FTT Embedded Finance


The Cost of Core Fitness

As the cost of technology falls and the regulatory environment (certainly in the UK) becomes more welcoming of newcomers, the competitive dynamics of the banking sector are starting to shift. But banks also face internal challenges. Not only are their legacy systems outdated, their very design was driven by the dynamics of a structurally different age. At retail banks, those systems were set up to underpin branch banking and batch processing. Now customers expect 24/7 personalised service across a range of channels. Delivering that, and keeping pace with the competition, requires very different back-office systems and profound cultural change.

A University of Surrey report, supported by Accenture, Escaping Legacy: removing a major roadblock to a digital future, estimates that 40-50 per cent of technology in retail and investment banking needs urgent updating. A challenge, the report notes, that has been made all the more pressing by Brexit. To be fair, banks recognise the importance of updating their technology to compete in this changing environment.

The awareness that they are now, effectively, technology companies has been reflected in expenditure. Recent estimates from Citi analysts note that banks spend around $200bn a year on IT; although 80 per cent of that goes on maintaining and building proprietary systems. The question is how that will evolve and what it will mean for employment.

Anne Boden, chief executive of Starling Bank, who built a full stack bank from scratch (on the cloud), forecasts significant jobs losses. She says that Starling works on the assumption of automating everything. She predicts job losses of 25 per cent overall at retail banks when technology migration eventually happens. A recent McKinsey report, Cognitive Technologies in Capital Markets, which focuses on investment banking, estimated that 30 per cent of the current workforce’s responsibilities could be automated. But it was optimistic about overall employment levels, noting the freeing up of resources to take on higher-value tasks.

Keith Saxton, an independent director and adviser with a long track record in the tech sector, says: “IT infrastructure jobs may move from banks to technology providers, but the absolute need for technologies to be embedded in the business is likely to offer significant employment opportunities.”

It may be that jobs losses will hit large swathes of operational staff across a range of functions. But Mukul Agrawal, director and solution lead – core banking and digital – at Finastra, the fintech company, says: ”The primary objective for installing modern core banking technology is to improve the bank’s bottom line by boosting customer experience, accelerating growth and injecting innovation. Reducing cost is a secondary objective.”

Agrawal adds that because modern technology reduces the manual effort required for repetitive tasks, the manpower released from day to day operations can be used in the front office as customer advisers to support more sophisticated products, which have been made possible by the new technology. “As a result,” he says, “we are seeing a shift in skill sets which increase value for the bank, rather than a net loss of headcount.”

Given the size of the task and the challenges remaining for incumbent institutions, more needs to be done when it comes to updating core systems. A big hurdle is cultural. Accenture notes that the challenge in a period of change is in having a workforce that understands the old systems and can help create/buy the new components needed. What Accenture does not mention is that people who understand both old and new, even if they can be found, are not necessarily motivated to undo existing structures and working practices.

They may have a reason for some foot-dragging. Ralph Hamers, chief executive of ING, quoted in the Financial Times, said: “I do think employment in finance will decrease and those people working in the industry will be doing very different kinds of jobs.”

Given that ING announced cuts of 7,000 to the bank’s 54,000 staff last year as part of its digital transformation strategy, a focus on digital paints a different picture of the future of banking. As Boden notes, Starling runs a bank with only 120 people. The question is whether it could really scale up to compete with the big four banks with a small staff. We may soon find out.