments being a prime use case for banks, it is no surprise that many institutions are looking at blockchain-based solutions in this area. The survey results show that 54% of responders viewed blockchain for international payments as being of either the highest or high priority; 44% was the similar figure for domestic payments.

Banks believe that a blockchain-based payments solution could provide them with lower transaction processing costs, enhanced security and transaction validation as well as faster processing times. There are several schemes being developed that aim to solve cross-border payments, the most well known being Ripple, as well as experiments happening with Central Banks. However, with many countries and regions now having an instant payments infrastructure (plus SWIFT’s gpi, global real-time payments product) as well as mature ACH offerings, it may appear that blockchain-based payments are merely a duplication of what’s out there and working already.

The topic of Trade Finance and supply chains comprising multiple parties and types of document – buyers and sellers, banks, logistics and shipping companies, purchase orders, invoices, bills of exchange, customs declarations etc. – is an area which has always been believed to lend itself quite naturally to a blockchain-based solution.

This is demonstrated by the survey results in which responders said that Trade Finance was their highest priority business area for blockchain, at 37%. The first cross-border, blockchain-based supply chain solution was launched by IBM and Maerssk the 2017. Indeed, Trade Finance is probably the most active area of blockchain experimentation with at least five major consortiums (Voltron, Marco Polo, Batavia, we.trade and HKTFP) currently developing propositions in this area.

Similarly, the business areas of Securities Trading and Asset Management also feature the involvement of multiple parties in a single transaction – buyers and sellers, brokers, stock registrars, securities depositories, stock exchange, banks etc. – and so would also seem to be ripe areas for the development of blockchain-based solutions. The well known R3 development was among the first in this area.

Whilst the survey responses had Securities Trading and Asset Management as the least important business areas for blockchain – with 46% and 52% of responders, respectively, saying that this area was only of low or the lowest priority – they represent potential areas for development.


16

08ARTIFICIAL INTELLIGENCE

Artificial Intelligence (AI) in its many forms, such as machine learning and data science and analytics, has the potential to help banks in several ways. Interestingly, the responses to the survey separate areas of internal application (such as AML and fraud detection) from customer facing initiatives, such as sales offers and personalised services. This is illustrated in Chart 10.

Globally, financial transactions are on the rise exponentially and are under greater regulatory and compliance scrutiny. Banks fear falling foul of AML and sanctions regulation / censure, and are vulnerable to sophisticated fraud. Hence their use of machine learning to help combat both.

In an increasingly data driven industry banks’, deployment of AI tools leans strongly toward its use in fulfilling their regulatory and compliance obligations. Failure to do so is damaging to their reputation and carries significant financial penalties. Furthermore, the successful deployment of AI tools can greatly reduce the incidence of ‘false positives’ created by sanctions filters, all of which require human intervention with its associated high cost.

Currently of less focus is the use of AI to personalise services to customers but this is on the increase. Marketing and personalisation of services in industries outside banking is prevalent and AI could be used by banks to understand customer behaviour and expectation, build loyalty programmes and offer enhanced products. This is still an evolving area and one that is core to the digital transformation of financial services.


17

Personalised customer servicing orimproved customer service

Management and analysis of legal/commercial documents

Personalised customer engagement

AML / Sanctions

Fraud detection and prevention

Targeted sales offers

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

Robotics/virtual assistant/chatbox

Wealth management

48% 19% 4% 6% 6%

1%

8%8%

10% 40% 12% 6% 9% 10%6% 7%

5% 10% 35% 17% 15% 6%5% 7%

10% 7% 15% 32% 6% 6%18% 6%

11% 11% 9% 11% 11% 34%5% 8%

6% 7% 4% 8% 8% 14%9% 44%

4% 2% 11% 7% 32% 14%16% 14%

10% 6% 14% 22% 10% 8%29% 1%

WITH ONE BEING THE HIGHEST AND 8 THE LOWEST, PLEASE RANK IN ORDER OF PRIORITY BUSINESS FUNCTIONS WHERE YOU HAVE DEPLOYED ARTIFICIAL INTELLIGENCE

CHART 10

1 62 73 84 5


18

09

WHAT IS YOUR APPROACH TO THE USE OF CLOUD-BASED SOLUTIONS FOR CRITICAL APPLICATIONS?

CHART 11

Private cloud only

Do not use

Public cloud only

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

Hybrid cloud

Hybrid cloud

Public cloud only

Private cloud only

Do not use

14%

42%

6%

38%

14%

42%

6%

38%

CLOUD

The acceptance and use of cloud-based solutions has become pervasive in recent years. As illustrated in Chart 11, 86% of respondents to the survey have adopted cloud, with a high amount (38%) adopting hybrid solutions. The data clearly shows banks recognising the benefit of migrating core processing from traditional legacy data centres to cloud solutions which can lead to reduced costs, improved resilience and being able to support innovation in a secure manner.

A cloud solution is a new business model recognised by regulators that modernises technology infrastructure to improve the way it is managed. It supports the industry shift toward digital services developed in-house and increasingly through partnerships and the creation of ecosystems. A single, integrated platform connecting banks and their multiple partners in a secure environment.


19

10IT PRIORITIES

1 62 73 8 9 104 5

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

Cyber security

Fraud monitoring

Regulatory compliance

Focus on cost reduction

Investment in innovation

Enhanced digitalcustomer experience

Investment in / partneringwith fintechs

Improved data analytics/artificial intelligence

31% 8% 6% 10% 8% 5% 9.5% 9.5% 8%5%

9.5% 27% 9.5% 6% 11% 7% 5% 6% 12%7%

14% 10% 12.5% 12.5% 4% 7% 6% 3% 7%24%

4% 6% 7% 14% 28% 11% 7% 9% 2%12%

5% 5% 9% 9% 8% 15% 30% 7% 1%11%

3% 11% 11% 5% 10% 5% 7% 35% 8%5%

2%4% 8% 7% 7% 7% 15% 13% 37%

4% 8% 32% 14% 10% 20%7%

9% 9% 9% 30% 8% 8% 3%3%17%

26.5% 20% 32.5% 4% 4% 5%5%

1%

2%

Open Banking / APIs

Expanding digital payments(i.e. instant payments schemes)

4%

4%1%

WITH ONE BEING THE HIGHEST AND 10 BEING THE LOWEST, PLEASE RANK IN ORDER YOUR PRIORITIES FOR 2019

CHART 12


20

The final survey question focused on responders’ priority areas for IT development in 2019. After a decade of bank IT spending being dominated by regulatory compliance (with as much as 80% of banks’ total IT development budget being consumed by mandatory items), market sentiment appears to be that the worst of this is now over. Budgets are now being freed-up to spend on other things such as innovation, measures to improve business efficiency and new products and services. For this reason, the results provided in Chart 12 are of particular interest.

In terms of the highest, and high priority items, digital customer experience (79%), innovation (45%) and cost reduction (46%) were the top three areas of expenditure. The move toward digital is a key strategy of many banks, bringing a range of benefits including enhanced processing efficiency and more automation. The priority given to innovation would include working with specialist new fintech suppliers (as covered in Section 6 above) to provide the bank concerned with a competitive advantage through the launch of a new product or service, or improve operational processes.

Against these three ‘very high’ and ‘high’ items, Regulatory Compliance / Mandatory projects account for only 24% of high priority IT spend. This supports the comment made above that, at last, there has been a fundamental shift away from the previous domination of Regulatory Compliance. However, banks are looking to commercialise their previous heavy investment in regulation and compliance by offering new services and generating new sources of revenue.

Cost reduction remains a perennial issue for banks, particularly in the current climate of (historically very) low interest rates, enhanced competition (as required by new banking regulations) and the move to instant payments that are usually tariff free for retail customers. Additionally, banks’ aged legacy systems are very expensive in time, money and resource for them to maintain.


21

11ABOUT

Finextra This report is published by Finextra Research.

Finextra Research is the world’s leading specialist financial technology (fintech) news and information source. Finextra offers over 100,000 fintech news, features and TV content items to visitors to www.finextra.com.

Founded in 1999, Finextra Research covers all aspects of financial technology innovation and operation involving banks, institutions and vendor organisations within the wholesale and retail banking, payments and cards sectors worldwide.

Finextra’s unique global community consists of over 30,000 fintech professionals working inside banks and financial institutions, specialist fintech application and service providers, consulting organisations and mainstream technology providers. The Finextra community actively participates in posting their opinions and comments on the evolution of fintech. In addition, community members contribute information and data to Finextra surveys and reports.

For more information:Visit www.finextra.com, follow @finextra, contact [email protected] or call +44 (0)20 3100 3670

VirtusaVirtusa Corporation (NASDAQ GS: VRTU) is a global provider of digital business transformation, digital engineering and information technology (IT) outsourcing services. Using a combination of digital strategy, business implementation, and IT platform modernization services, Virtusa helps clients drive profitable growth and lead market disruption through digital first client experiences. Founded in 1996 and headquartered in Southborough, Mass., Virtusa serves Global 2000 companies in the banking, financial services, insurance, healthcare, telecommunications, media, entertainment, travel, manufacturing and technology industries. For more information:Visit www.virtusa.comcontact [email protected] call +1 508 389 7300, or fax +1 508 366 9901

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