The world of banking is changing, from top to bottom and from corporate to personal, and facing up to the challenges can mean the difference between profit and loss.
With its experience in management and technology consultancy, BearingPoint sees itself as ideally positioned to help Irish banks adapt to what can at times seem like a market being assailed from all sides: fintechs and neo-banks nibble away, while overseas banks come in looking to cream off only the most profitable services.
“We provide not only the high-end strategy consultancy, but also the big systems integration,” Noel Crowley, director of financial services at BearingPoint, said.
“Our expertise would be in regulatory reporting and customer experience, and we’re currently focusing on banking efficiency,” he said.
It’s no secret that the customer experience side of banking is rapidly changing, with customer expectations of instant, seamless transactions driven by their experience of new challengers in the market – and naturally, Ireland’s banks want to compete.
The fact is, though, that banks face unique challenges when it comes to IT. Notably, the back-end and back-office systems – the ones that actually run the banks’ core services – are more central to how banks operate than any app.
“The legacy issue is the big, single problem,” said Crowley.
The problem isn’t lack of investment, but the legacy systems, despite being reliable and secure, can also be a source of drag.
“Banks and other financial institutions invest more money in IT than most other industries and they have larger teams of people, certainly more than retail, distribution and so on. But so much of that is about keeping these legacy systems up and running, so the ability to spend, both money and time, on customer-facing services, apps and so on – the things that digitally-enable transactions – suffers,” he said.
Regulation is a major factor too: investment in regulatory and statutory compliance is a significant overhead for the sector.
“The banking crisis brought on a whole raft of new regulations, such as Basel III and so on,” said Crowley.
Basel IV, though officially it doesn’t have that name, is coming down the tracks too, and the upshot is that seemingly straightforward things can be anything but.
“Being in a highly regulated environment, you have to worry about a lot of things. Even a simple, or what would appear as a simple app to a customer, can be very complex,” he said.
“We’re also talking about complex products. A simple payment product, okay, but a lot of banking applications are anything but simple: forex, mortgages, savings and loans. A bank has to be very careful that it’s giving the best advice at any time.”
Managing costs with investment
Crowley said that the key issue for banks in Ireland is improving cost-to-income ratios (CIR).
“Cost-to-income ratio is the biggest challenge we’re facing at the moment,” he said.
The pandemic has had an impact, of course, just as it has in every sector.
“The impact of Covid has been on the income side. If businesses come to a bank and say ‘I need a holiday from my loan’ or whatever, it may be that the risk of default by that customer has gone up, so they need to set aside more money. Even if they kept their costs down, which many will have struggled with, this is an issue.”
The challenge for banks is to improve CIR while maintaining customer service and their wide range of products, while also undergoing digital transformation that will deliver the experience customers want as well as smoothing out the underlying transactions.
Of course, change is not always popular, so banks must tread carefully.
“Ireland is a difficult market because you have a small number of banks, [and] so it becomes a big public issue if they change something because people can’t easily move,” he said.
Lowering staff costs is a traditional approach to cost-cutting, but Crowley said it cannot be a replacement for strategic investment.
“There’s the obvious headcount reduction. Also, Irish banks offer, in comparison to their European counterparts, a much wider range of products.
“They’re aware of that, but changing it is controversial. They needed to have that range, particularly at the top end of the market, in order to compete against the really big international players.”
BearingPoint brings a unique perspective to the CIR puzzle, said Crowley: it develops strategies to modernise core transactional functions.
“The point of view we’re trying to put forward is that digital investments and strategies are all well and good, but we think that while putting a lot of effort into customer-facing services will help, they also need to invest into the back-end of the system to reduce the cost of processing those transactions,” he said.
Crowley said that the introduction of technologies like robotic process automation (RPA), data analytics-driven decision-making and artificial intelligence (AI) are key to reducing costs.
“The best tool is investment in technology, and not the exciting stuff that the customer sees, but automating the processes,” he said.
Part of this is to look again at infrastructure, with a view to moving from on-premise to a hybrid mixture of public and private cloud.
Crowley said that objections to the cloud are starting to fall away, particularly in light of the global shortage of IT security personnel.
“You have to ask the question: is an on-premise solution supported by a small team of banking IT staff any more secure than a cloud which has the world’s best security people? There’s a fallacy out there about having it under your own control, but are those people the best for fighting really sophisticated attackers?
“People are learning it’s not an ‘all or nothing’ solution. You move things piece by piece, and most are going with hybrid solutions, he said.
Indeed, one financial institution was interested in buying a specific solution from BearingPoint, making it clear that it would only consider an on-premise solution. However, when it came time to sign the contract it had decided to deploy it as part of a private cloud strategy instead.
“They did a lot of due diligence, which is right and proper and you would expect that, but in the process, they changed tack completely,” said Crowley.
Crowley said that BearingPoint’s goal is using technology as a function of problem solving in the business.
“We feel that investment in technology is the best route to address the CIR challenge. It’s not a question of just throwing money at it, you need to develop a strategy and to see that as a way of improving the business,” he said.