Of banks and butterflies

Peter Hazou, Director of Solutions for Financial Services at Microsoft, discusses why moving to a Cloud-based platform is an evolutionary step that will help the banking industry soar on digital wings

Banks today face the butterfly challenge: unless they entirely transform their business models to become fully-fledged digital beings, they will cease to be competitive and will be replaced by new entrants who are unencumbered by legacy systems. It’s the survival of the technologically fittest, which means banks must adapt to the new business environment and embrace the 4.0 economy. 

For the financial industry, and indeed all industries now, the Cloud represents one of the biggest changes to existing IT infrastructures. Among other things, it promises costs savings, greater business agility and performance, and a firm foundation on which to develop other transformative technologies, such as blockchain, artificial intelligence (AI) and machine learning. Few organisations understand this better than Microsoft, whose reputation is built on innovation and business transformation through the deployment of the latest technologies.

When it comes to building infrastructure-as-a-service (IaaS) platforms, Microsoft stands tall. According to research firm Gartner’s latest IaaS Magic Quadrant report, Microsoft’s Azure Cloud is second only to Amazon Web Services as the platform of choice across industries. A  recent partnership with financial technology specialist ACI Worldwide is designed to make it the pre-eminent one for banks.

The banks’ Cloud journey is a fairly recent one, beginning just a few years ago with sales and marketing platforms such as Microsoft Dynamics. Next came the development of HR and finance platforms, and now we are seeing the biggest step of all as Cloud technology reaches into core activities such as payments.

Microsoft appreciates that banks can’t make this technology leap alone. They need partners to help them shed their traditional – and now restrictive – IT skins and evolve into digital players.

Peter Hazou, who is helping to develop Microsoft’s solutions for financial services, has the perfect vantage point over this rapidly-changing marketplace.
He firmly believes that the future belongs to those that are Cloud native and digitally enabled, and that incumbents must catch up before they are replaced by challengers. Nowhere is that more obvious than in payment services.

“There’s a revolution in payments,” says Hazou, “and it’s being driven by non-bank institutions born in the Cloud. The fundamentals have changed, because customer expectations are now completely different. You could say the arrival of the smartphone was the turning point. The smartphone experience is shaping a new banking model that depends on speed, agility and ever-more-meaningful data to build services customers demand today.

“The essence of payments is data,” he says. “Data insights are immensely powerful, but banks have never been very good at harnessing data to create new products. Some of the businesses coming out of Asia are actually data companies – such as WeChat, Alipay and Tencent – and are enormous non-bank competitors.”

The ‘widget’ of a payment is not as important as the insights the data around it provides, says Hazou, creating not just the familiar cross-selling opportunities. “Now, with big data, it’s about risk, cashflow forecasting, budgeting and investing. The benefits span all types of payment and money management,” he says.

And since payments is fundamentally a technology business, Hazou says that Microsoft is an ideal agent for change because it knows how to extract that value from transaction data.

He believes the days of banks running big, monolithic systems are numbered and that the traditional batch payment processing model, based on overnight business, is no longer sustainable in the era of open banking and versatility brought by application programming interfaces (APIs). Instead, the Cloud is the way forward for real-time payments and a new era of banking where technological change becomes all-embracing rather than incremental. A recent study by ACI Worldwide and the research firm Ovum, entitled the Culture of Innovation Index, confirms that view. In it, real-time payments are highlighted as a significant driver of innovation, with trailblazer organisations steadily moving their mission-critical activities to the Cloud.

This is where Azure serves as a bridge between the past and the future. It breaks down the silos that have multiplied as a consequence of bank mergers and acquisitions, unlocking the data trapped within banking organisations, and then focusses everything centrally. Having migrated a bank’s data to Azure Cloud, real-time crossborder payments are possible, with data from every system available in a single view with single reporting and processing capability.

Hazou describes Microsoft’s Azure Cloud as a versatile platform with many tools to help banks improve customer engagement and service levels. He calls it the ‘core for digital transformation’ and underlines that it is far more than a data centre in the sky.

Collaboration and the Cloud

Partnership is the catalyst for Cloud innovations, believes Hazou, and Microsoft itself is teaming up with other technology innovators to accelerate the transformation and create even greater value for banks. Its partnership with ACI Worldwide, which supports electronic payments and banking for more than 5,000 organisations globally, is a case in point. ACI has joined Microsoft’s partner network programme – one of 10 global independent software vendors (ISVs)  from the financial services industry – and is using Azure to deploy its Universal Payments Portfolio service. One global Tier 1 banking customer is now using Azure, thanks to the collaboration and other ACI customers are planning to follow in 2020.

Hazou emphasises that the great thing about many of the cross-industry collaborations that are now emerging, is that banks no longer have to handle product development themselves.

“Technology collaboration and partnerships are now shaping the industry and helping banks to stay current and competitive,” he says. “We have a very strong relationship with ACI, and we are helping to support its clients and deliver new services that leverage the Cloud.”

One of the reasons Azure is gaining attention from companies like ACI, is because Microsoft has already completed all the necessary work with regulators to ensure banks can satisfy compliance requirements associated with moving their core competencies to the Cloud. Microsoft works closely with scores of regulatory agencies worldwide and claims to be the highest certified Cloud provider for financial services, making Azure a highly robust, industry-compliant platform.

Compliance, of course, has been a key concern when developing Cloud-based banking solutions. While it is true financial regulators have not always viewed Cloud technology favourably, that is changing. Regulators are beginning to see the security merits of storing data in the Cloud rather than on physical systems, and are now encouraging Cloud providers to collaborate with the financial industry to build compliant systems that can minimise risk.

This policy shift is reflected in a recent UK Financial Conduct Authority (FCA) update guide for firms outsourcing to the Cloud. The guide highlights security as one of the principal advantages of the Cloud, alongside other benefits such as cost efficiencies and ‘more flexible infrastructure capacity’.

These benefits are attracting more banks to work with Cloud providers. An example is Bank of America, which has just announced that it is collaborating with IBM to create a ‘financial services-ready’ public Cloud that is designed to meet regulatory compliance and security requirements.

A new way of banking

While there are many operational benefits to be gained from the Cloud, Hazou maintains there is a much greater prize on offer: it allows financial institutions to rethink their business model in response to the changing business models of their clients, which, according to consultancy Accenture, could potentially impact up to 80 per cent of current bank revenues.

“What we are really talking about is opening the door to a whole new way of banking,” says Hazou. “It’s not just about being faster; it’s about all the products and services we can build on the back of the Cloud and real-time payments. It’s about product managers being creative and focussing on how one technology can lead to another. There are so many use cases out there, we’re only at the beginning of what’s possible.”

Chief among those use cases are AI and blockchain. The Cloud provides a foundation to experiment and integrate technologies, and no business can afford to ignore the potential. Among other advantages, AI can eliminate manual processing, automate compliance and risk management, and automate customer service, through tools such as chatbots. While the role of blockchain is still uncertain, few doubt that it will be transformative in the long run, with applications including trade finance, crossborder micropayments and know your customer standards.

The clear message is that moving to the Cloud is the only way for banks to reinvent themselves and remain relevant. The question, then, is not ‘why migrate?’,
but ‘how do we evolve quickly and compete with Cloud-native providers?’. Which is what Microsoft, with its cross-industry partnerships, seeks to address. Then banks can truly spread their wings.

 


This article was published in The Fintech Finance Magazine: Issue #15, Page 98 & 99.

Author: Yash Hirani

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