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Howard Bush is a Principal, Banking & Capital Markets Lead in the Azure Cloud Industry Experiences team under General Manager Paul Maher at Microsoft. As a practitioner of the “art of the possible,” Howard is a 25+ year banker wrapped in IT clothing, impacting the Banking & Capital Markets Industry by building bridges to cloud adoption. Below we talked to Microsoft’s Wayne Bartlett, Head of UK Banking. We discuss new technologies gaining traction in the sector, and how banks are moving cautiously towards innovative digital transformation.

Caution over Blockchain

Bitcoin may have entered the public consciousness, but not much has changed for the banks over the last twelve months. Bartlett says, “distributed ledger technology is something of great interest – the question is how do we turn something of great interest into something of great value?”  

Certainly there’s a perception in banks that while distributed ledger could be valuable, there are problems to be worked through first, and even the most technologically-savvy are moving cautiously. There are still big problems for banks, specifically around anonymity and the problem in anti-money laundering that it creates. 

“All the banks are investing R&D in [distributed ledger],” says Bartlett. “They want to be seen as active players.” But even banks with a reputation for being forward-thinking when it comes to adopting new technology are moving cautiously with distributed ledger. The initial rush of interest over cryptocurrencies has been replaced by a more measured view of what distributed ledger can offer. 

So where are the benefits of distributed ledger? When applied to the banking system distributed ledger offers a more efficient alternative to the current payment processes; but moving these legacy systems onto an entirely new technology stack is a large, expensive and risky undertaking. Performance improvements and cost reductions promised by distributed ledger could be realized using alternative technologies such as Artificial Intelligence (AI) and Robotic Process Automation (RPA).  

“The benefits to a bank tend to be on the transaction side,” says Bartlett. “Look at the payment world, which is relatively inefficient. They could solve problems with payment failures and manual remediation of payment failures with technologies such as AI and RPA. These technologies could take a huge amount of inefficiency out of the international payment environment.”  

Even then, Bartlett sounds a note of caution. “The distributed ledger approach of removing the intermediaries and having a trusted transaction is only one way to solve the problem. An alternative would be to have a low latency, co-located system hosted in a trusted system, such as Azure, and then run intelligent algorithms on top of that system to look at how payments are failing, to predict payments and settlements, etc.” 

Ultimately, then it’s still early days, and other solutions may yet present themselves. “distributed ledger is one pressure on the system, but there are other pressures creating uncertainty,” Bartlett says. “When you look at a technology like distributed ledger, it is a pressure point on an environment or ecosystem, and the ecosystem can respond in multiple ways. Banks typically, because of their conservative nature, tend to look for efficiencies in their current environment, rather than adopting new technologies. We’ll see how it plays out.” Microsoft is investing heavily in Blockchain with Project Bletchley and Coco Framework. 

APIs – a platform of value

Banking is a highly-regulated industry, and the banks are prepared for mandated changes such as the second Payment Services Directive (PSD2) and Open Banking. That’s not where the uncertainty lies. The banks don’t want to be like Blockbuster. “The challenge,” says Bartlett, “is who’s going to see Netflix coming?” 

The API trend is yet to mature, but Bartlett believes it will only take one or two sharp organizations to build a platform of value rather than just substitute value. “Where API will come into plays is when you start to see smaller players able to offer platforms of value by coming together under the umbrella of a third-party platform. So, a building society might combine with an insurer, plus a mortgage provider, plus a Monzo-like debit card – and presents itself as one platform.” 

Still, the churn is low. Current account switching in the UK is only in the 3-4% per annum range, and the change in market share is also low even with initiatives such as Open Banking. “Monzo is a cracking idea for that generation of millennials who are mindful of how they spend their money, and when that experience has become a lifetime service you’ll just come to expect it. Monzo have already produced Open Banking APIs for Account Information Service Providers, but it’s really the user experience which sets Monzo apart. The banks aren’t being threatened by [Open Banking] APIs just yet.”  

Trends in cloud computing

Regulatory-mandated changes are a chief driver when it comes to the adoption of cloud technology. Initiatives such as the Fundamental Review of the Trade Book (FRTB), part of the Basel Accords, are changing the way in which traded assets are valued throughout the course of a day, and the risks associated with that.  

Bartlett says it’s a process that demands a large amount of compute. “Banks’ first foray into the cloud has been with analytics workloads, things like grid compute. For FRTB all the banks are looking at cloud.” Speed is of interest here. “We can spin up an analytics environment in hours, not months, so we’re seeing banks go down that path.” 

Another driver towards the cloud is dealing with legacy technologies. The cloud offers the advantage of avoiding the huge expense of on-premise technological solutions. “The cost of those services in-house is ridiculously expensive, particularly when you look at the switch on/switch off costs.” In-house assets, such as grid or HPC computing infrastructure, can have multi-million-pound initial outlay costs that rapidly depreciate in value. “Whereas an Azure Service like Batch you can switch it on, get the value out of it, and switch it off.” 

To compete with the challenger banks and the FinTech startups, the established banks need to provide a better customer experience at a lower cost. “Banks all struggle with trying to get the cost/income ratios down,” Bartlett says, “and a large part of that is driven by legacy technology environment that are inflexible, too costly and too slow moving to adapt to these new requirements.” This in turn creates blocks to knowing more about customers. “That’s when you start to see technologies like Azure Data Lake being used to create a better source of information.” Machine Learning and advanced analytics workloads and are gaining traction too. “Banks are trying to see how they can take the information assets they already own, move them into modern data platforms. Then they can learn more from every customer interaction. This allows them to provide better customer experiences, with greater customer intimacy, to gain greater efficiency and challenge the challenger banks”.  

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